Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

A Beginner's Guide To Roth Conversions

• Ari Taublieb, CFP®, MBA • Episode 281

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Are you overthinking your Roth conversion strategy? While Roth conversions can be powerful, not every retiree needs them. In this video, you’ll learn when a Roth conversion truly makes sense—and when it may just add unnecessary complexity.

Using the “cauliflower analogy,” we break down how Required Minimum Distributions (RMDs) can push retirees into higher tax brackets, and why paying taxes now can sometimes help avoid bigger bills later. But there’s an even more important question: could you be better off retiring earlier or spending more instead of over-optimizing your tax plan?

We’ll also highlight the sweet spot for conversions (between retirement and when Social Security and RMDs begin) when tax savings can be most effective. Ultimately, a great financial plan isn’t defined by your Roth conversion strategy, but by building a life well lived. 

 Whether you're considering your first conversion or refining your existing approach, this episode provides the foundation for making decisions aligned with what truly matters in your financial journey. 

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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.

The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.

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Ari Taublieb, CFP ®, MBA is the Chief Growth Officer of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.


Speaker 0:

Roth conversions can be powerful. They can lead to millions of more dollars in your ending balance of what you've worked so hard for. But sometimes they're not necessary at all, and I'll see a lot of people want to do a Roth conversion because it sounds cool, it's different, maybe their neighbor hasn't done it. They love tax arbitrage, where you're kind of making the most of your tax situation today versus retirement, and the reality is, I find way too many people execute conversions incorrectly. This is going to be a beginner's guide to Roth conversion, so I'm not going to go into great detail on Irma, surcharges and tax brackets. Changing Today is just how Roth conversions work, keeping it plain and simple, nice and easy, and so if you're considering a conversion, I would recommend listening to this, and if you want my deeper episodes where I go into tons of detail, just look up Ari Roth conversions on YouTube or search in the podcast app and you will see it will come up, unless I am shadow banned for some reason, which I don't think is the case. So, with that being said, thank you, as always, for tuning into this podcast. All of my episodes are also posted on YouTube. The timing will vary based off when my amazing editors have a chance to get to it, but I want to make sure all of you continue to get this content as you want it, so it's always going to still go to the podcast apps, it's always going to go to YouTube, and thank you for allowing me to do this because I love it.

Speaker 0:

I am Ari, the host of this podcast, early Retirement, chief Growth Officer at Root and a certified financial planner. I often say how many people would you never let touch your body that are doctors? Probably a lot of them, not because they're bad, but maybe they're just not a great fit for you. Now some of them are bad In the industry. I work in the financial industry. I took a CFP course to get certified, of course, and there were people in my cohort who I would never let manage a dime of my money, let alone hold my lunchbox. So I'm telling you this because I hope you don't listen to me, because I'm a CFP. I hope you listen and resonate with my style, which I hope is very transparent, because that's what I try to do here.

Speaker 0:

So we're gonna talk about Roth conversions. We're doing a fun way. So many of you know my cauliflower analogy. I'm going to give it to you one more time, if you have not heard it. I will often talk about Roth conversions, like eating cauliflower.

Speaker 0:

Pretend you've saved and invested. Well, you're going to have a 401k. I'm just going to take an example. If you have a 401k, it has a million dollars in it and it keeps growing. Maybe when you're 75, it might have like two or three or five $10 million, who knows. You're going to be forced to take out a certain amount. That's what's called a required minimum distribution. Nothing to do with cauliflower yet, but we're about to learn so that RMD starts at 3.8%. So I'm whipping out my fancy calculator on my iPhone right now.

Speaker 0:

And let's pretend you have $3 million at 75 in your 401k, which is pre-tax. Well, you're going to be forced to take out $114,000, whether you want it or not, starting at age 75, depends on when you were born, but for most of you, 75. Okay, so some of you are like well, what's the problem? I like money, and 114,000 is like a good amount of money, so I see no issue here. Well, at 75, you'll also have Social Security. Maybe that's another $40,000. So now you've got, we're looking at $154,000. And maybe there's inheritance, maybe there's rental income, maybe that, who knows? But let's just round it up and say now you really have $180,000 that's coming in, whether you want it or not. You might be like, well, like, did you not listen to me? I don't need $180,000. I need 120,000. Well, what gets happened? What happens to the excess from 120 to 180? That 60 is it's all taxed at your highest marginal bracket, which is not fun.

Speaker 0:

So what we'll often recommend is that you eat a little cauliflower, pay a little bit in taxes so you're not forced to eat a ton of cauliflower in retirement. You probably want pasta in steak and all the good stuff. Those are some of my favorite foods and you can debate me as much as you want, but a good pesto pasta will still beat marinara every day. Now you can let me know if you feel strongly one way or the other, but at its best, not the average. If you want general marinara, I'll take that over like an average pesto. I'll never buy pesto just in a jar from the store. You know, call me bougie, but debate me on that later. I try to keep these fun and entertaining because I make a lot of content, guys, so hopefully it's not annoying.

Speaker 0:

Now let's get back to the example. Okay, so 180,000 is theoretically what you're forced to take Now, 120 is really all you need. Could you spend more, of course, but you don't want to spend for the sake of spending. That's just illogical. So that $60,000 otherwise would have been taxed at, let's just say, 35%. If you live in California, like I do, we have a very advantageous tax bracket system to the IRS.

Speaker 0:

I always like to say I'm all for paying taxes, I'm all for being patriotic, but not to the point that I pay more than I need to. So what if you retire at 60 and you're like 75, that's going to not for 15 years. What can I do now so that this isn't an issue? Well, what you can do is you can go. I'm currently in the 12% tax bracket. Why don't I pay taxes at 12% to avoid paying 35% in the future? And as I convert money from my 401k to a Roth IRA or IRA to Roth IRA, what I can do is have that money invested well so it grows, and as it grows, it's all growing in a Roth account. So you never pay taxes ever again. So Roth conversions can be beautiful.

Speaker 0:

When do they make sense? They make sense when you know you're going to be in a higher tax bracket in the future. So if right now you're 55, you're working, you make 500K a year, you're crushing it. You're in a high tax bracket. You're 55. Now, at 60, you retire, you and your spouse pretend, don't work, you have no rental income, no social security, your income is zero. That might be a great time to do Roth conversions because you're in a very low tax bracket, knowing in the future you'll be in a greater one. So that's when it can make sense to Roth conversions, when you know you're going to be in a higher tax bracket in the future than when you retire. Now what should we do before we look at Roth conversions, which sound good, by the way, and if you use the software I talk about, you can see, you can play around with the little slider and it will tell you what's going to make most sense for you.

Speaker 0:

But what it misses out on is two big factors. Before looking at Roth conversions, I would beg you to consider spending more or retiring earlier. What a lot of people do is they keep working and working because their 401k grows and grows, and then they're like I'm going to have to do Roth conversions. No, you don't. You could retire earlier, have a smaller balance, enjoy your life more.

Speaker 0:

The point of life. I've never had someone come to me and go oh my God, I'm so glad my average return was 8.32961%, or I'm so glad I did X amount of Roth conversions it's always. I'm so glad I retired earlier. I'm so glad I did spend 160,000 instead of 120,000 because I really enjoyed my retirement. So Roth conversions can be amazing. There's a reason they exist and I love them. But they can be equally amazing if you don't do them and instead enjoy your life way more, which sometimes is going to be what you actually care about. So, yes, always run the financial analysis so that you're making a conscious decision.

Speaker 0:

I have clients that go wow, I'm actually scared to travel because I don't want to throw off the amazing Roth conversion strategy we showed you. And then I'll say, well, I didn't do my job. Well, because the point of life, the sign of a good financial plan, is a life well lived, not your Roth conversion strategy. Now, sometimes I'll go to a client. I'll say Look, I know you want to spend big. I know you want to retire. Even if you do these things, you're still going to get crushed in taxes. So we're doing Roth conversions. That's not the debate. The debate is how much do we do? And that's generally what happens.

Speaker 0:

Most of you who have saved and invested well, you're going to probably need to do conversions of some sort, based on many different factors, but a lot of you will want to do them and if you don't do them, you'll literally just be leaving. You're giving more money to the IRS. So if you need to do them, the question is how much do you do them, when do you do them? And all these moving pieces in between which I go into great detail on and it's what we specialize in. So just a quick, short and sweet beginner's guide to Roth conversions, aka eating cauliflower.

Speaker 0:

Can we eat a little cauliflower from 60 to 65, when we're in a low tax bracket, before Social Security kicks in, before maybe rental income or a spouse decides to stop working, and now, all of a sudden, maybe you're, in a way, higher tax bracket and that's when we maybe want to do some conversions, but not as much as you were doing before. You can get real creative with it. The beautiful thing about retiring early is the earlier you retire, the more of a tax window you have If you retire at 63 and then you turn on Social Security at 67 and RMDs start at 75, you don't have that long of a window to do these conversions. So you want to make sure if you are retiring and you're in a good spot, there is something to consider for retiring earlier so that you have a longer window to execute Roth conversions. So, short and sweet, hopefully you guys enjoyed this episode. This is what we do. If you're like, wow, I can tell you guys love Roth conversions more than I do, well, reach out to us. We love helping people optimize and you can absolutely see that this is what we do. When you reach out to us and head to our website, rootfinancialcom and you can see in the description of this episode on podcast or YouTube, wherever you are watching slash listening you can get access to the software that I use to actually let you calculate your potential Roth conversion strategy. So hopefully you enjoyed it. I think I said that five times now. See you guys next time.

Speaker 0:

Thank you all, as always, for listening to the early retirement podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this. Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney, please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom, if you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it. At the very least give you some insight. That's it. Thanks, guys.