David McKnight unpacks the five most common objections to Roth conversions and why they simply don’t hold up under scrutiny.
The first objection has to do with people not wanting to voluntarily pay taxes before the IRS requires them to.
While on the surface, postponing this may sound logical, it ignores a fundamental aspect: the state of the U.S. national debt.
It has just passed $39 trillion, and it’s slated to grow by $2 trillion per year for the next 10 years, and $3 trillion after that.
In other words, interest on the national debt is becoming one of the largest line items in the federal budget.
That means that by refusing to pay taxes today, you’re making an insanely risky bet that taxes in the future will be lower than they are right now.
All, while your IRA keeps growing and compounding over time.
Thus, 10 years from now, not only could tax rates be higher, but your required minimum distributions could be dramatically larger.
The second most common objection to Roth conversions revolves around people saying, “If I do Roth conversions, that additional income will force me to pay increasingly higher levels of IRMAA or cause my Social Security to be taxed.”
David points out that Roth conversions do increase your taxable income, which can trigger those additional expenses during the conversion period.
However, while it’s true that you’ll pay IRMAA and Social Security taxation in the short term, you’ll get rid of those additional expenses for the rest of your life once your conversion period is over.
Objection #3 is “There’s too much opportunity cost, I won’t have time to make up for the taxes I paid”.
David explains that, despite sounding sophisticated, this objection is based on a flawed premise.
Your IRA is a “business partnership” with the IRS – and every year they get to vote on what percentage of your profits they get to keep.
So, when you do a Roth conversion, you’re not losing money. You’re simply buying out your “silent business partner” at today’s historically low tax rates.
David highlights that, if taxes double in the future, you’ll be glad you bought them out while taxes were still on sale.
The fourth objection – “In retirement, I’ll be in a lower tax bracket” – is actually one of the most dangerous assumptions in all of retirement planning.
People assume that when they retire, their taxes automatically go down.
For many Americans, the exact opposite happens, though.
Once required minimum distributions kick in, they can force huge amounts of taxable income onto your tax returns.
David touches upon an additional issue almost nobody talks about: the so-called widow’s penalty.
The fifth objection to Roth conversions revolves around the question, “Won’t the federal government tax Roth IRAs sometime down the road?”
People don’t realize that the government loves Roth IRAs because they generate tax revenue today – unlike traditional IRAs, which delay tax revenue.
That’s why, every time Congress needs money, they tend to pass legislation that makes Roth accounts even more attractive.
Remember: Roth conversions are about taking advantage of the tax sale of a lifetime before catastrophic levels of debt force tax rates higher.
Mentioned in this episode:
David’s new book: The Secret Order of Millionaires
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com
