Should I Do Roth Conversions With A Pension? | Early Retirement Hotline

Most people think tax strategy is the starting point. It’s not. It’s the final layer that sits on top of a life you actually want to live.

In this episode, Ari Taublieb, CFP®, responds to a listener with over $3 million across pre-tax, Roth, and brokerage accounts, plus a pension and future Social Security. On paper, everything looks optimized. In reality, he’s stuck on a question that keeps a lot of high savers from moving forward.

Should he use his brokerage account for income, for tax strategies, or to fund Roth conversions?

The answer is not as simple as picking the most tax-efficient move. In fact, focusing on taxes first can lead to the wrong outcome entirely. Ari walks through why having too much income later in life can create a “tax bomb,” how required minimum distributions change the equation, and why Roth conversions can make sense when future tax rates are likely higher.

But the real takeaway has nothing to do with spreadsheets.

Before deciding on conversions, withdrawal strategies, or tax brackets, the first question is much simpler. How much do you actually want to spend? Without that clarity, even the best tax plan can lead to regret. With it, the right strategy becomes much easier to see.

Because the goal is not to minimize taxes at all costs. The goal is to use your money in a way that actually improves your life while you still have the time and energy to enjoy it.

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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.

Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements

Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.

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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.

Transcript

New Voicemail Series Kickoff

SPEAKER_01 0:00

Over the last few months, you have heard me speak with real retirees as well as people who want to retire early, and I hope that that has been helpful perspective. I love everything early retirement related, but I hope it's hit different hearing it from real people. So what you're actually going to hear now is a new series for the next few months where I'm actually responding to real voicemails for people who are asking me a wide range of questions, such as, how do I know I have enough money? When should I actually look at a Roth conversion? Should I be worrying about healthcare? And a million other things like that. And so these are people who are calling me to leave a voicemail, hoping I respond in a future episode. If it's up to me, I'd respond to every single one of you. But fortunately, many of you have similar questions. So what I try to do is put them into one episode that I feel would be most helpful. So if 10 people ask, hey, what should I do about XYZ regarding healthcare? I try to do my best to address those, whether it's me addressing your specific point. But if you would like, you can of course call my number, 213-316-8397. I do read through every single one, as well as my team. And if you say in there, hey, the truth is I just don't even know. When does it make sense work with an advisor? I have no idea. Should I even be looking at retirement? Should I have retired 10 years ago? Am I in a good spot? What you will hear from us is at a minimum, hey, here's absolutely what I would recommend considering in your situation. So not a formal yes, go retire or no, why did you retire? We would never say it like that. But what we would do is say, hey, even though we're not gonna maybe respond to your specific voicemail, here's a guide that I think is gonna be really helpful for you. Or here's a video that we've recorded in the past that went out a year ago that applies to your situation. Make sure to check that out. So I'm always gonna make sure that you feel the effort that you put in to make the voicemail to leave for me will be equally responded to with effort to make sure you're getting the help that you're looking for. So once again, if you would like, you can call and literally tell me anything. But the the phone number is 213-316-8397. The next few months you're going to hear voicemails and me specifically responding to those voicemails. I hope you enjoy this next series. I'm always trying to come up with new creative ways that are helpful for you. As always, if you're wondering, okay, am I in a good spot to retire? Email me and put in the subject line the word retire. Very simple, just the word retire. And that my email is ari at rootfinancial.com. That's R O O O Tfinancial.com, and I will respond with that free guide just for you. And thank you in advance for always listening to the podcast episodes and hope you enjoy these.

Listener Portfolio And Key Questions

SPEAKER_00 2:27

I had uh a question. I sent you an email and you said I should leave uh a message here. So uh quick look at my portfolio. Uh the the question is about the use of my superhero account, uh whether for income or for Roth conversions.

SPEAKER_01 2:40

For those of you who don't know, superhero account, that's my nickname of a brokerage account. It's my favorite account because it helps people retire early and bridge the gap until you can access your qualified money, 41k Roth, etc.

SPEAKER_00 2:51

Uh, or for um tax arbitries. So my uh portfolio has uh 1.9 million in the tax deferred account, my 401k and 403B. Uh I have 1.4 million in our Roth account. Uh tax free. My superhero brokerage account has 170,000. Uh my bank and high yield savings account uh has about 100,000. Uh currently uh 58 that I'm receiving uh a pension currently.

SPEAKER_01 3:22

This is what we call qualified rich. You most of you know house rich cash poor. This is qualified rich cash poor. He's got 1.9 in a pre-tax 4K, 1.4 in a Roth. I don't know how old he is. That'll be my my big concern here. If he wants to retire early and 170k in a superhero account, he's about to tell us about a pension.

SPEAKER_00 3:40

Uh from federal government that's uh 96,000 a year gross. Um and in retirement starting this year, I look to spend an estimated five percent withdrawal rate, so about eighteen thousand uh a month total after taxes.

SPEAKER_01 4:00

This guy has a lot of money that he's either gonna die with or he's gonna want to try to spend. Let's see.

SPEAKER_00 4:06

So my question is about my superhero account. I have a couple different options, and I'm not sure which one I should use. Um Should I use the superhero account for withdrawal from my uh portfolio at the beginning of retirement because I get the long-term tax rate? Should I use the superhero account to use the task overcome at the end of the year to try and avoid going into the 24% tax rate? Or should I use the superhero account to pay the taxes on Roth conversions? Well I'm not sure if I should be doing Roth Conversions because according to Right Capital, it says I should only be converting up to the 12% tax bracket, which the only time I'll be in the 12% tax bracket is uh when I'm 70 when I start receiving our joint.

SPEAKER_01 4:50

If you don't know Roth Conversions, that's why I'm wearing this shirt, Cauliflower. Cauliflower is my little dopey analogy for before you actually do Roth Conversions, make sure it makes sense. Now, paying taxes to do Roth conversions is not fun, but the reason, quite simply, people do Roth Conversions is hey, I'm retiring and I'm in X tax bracket. Let's just call it the 22% bracket. If I do nothing and spend what I want in retirement, by the time RMDs begin at 75, I'm going to probably be spending less. My portfolio probably grew more, and my social security is probably turned on. So now I'm going to be in, let's call it the 35% bracket. Shouldn't I pay taxes at 22 or eat cauliflower at 22 to avoid having to eat a lot of cauliflower in the future? Hint we don't like cauliflower. Let's listen a little more.

SPEAKER_00 5:56

So I guess the second question is about Roth conversions. Is if I should only be doing Roth conversions up to the 12% rate, and the only way I would think that that would be the case is if the amount of withdrawing is just so high that I don't have to worry about RMDs later. Uh I'm not sure how bad. But uh I think that's my question. I'm happy to provide any additional information that you might need.

SPEAKER_01 6:17

Now there's a lot going on, and this is gonna be a fun episode because I love responding to questions like this, which are some of the most common I

Tax Gain Harvesting Limits With Pensions

SPEAKER_01 6:23

received. Before we actually get started, we're only hearing a small snapshot of this person's actual situation. So we're gonna walk through what a CFP, a certified financial planner, would typically think about when hearing things like this. But this is not personalized financial advice that's important. If you don't know, I'm Ari, I'm a certified financial planner and host of the Early Retirement Podcast. I'm also the CGO here at Root Financial. So make sure to subscribe if you want to retire early and not work forever. So I get a sense there's a lot of moving pieces here. You're wondering, so first what do I do with my superhero account? And then Roth Conversions, do I need to do them? Let's tackle the superhero account first. So the superhero account, or my nickname for a brokerage account, this in your situation is interesting because there's something called tax gain harvesting. So if you've never heard of that before, that's how the ultra wealthy pay 0% in taxes. And I made this video here showing how you can do that if you want to generate over 120,000 of tax-free income. But that doesn't apply to g why? G has a pension, and that pension is bringing in $96,000 a year. So if G was trying to optimize to the nth degree to try to live off of the pension in the superhero account in order to pay truly 0% in taxes, it's just not realistic because he already has so much coming in from his pension that he's automatically filling up some of these tax brackets. So that is why tax gain harvesting, this strategy, is awesome. But if you have income coming in, whether it be through Social Security, part-time work, or a pension, that strategy is generally not going to be the

Spend Goals Before Tax Strategy

SPEAKER_01 7:53

most effective. Before we get to Roth Conversions, I would want to ask 2,000 other questions, primarily the following. Now I'm just gonna rattle off what my brain is thinking right now. Obviously, he's not on the other line here, but if you were a client, this is what I'd want to know. How much do you want to spend in retirement? And he said, Yeah, you know, I'm taking 5% out of my portfolio as well. Okay, well, how much do you want to spend? Not how much are you spending? So $96,000 a year is gross, what's coming from his pension. I don't know how old he is, but let's just pretend he's 60. Well, he has three and a half million between his 401k and Roth. And so if we're taking a very conservative 4% withdrawal rate, which I'm not saying that's the rule to follow. In fact, in many of my videos, I talk about why I don't like the 4% rule developed by Bill Bangin, who said himself that that rule of 4% is outdated. But 4% of a $3.5 million portfolio is almost $12,000 a month on top of the $96,000 a year coming in from his pension. So when do we look at Roth conversions? If we're going to be in a higher tax break in the future, this looks to be a case where that's likely to be the case since he has inheritance coming. We don't know what account that's coming from. If it's coming from a brokerage account or superhero account, then you don't have to worry about RMDs. But if it's coming from an IRA or Roth IRA, there's a schedule you have to withdraw from. So it becomes really complicated. So that's where it gets fun. So in terms of what he needs to think about is okay, if I'm 60, hypothetically, we don't really know, and he wants to make sure he's optimizing his tax strategy, the first thing you do is you actually ask yourself, how much do you want to spend? Pretend you were to say, I want to spend $40,000 a month. Do you guys think Roth conversions are ultra important? Probably not as important. Why? Because he would be spending so much of his 401k in addition to his pension that there might not be a huge amount left over that he has to do conversions for. The reason you do conversions is because you have this big 401k that's gonna force you to take out more than you probably will ever need in the future. So don't spend for the sake of spending. I don't want to go, oh, so I should just spend more in order to not do Roth conversions. No, that is throwing money in the trash. Don't do that. But if money could add to your life, meaning today wants to spend $40,000 a month or $30,000 and he only spends $10,000 a month, okay, well, maybe it does make sense to consider doing some Roth conversions. Now I forget exactly, but he said he's taking 5% out of his portfolio, I imagine, of the superhero account. So if let's say he's taking $20,000 out, just to keep it simple. So I'm gonna round up, let's say he's $120,000 a year is what he's spending today. And he were to tell me that's everything I want and more. I can live my dream retirement, travel, healthcare, I'm good. Okay, well, the the reality is that 401k is gonna grow a ton. And so, assuming it gets good growth, which it probably will, and that Roth, okay, well, that's already in Roth. If everything was in his pre-tax, we'd have a bigger tax bomb coming. But it's still gonna be decent. Let me give you an

RMD Tax Bomb And Future Brackets

SPEAKER_01 10:40

example. Let's pretend once again, he's 60 years old, and he at age 75 is gonna have RMDs turn on, required a minimum distribution. He's gonna be forced to take out a certain percentage of his pre-tax balance. It's about 3.8%. We're just gonna just use simple math here. Let's say that his $2 million or so 401k doubles. It'll probably more than double, but let's just assume it doubles, assuming the rule of 72 takes about 10 years, his money doubles, assuming he gets about 7% in growth. So now his $2 million is worth $4 million. So now he has $4 million and he has to take out, let's say, $150,000 a year, whether he wants to or not. Now a reminder, that gets taxed as if ordinary income. So if he's in the 35% tax bracket, he's getting taxed at 35%. And then there's state taxes and net investment income tax. So let's assume he has $150,000 a year he has to take, plus $96,000 from his pension, which I don't know if that has a cola on it, plus, don't forget, the inheritance and social security. So now we're looking at, let's write it down so it's simple for my brain to follow. $150K RMD, okay? Then we've got $72K Social Security. Have fun with that. So now we're at $220K. Then we're going to have inheritance. I don't know exactly what that's going to be, but then let's add the 96K from the pension. He very well may have $300,000 coming in in gross dollars that is taxed. And so that's about $25,000 a month. And a reminder today he's spending $10,000 a month. So that $15,000 a month, all of that extra theoretically, if he doesn't spend it and everything else stays the same, which is unrealistic because life changes, but assume that's the case. Now all of a sudden, that all gets taxed at your highest marginal bracket, aka you're paying probably way more in taxes than you'd

Using Brokerage Money To Pay Taxes

SPEAKER_01 12:25

ever want to. Now my editors are going to put on the screen my important number sheet. If you want access to this, comment 2026 below and I will send you this. These are all the important numbers you need when you're doing any retirement calculations, is what I have at all times on my computer. It's on my desktop. Even though I know some of us have two million things on our desktop, including myself, this is the prime one that I like, I know exactly where it is on my desktop because I click it so often. So he's putting it on the screen for me. Thank you, editors. You guys are the best. So you're gonna see here that he falls right in that 22% bracket. So he's wondering if he brings in, let's call it, $120,000 a year by taking a small amount from his superhero account and living off of his pension, he has room to fill up the 22% bracket. Well, of course, tax brackets can change, but you can see it's more than likely in the future he's going to be in that 24% bracket. Now, as of today, you can see that starts at about $211,000. So the argument would be should we convert on purpose right now at 22% so that in the future, as money grows, all of that Roth money grows tax-free. I put out this video called Stop, don't do a Roth Conversion, where myself and my partner James and the founder of Root talk about the big mistakes people make before they do Roth conversion. So if you're wondering if you should do one, make sure to check out that video. And you can also comment the word conversion below, and I'll send you a free guide that tells you and really walks you through a roadmap of what you need to consider before you do a conversion. This is an example of someone who is essentially talking about tax planning before life planning. And I would be asking how much do you want to spend truly? Pretend he says, hey, I'm spending everything I want and more. Well, Roth conversions might make sense, but I'd want to go even deeper before we go that

Software Is A Gut Check

SPEAKER_01 14:00

route. Roth conversions are like surgery. They're awesome, can put people back together just like it did for me, because I'm a soccer player. But too many people do surgery too quickly when maybe we should consider non-invasive methods first. Perhaps spending more, perhaps retiring earlier. Okay, this person's already retired. Perhaps giving more, not just for the sake of giving, but if you want to do more giving, can we do it in a tax-efficient way? Can we sit consider doing this really strategically? He mentioned having 170,000 in that superhero account and wondering what do I do? Do I take those funds to live off of? I don't know how old he is. Pretend he's underage 59 and a half. I don't know how else he would be able to spend more other than living off of his cash, which he might not want to do. No one's ever like, oh my gosh, you know what sounds so fun? Paying taxes on Roth conversions. Let me use my superhero account dollars to do that. But if he, let's, for example, didn't do that and just lived off the superhero account, had a ton of fun with it, brought it back down all the way to zero, and then wondered, hey, should I do Roth conversions now? Well, you got to pay those taxes somehow. And if you don't have cash shitting on hand, you're not being as efficient when you pay the taxes. Why? Because you're having to withdraw from your 401k, which essentially pushes you into an even higher tax bracket, which makes the effectiveness of those conversions not nearly as effective, obviously. That wasn't said well, but you guys know what I meant. So here is wondering, should I intentionally leave money in there so I can pay these conversion taxes? The answer is always it depends, but we need to make sure we're not letting the tax tail wag the life dog. And I see this often where people want to make sure they get the taxes so perfect. And I get it, I'm all about being patriotic. I don't want you to pay more taxes than you need to. But the risk is you look back at your life going, okay, so I did the best conversion strategy for my family, but I didn't spend as much as I actually wanted to when I had the health and energy to do so. So I would ask primarily, once again, how much do you actually want to spend? What's the dream? And if he's fully content with everything, more than likely conversions are going to play a big role. And if some software says do it or don't do it, software is like a good gut check, but it relies on so many inputs and you have to know the software really well. So it's a good starting spot, but I like to explain software like using a thermometer. If you're cooking a steak, it might tell you it's the correct temperature, but it doesn't mean it's it's perfectly medium rare if that's how you like your steak. It doesn't mean that the crust is going to be, you know, crunchy. It's not optimizing. It's just saying, okay, this is a gut check. It's a temperature check. It's just giving if you put the thermometer in one end of the steak, you know it might say it's 120 degrees and one might say 145, and you're like, okay, what the heck do I do? It causes a lot of confusion. So this is why we exist. We love doing financial planning to help people bring all of this together tax, estate, health care, insurance, all

Subscribe And Submit Your Question

SPEAKER_01 16:40

of it, so that you can live your dream retirement. So as always, you can call the number on this screen wherever my editors put it because they're awesome. And that is the number to submit your situation that I might respond to in a future voicemail. Please subscribe if you want to retire early. And if this resonated with you, please like this. Comment below what you learned. 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, early retirementpodcast.com. 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.