How You Should Be Using Roth Accounts: Before and After Retirement

In today’s episode, we’re tackling these topics:

🔍 Roth 401(k)s ≠ Roth IRAs – No income limits inside employer plans — huge advantage.

📊 Tax Bracket Targeting – Use your future bracket to decide Roth vs. pre-tax.

🏥 Near 65? Watch ACA Rules – Roth savings can preserve subsidies pre-Medicare.

🔄 Conversions After Retirement – Pay taxes strategically when income drops.

👩‍❤️‍👨Protect the Surviving Spouse – Single tax brackets + IRMAA penalties make Roths crucial.

Listen Now:

The Smart Take:

Go Deeper Into the Conversation:

0:00 – Intro

3:43 – Pre-Retirement Considerations

12:06 – Mega Backdoor Roth

16:57 – Post-Retirement Considerations

21:22 – Creating Flexibility

25:05 – Protecting Your Spouse’s Future

30:50 – Investment Asset Location

 

Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

In today’s episode, we’re breaking down how to think about Roth accounts before retirement, after retirement, and even how these decisions affect your legacy and potentially your spouse. If you’ve ever wondered if you’re using the Roth accounts the right way, today’s the episode for you.

Walter Storholt:

Thanks for joining us again on Retire Smarter. I’m Walter Storholt, as always joined by certified financial and chartered financial analyst, Tyler Emrick, one of the wealth advisors at True Wealth Design. And great episode on the way today. Something I’ve always been kind of curious about, Tyler. Yeah, how you treat maybe your Roth accounts and those type of investments before and after retirement. What’s that difference? Is there a needed change in mindset during those timeframes? So I can’t wait to dive into that with you here in just a moment, but before we dive into all of that, how’s life treating you, my friend?

Tyler Emrick:

It’s doing pretty well. Holidays, right?

Walter Storholt:

Yeah.

Tyler Emrick:

So eating plenty of food, snacks and candies, and yeah, spending time with the family.

Walter Storholt:

It’s already flowing through the house in large quantities?

Tyler Emrick:

It is. It is. I put a pretty big dent in the Halloween candy, and so we’ll see.

Walter Storholt:

Okay, nice.

Tyler Emrick:

I need to be staying out of that. But no, it’s been, hopefully continues to be a good finish to the year here, but going all pretty well. How about you?

Walter Storholt:

We got pretty addicted to those Costco, I don’t know if you’re a Costco guy, but I begrudgingly am a Costco guy. I don’t really like the experience of going to Costco, but do like the stuff that they have and the efficiency and the buying bulk, all that. Anyway, we got very addicted to their 5.99 pumpkin pies that were the size of a car essentially. We must have eaten four or five of those after the baby was born leading up to Thanksgiving because it was a very nice… We just had a baby treat. And I was like, oh, I went to Costco the other day. I was like, all right, they’re not going to have those pies anymore, so we’re good. And I walk in and the first thing I see is this humongous tray of Christmas cookies and Christmas bars. And I’m like, oh no, they’re going to get me for the whole month of December with those now.

Tyler Emrick:

Oh, yeah. Never ends. ‘Tis the season. ‘Tis the season.

Walter Storholt:

It is the season.

Tyler Emrick:

Pumpkin pies are pretty good. So our family does pumpkin bars, which are a little different, similar to pumpkin pies, maybe more like a pumpkin roll. I mean, the big secret is just the cream cheese icing on the top.

Walter Storholt:

Sold.

Tyler Emrick:

Me too. It gets me every time.

Walter Storholt:

Anything involving pumpkin or cream cheese is going to pretty much get me there. So you’ve got both. We’re in good shape.

Tyler Emrick:

Yeah. So nope, but yeah, all good. Ready to talk about Roths? It’s such a big topic, right? I feel like we try to at least be talking about Roths a couple times per year. It’s been a little while since we’ve talked about them, but always a topic that’s pretty highly requested and viewed. So excited to kind of jump in.

Walter Storholt:

Well, I know you’ll give us kind of a good full picture as we go through, like you always do, but I like that we’re at least lasering a little bit into this idea of before and after retirement, some of those differences. So what inspires this? Is this just because you guys are getting questions about this kind of stuff all the time?

Tyler Emrick:

We are. Yeah. I think it’s just always a pretty hot topic. It goes in hand in hand with year-end tax planning and some of the things that you have to know to really utilize a Roth account well. Well, our tax-oriented, cashflow-oriented and planning oriented, meaning that, hey, you have to have some type of vision on, well, hey, what’s the next handful of years look like? What’s the next 30 years kind of look like? And using that information to kind of make better decisions with your Roth. So with it being year-end and us doing a lot of those year-end tax planning items, Roths are pretty much a conversation piece for most families this time of year. So yeah, definitely a victim of that for sure.

Walter Storholt:

All right. Well, let’s dive in and look at kind of the behind the scenes of the Roth. Where do you want to start? The pre-retirement area is-

Tyler Emrick:

Yeah, I think that’s great. We’ll break just how you described, right? We’ll break it down pre-retirement and then handle post-retirement. As we kind of think about pre-retirement, individuals working, saving, I think the big thing with the Roth is like, well, should we be putting money into a Roth or should we not? And two, what type of Roth account should we be using? Because most individuals are going to have access to Roth savings inside of your employer plan. So your 401ks, your 403Bs, things like that that are offered through your employer. And you have generally a choice, right? Do you want to save in those employer plans either pre-tax or you get the tax deduction now, but then obviously when you pull it out in retirement, you’re going to pay taxes on it, or would you like to be saving Roth? Which means that, hey, you pay the taxes when the money goes in, if it’s through your employer plan.

And then when you pull that money out in retirement, assuming you do it in a correct way, there’s no taxes or penalties or anything like that due on it, right? So employer retirement plans are a big piece of kind of the options that are afforded to most individuals. And I think one of the big hiccups with it is a lot of individuals are like, “Well, hey, Tyler, don’t I make more money I can’t contribute to a Roth?” And I think that’s probably one of the big sticking points to kind of just clarify here real quick is saying, “Hey, you got these employer plans, pre-tax or Roth savings available to you in there, but you also got IRA accounts.” So a Roth IRA account is generally something you would do outside of your employer retirement plan. You go to anybody, open up a Roth IRA, and you can put money in that as well.

So the Roth IRA accounts do have income limits that you have to abide by. If you make too much money, you might not be able to put money into a Roth account, or you might have to do the old backdoor Roth contribution where the money goes into a pre-tax, traditional IRA account, and then you convert that money over into a Roth. Now, when we’re talking about employer plans though, Walt, there are no income limits, meaning that, hey, you can make as much money as you want and you can still contribute to the Roth portion of your 401k if your employer allows that. So which I think that gets us to our first big point is like, “Well, hey, should I even be using that Roth account or should I be saving money into pre-tax?” Which is a really good question.

Walter Storholt:

Or one over the other, right? Am I benefited by doing it in the employer plan versus a Roth IRA if you have the option to?

Tyler Emrick:

Correct. Yes. And I think having an understanding of two things is extremely important when trying to make that decision. The first of which is kind of what we alluded to earlier when we set up the episode here was talking about, well, hey, you need to have an understanding of like, how is your tax bracket going to potentially change over the course of the next handful of years or even further out, right? So that way you can kind of get a framework to say, “Well, hey, I’m in the 24% tax bracket now. I’m going to be in the 32% tax bracket down the road. Maybe Roth is a better path for me to go because pay taxes at 24% now versus pulling it out of an IRA account or a traditional savings account, 401k account and pay taxes at 32%.” So it’s kind of picking up that-

Walter Storholt:

On the surface, that sounds very reasonable.

Tyler Emrick:

It does, yes. But the hard part is, well, understanding how your tax bracket is going to change, right? I’d encourage anybody listening, well, hey, do you know what your federal tax bracket is right now? Do you know what it’s going to be like next year? Do you know what it’s going to be like in a handful of years?

Walter Storholt:

If you get that wrong in the assumption, then it kind of throws off the whole theory.

Tyler Emrick:

Correct, correct. So I think that’s the first basic thing that you got to try to have an understanding of. The next thing is understanding and saying, “Well, hey, where are you likely going to fall this year and is some of your income bumping up into the next tax bracket or not?” What I mean by that is like, hey, maybe you’re going to fall into 32% marginal rate federal this year and you’re running your taxes and you’re like, “Well, I’m only going to fall into that by about $10,000.” Well, then maybe as you’re looking at the upcoming year, you would say, “Hey, I want to put $10,000 back pre-tax into my 401k account and then everything else I’ll put back into Roth.” So that way you’re going to bump your income down low enough to stay out of that 32% tax bracket and then you’re paying taxes on the Roth money at 24, right?

So you’re managing that on a year-end and year-out basis. But to understand that, well, you got to have an understanding, well, hey, what’s my taxable income look like this year? And you preferably got to know that ahead of time looking at the next year, right? Because think about your retirement plans. Most of us get paid what, biweekly, bimonthly, maybe once a month. So if you’re doing this planning at the end of the year for this current year, well, you don’t have a whole lot of paychecks left to kind of change that contribution from pre-tax to Roth or whatever the case is. So those individuals that have income that’s right at the top of one bracket, maybe just going into the next one, I think there’s a pretty big opportunity there for you to kind of look and say, “Well, hey, how do I want to manage this for the upcoming year?” Versus just saying, “Oh, I’m going to put it all in my 401k, maybe pre-tax or whatever.”

Walter Storholt:

Hard enough for somebody who’s like maybe a W-2 employee, but relatively maybe predictable year to year income gets even more complicated if maybe you’re working on a lot of commission work or a business owner. Very hard maybe potentially to predict where you’re going to be.

Tyler Emrick:

Yes. And that’s why we spend so much time during this time of year looking at the upcoming year, trying to get a little bit of an understanding of what are our expectations, when are we going to get more clarity on maybe when that bonus is going to happen or whatever that is, so that way we can plan for it, once we understand the data, then make any adjustments that we need to from there. So a lot of individuals though, pre-retirement, that’s the big decision point, right? Hey, do I want to pay taxes now or do I want to pay them later? What does my tax bracket look like and how can we capitalize off of it? I would probably like to zero in too on individuals that are maybe just a year or two out from retirement, right? We’re almost there, Walt. We’re heading into retirement, and specifically those individuals that are close to retirement and going to be retiring before age 65.

And the reason why I say that is because age 65 is, hey, you get access to Medicare, it’s a big healthcare age. If you’re looking to retire before 65, now we got to kind of figure out and wrap our arms around, well, what are we going to do for healthcare? And while we’ve done no less than maybe a handful of podcasts on individual healthcare ACA tax credits, but for individuals who might not have lumpy income or maybe not be bumping up into the next tax bracket, but are a couple years out from retirement, one of the big planning opportunities would say, “Hey, do we want to start socking away some money in maybe a Roth 401k?”

So that way if you do retire at 63 or 64 and you need to have individual healthcare for a year, maybe we have a Roth account that we can pull from that is not taxable, doesn’t hit your tax return, and then we can better manage your income for those ACA tax subsidies for individual healthcare. So a really big caveat there for those individuals may be on the doorstep of retirement, your decision might change a little bit, right? You still want to say, “Hey, what’s my tax bracket now versus in retirement down the road?” But you’ve got this little added caveat that we want to absolutely be mindful of.

Walter Storholt:

Definitely, by the way, just a quick aside, check out the link in the description of today’s episode. We’ll link to that recent healthcare episode that we taped. Definitely go check it out where you can learn a little bit more about how to get a large healthcare tax credit even if you are affluent. That might apply to a lot of our viewers and listeners. So we’re going to link to that in the description of today’s show. It was just like two episodes ago, but we’ll go ahead and make it easy for you and link it down there. But check that out if you want to learn a little bit more about healthcare planning as part of tax planning in this overall financial picture that we’re talking about today. It’s a little bit of a different discussion, but still kind of very similar to what we’re talking about today, but with even more depth into how to handle healthcare subsidies and those kinds of things. So that was a cool episode.

Tyler Emrick:

Absolutely. Definitely. And it impacts a ton of individuals and families. So if that’s affecting you, check it out. The last tip that I’ll think of, or I just want to kind of point out to individuals that are maybe pre-retirement, just, hey, where should I be saving? Don’t lose sight of your 401k plan and having an after-tax contribution available in there as well. These are this, mega backdoor Roth is I think kind of the term that’s used and searchable there. But if you’re looking for places to be able to deploy capital, save assets for retirement or the like, a lot of individuals think once they hit the maximum to their 401k, either pre-tax or Roth, they’re kind of shut off and can’t put any more money in there.

Well, a lot of employers now are giving you a third category of savings inside of your retirement accounts through your employers. We call it after-tax savings. So once you’ve maxed out pre-tax or maxed out Roth contributions, this after-tax is the next plot that you can go to kind of sock away a little bit extra money. So if it’s afforded to you, I think that’s another big thing that adds another layer to the conversation as you’re thinking about, hey, how do we want to be saving and what types of accounts do we want to be positioning to? But yeah, so pre-tax, pretty light-

Walter Storholt:

Is that an additional account that you would then see from a 457 plan would come into the equation or is that something that’s still happening inside of the 401k or 403B?

Tyler Emrick:

It’s still happening inside of the 401k or 403B. So you go on to your employer’s website, wherever the account might be custodian, the easiest way for you to figure out is if you go to this section that says, hey, contributions, like where you would go and change pre-tax, Roth, whatever percentage you want. If there’s a third line item down there that says after-tax contributions where you can change a percentage, it’s a nice, easy way for you to be able to figure out, hey, does my plan allow for this or not? And then the employer is required or the custodian who holds the retirement plan is required to keep track of all those different, what we call sources of money going into the retirement plan. A source is, hey, is it pre-tax? Is it Roth? Is it company matching? Is it a profit sharing contribution from the employer? All these types of ways money can get in your employer plan have to be categorized by the employer and the custodian. So they’re already doing it for you, after-tax is just another categorization. So if you retire-

Walter Storholt:

Would that be similar to just opening up a brokerage account, but now you’re able to just do it within your existing, those kinds of dollars are happening inside of your 401k?

Tyler Emrick:

It is. You don’t even got to open up-

Walter Storholt:

Okay.

Tyler Emrick:

No, absolutely. You don’t have to open up a new account, right? It would just be saying, “Hey, I want to put 2% of my pay into after-tax contributions.” And then what might happen, Walt, is, hey, let’s say you do that for a handful of years where you’re doing some Roth money, you’re doing after-tax money and then you’re getting your company match or profit sharing or whatever and you go to retire. Well, you might look at your 401k account and there might be a few different buckets of money in there, right? There might be a pre-tax bucket, which is money you haven’t paid taxes on. There’ll be a Roth bucket where, hey, you’ve already paid the taxes on it, and then there might be this after-tax bucket inside of there. What the IRS allows you to do is they allow you to take that after-tax bucket and actually shift it over into the Roth bucket to where it eventually would start to grow tax-free, which is really the big added benefit.

A little earlier, we talked about, hey, if you make too much money, you can’t contribute directly to a Roth IRA. Obviously that’s separate than a 401k and what we’re talking about, but this after-tax is for high income earners. It’s another wonderful place for you to kind of sock away a few extra bucks to eventually get it positioned into a Roth account, which when we think about asset location and what types of retirement accounts and just in general investing accounts that you’re using, the Roth account can be a pretty powerful tool as you’re starting to think about where’s my money going to come from in retirement because, hey, that money’s already been taxed, the earnings not taxable to you and all that good stuff. So all the benefits that Roth provide.

Speaker 3:

What would your life look like if you designed it around your True Wealth? It’s a powerful question and one that True Wealth Design helps individuals, families and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Very cool to know about that nuance. By the way, if you have any questions for Tyler or the team at True Wealth Design as we go through the show today, you can always reach out and schedule a 20-minute discovery meeting with the team by clicking the link in the description of today’s show. Again, very easy to do that. It allows you to have a conversation about your financial life, maybe some of the gaps in your planning, how they can step in and help you get to where you need to be to see if you’re a good fit to work with one another. That’s really the first step that everybody takes. So again, click the link in the description of today’s show and you might see a Let’s Talk button. You can click on that as well and schedule that time to visit at your convenience from wherever you may be.

All right. So that’s all the pre-retirement conversation about Roth and how to handle it. Post-retirement though, the conversation changes a little bit, right?

Tyler Emrick:

It does, because generally speaking, if you’re retired, you’re not having any earned income coming in because you’re not working. So that would limit your ability to actually put new money into a Roth account through a contribution. But what opens up for most retirees is the ability to do these Roth conversions, right? So Roth conversions are very different than a Roth contribution. Roth contribution is when you’re taking money that has never been in a retirement account and trying to put it into a Roth portion of a 401k or an IRA or the like. And when we say a Roth conversion, what we’re essentially saying is, “Hey, we’ve got some money here that’s already in retirement accounts, specifically pre-tax retirement accounts that I’ve never paid taxes on. I want to think about shifting some of that money over to a Roth account and actually pay the taxes on it so that way I can get it to where it’s growing now tax-free for the rest of my retirement life, whatever the case is.”

So that transition from into retirement, we stopped talking about, hey, how should you be saving? And we start thinking about, hey, should we start getting money out of your pre-tax retirement accounts and over into a Roth account through a Roth conversion? When we’re thinking about that decision, some families are kind of torn between a few different options on how do we take more income. And one of the decisions that individuals that we’re working with or a lot of families are thinking about here at the end of the year is, hey, do we want to prioritize a Roth conversion or do we want to maybe realize some taxable gains inside of our retirement account? For some individuals, and well, let me back up a little bit. So when I say realize some gains in a taxable brokerage account, that might be a little counterintuitive because I would assume most individuals listening, they’re thinking of like harvesting losses or tax loss harvesting inside of their non-retirement accounts.

This is kind of the opposite of that. This is us saying, “Hey, you have some money that’s outside of retirement accounts already.” It’s invested, it’s in maybe a brokerage account, you might have some gains of investments, hopefully you have some gains from your investments inside of those accounts. The question becomes is, do we want to start realizing some of those gains at the end of the year because there’s a tax opportunity for us to potentially do that, right? We do this a lot with individuals that we are potentially managing income for for ACA tax credits, right? Where if you have a pot of money that you’ve accumulated outside of retirement accounts, we might be able to realize those gains at a very low or no tax with no tax consequences at all. Long-term capital gains rates for some individuals, depending on your income, is 0%.

So we might be able to go into your taxable accounts, sell some investments that has no negative tax consequences to you, doesn’t necessarily hit your tax return and create a tax bill for you and would maybe get you some money to live off of if you’re trying to manage your income for whatever reason, right? So I think this idea of saying, “Well, hey, do we want to prioritize Roth conversions? Do we want to maybe realize some gains inside your account?” Well, it all kind of comes back to, hey, what are we trying to accomplish for the year and what is our tax target or what’s our income target, and what’s going to be more beneficial for you and the family for the tax year that you have?

Generally speaking, when you’re retired, we don’t have that income coming in. So we have a lot more flexibility if we’ve kind of accumulated wealth in a multitude of different accounts, retirement, non-retirement, Roth, so on and so forth. So this idea of, hey, do we want to maybe do a conversion, take your income up higher, pay the taxes on it because we like the tax rate, or do we want to maybe go into one of your other accounts, realize some gains, do it at a more preferred tax rate? And kind of weighing those pros and cons for individuals, especially individuals early in retirement and individuals on individual healthcare plans. I think this is a big key or a big caveat that we’re talking through to try to manage, well, where’s your money going to come from, whether it be this year or next year coming up. So very important.

Walter Storholt:

I know a lot of people probably want an answer on, should I do post or should I do the Roth or should I do traditional? And give me a percentage, or just all or none would be even better because it would just simplify life. Sounds like, without giving specific percentages, because I’m sure it’s client to client obviously, but it sounds like you guys do like a mix of them to work with to give you that flexibility in retirement.

Tyler Emrick:

It is, right? I mean, when I think about retirement, one of the biggest assets you can have is flexibility on what assets you can use in retirement. And when I say flexibility, what I’m getting at is having accounts that are maybe pre-tax, having accounts that are in Roth, having accounts that are saved outside of retirement accounts, all three are very important to kind of build up. So if you’re one of those individuals that are, hey, I’m still a handful, two handful years away from retirement, I would really urge you to start thinking about and prioritizing, well, hey, am I building some flexibility?

Because if you’re just putting all your money in pre-tax retirement accounts, you’re not necessarily giving yourself much flexibility in retirement to say, “Hey, where am I going to pull my money from when I need it?” Well, you’re going to pull it from your pre-tax retirement accounts and that is all going to hit your income as ordinary income in the year that you pull it out. So when we start thinking about, well, where are we going to be appropriating? Where are we going to be saving our money? There is no golden rule with it all. I wish I could-

Walter Storholt:

But you’re exposing yourself to a lot of risk by doing that, right? Because if all of a sudden they say, “Hey, we’re finally going to handle the national debt. And so sorry folks, but tax brackets are going back up to,” where was it? Reagan was paying 90% on his acting career or whatever it was. But whatever amount, like you just lost a bunch of money if you didn’t have that flexibility and hadn’t been thinking in advance about some of these things. So I know things don’t necessarily seem to happen overnight like that and we get some time to prepare, but you never know and you might be caught kind of in a bad situation. So having that flexibility, I mean, you can’t understate that, I think.

Tyler Emrick:

No, not at all. Well, I see it a lot. I don’t see a lot, I think the education out about Roths and pre-tax retirement accounts and savings, I think there’s a lot of it out there, which is great. So a lot of families come in, and a lot of the, should we be saving Roth? Should we not? It’s a very big-

Walter Storholt:

Yeah, they’re at least asking the question now. Yeah.

Tyler Emrick:

Correct, right? Where I see that flexibility that we alluded to, maybe not as out there would be in the form of like, hey, this annuity, or I have this product that’s going to solve all your problems, put all your money into this, and it’s going to give you a stream of income for the rest of your life. Things like that or decisions like that are definitive and they’re long term and they’re long-lasting to reach the benefit and you don’t give yourself much flexibility when you do things like that. So when I think about the flexibility aspect, I think it’s perfect for what we’re talking about here when we’re thinking about Roth or not, but I also would, as a quick little tidbit, be mindful of an individual telling you, “Hey, this is going to put all your money here or do all this or lock it up or whatever the case is,” because you’re losing a lot of that flexibility and retirement.

And to your point, tax laws change. I don’t know if we’re going back to those high, high rates, maybe we will, maybe we won’t, but at the end of the day, what I can tell you is we’re going to continue to have some change. And if you have flexibility built into your retirement plan, you can kind of maneuver that and do it efficiently and have some flexibility depending on what you’re trying to accomplish. So flexibility is huge and Roth conversions versus taxable gain harvesting versus how much or how little I think should be on the docket for all individuals as you’re thinking about year-end and the upcoming year, for sure.

The other thing that, what I put on here for post-retirement, how to think about using your Roth that I think gets lost a lot is, especially if you’re married, how to protect your spouse’s future, right? When I think about that, it’s like there’s all these buzzwords that we talk about all the time on the podcast, right? IRMA, increased Medicare costs, tax bracket management, things like that. Well, those are all fine and dandy if you’re married filing jointly. But what happens is when you pass or your spouse passes, you go from filing joint to filing single over a period of time. So when that happens, well, your standard deduction likely gets cut in half. Your tax brackets get cut in half, your IRMA limits get cut in half before they start charging you more for your Medicare B premiums. That’s at IRMA that we’re talking about.

So all these things where, hey, when we run out of projection over the next 30 years, hey, you’re good. You don’t have an IRMA issue. Hey, your tax bracket’s fine. Well, have you tested that to say, “Hey, what happens if one of us do not live into our mid 90s and passes away?” What does that kind of look like for the surviving spouse and what are some of those issues? Because thinking through that, I’ve had a number of families say, “Well, that might be one of the reasons why we get aggressive with our Roth conversions or our gain harvesting,” or whatever the case is there. So make sure that’s a good piece of the pie and a good what if scenario to be thinking of. I think we think about the surviving spouse in the form of insurance a lot, Walt, like, hey, are we properly insured? Do we have enough for this surviving spouse to be okay? Is a long-term care need okay?

Walter Storholt:

But rarely do we think about the taxes involved.

Tyler Emrick:

Correct, which I think go hand in hand with how you should be using your Roth and into that decision on like, well, hey, are we doing a conversion this year or not? Understanding that what-if scenario I think is pretty imperative.

Walter Storholt:

Because you don’t just divide things by two, all of a sudden that happens. As anyone who’s been through that process would tell you, the math doesn’t math exactly like you would think it would.

Tyler Emrick:

No, your income does not get cut in half, generally speaking. And certainly maybe one of your social security payments goes away if you’re both getting that, but those required minimum distributions, once you turn in your mid 70s, those aren’t going away, and theoretically, if you-

Walter Storholt:

Yeah. And your expenses don’t cut in half either.

Tyler Emrick:

They don’t, right? So I think it’s a good thing to be forefront as you’re thinking about your planning and your income targeting that sometimes can get lost in the weeds as you’re thinking about it because, hey, if we’re doing these big Roth conversions, Walt, I mean, at the end of the day, you’re writing the IRS a pretty big check. So you got to have some conviction into the reasoning as why are we doing this?

Walter Storholt:

Yeah, it’s a little easier when it’s little by little coming out of your paycheck, a little bit harder when it’s some big amount that you’re writing that check to the government.

Tyler Emrick:

Yeah, especially if you’re in the 22, 24% tax bracket, right? You want me to convert 100 grand and pay 25 grand in taxes, 24 grand in taxes? Yeah, it makes sense, right? Okay. Well, it’s like the understanding kind of the why behind it, and that’s why leaning on a financial plan I think is so important during times like this.

Walter Storholt:

Yeah. That’s why you have to have a long-term picture and timeline with these things. This is not short-term decision-making. This is for the big picture and the long-term.

Tyler Emrick:

Correct. So just like with a surviving spouse, I would take it one step further and thinking about inheritance legacy too, right? If you have children that are going to inherit these accounts.

Walter Storholt:

Well, yeah, because all of those things are going to pass differently, right?

Tyler Emrick:

They are, right? So if you’ve done a great job saving, maybe you’re not going to spend through all your assets, maybe your tax bracket’s perfectly fine. There might not be a whole lot of opportunities for your Roth conversions. But then when we start opening up the conversation to like, okay, you’ve saved all this, you’re going to live long, healthy, happy retirement, everything looks great. Well, hey, what gets passed down to the kids and how do they receive that money, I think is important to a lot of families. You inherit a retirement account that’s pre-tax. Well, generally speaking, there’s rules on how and when you have to pull that money out. Generally speaking, those are all going to be taxable to you when they come to you and you’re doing those distributions. Is your children in a higher tax bracket than what you are or are they not?

That could also be another one of these triggering events for us to get aggressive with using our Roths, maybe converting more money to Roth as if your children are high income earners, in higher tax brackets than you, you’re able to convert at a lower tax bracket than what they’re in. Well, hey, you’re maximizing the wealth at the end of the plan, right? You inherit a Roth account, certainly there are distribution rules you need to follow, but those distributions are not going to be stacked on top of your working income. They’re going to come to your heirs essentially tax-free. So I think understanding how your assets, specifically pre-tax retirement accounts versus Roth, how they change over time and how that impacts your heirs in thinking through the estate, it all goes hand in hand. Again, going back to that having a retirement plan, Walt, and kind of using it to help Let’s make those decisions.

Walter Storholt:

This is where they used to have the stretch IRA, that now I guess that’s gone and it’s eliminated some of the flexibility that we used to have. It’s been pinched a little bit in that inheritance conversation.

Tyler Emrick:

They pinched it a little bit, for sure. Not gone completely, but you do have to qualify and be a designated eligible beneficiary, which is a fancy term for, hey, there’s a few set of criteria where if you meet them, yes, we’re able to stretch those payments out over the lifetime. So hey, if you inherit a retirement account, you might be able to make RMDs or required minimum distributions for the remainder of your life and never be fully required to take all that money out of the account. But that’s few and far between where that exception is kind of coming up here. So planning for it, or does that exception apply for who is going to inherit some of your assets and things like that I think are important considerations.

And then the last thing I had on here was just investment asset location. So this probably comes up quite a bit when I talk to new families and kind of are looking through their account statements and just trying to get a framework for, hey, where are you at? What are you doing? I see it all the time to where, hey, they’ve maybe built up a good amount of money in Roth. They’ve started saving in maybe a Roth 401k or Roth IRAs. They’ve been doing them for a handful of years and they’re accumulating some assets in there and they manage them very similarly to how they manage their IRA accounts. Hey, we have a mix, we have some stocks, we have some bonds, we have some cash in there. It’s managed based off my risk in this fancy questionnaire that I filled out and it’s just like my IRA. Well, when we kind of think about that, it’s like, well, do we really want our investments that are there more for protection, maybe slower earning growth like a bond, for example.

Do we really want those in our accounts that are growing tax-free like a Roth? Well, ideally we wouldn’t, right? We would want those lower expected return assets like a bond, we’d want those in our IRAs or in our pre-tax retirement accounts. We would want our more risky, our higher expected return over a long run assets inside of our Roth accounts, because if we can earn more interest or excuse me, more return in those Roth accounts, well, that’s all tax-free money. So when we think about looking at all your accounts and how a Roth fits in, I think a lot of families look at it in a silo because, hey, inherently maybe you have some retirement accounts at one custodian here at another, maybe one’s in an old retirement plan and you’re not kind of looking at maybe everything in the aggregate.

But what investments that you’re using inside of your Roth I think is where we can certainly pick up some efficiency and making sure that those assets align with not only your household goals and risk and comfortability, but also, hey, we want to fill up your stock exposure first inside of those Roth accounts, then move on and kind of go into the IRAs and so on and so forth. But that asset location piece, I think I see a lot of families kind of missing that and I think it’s over time was really valuable. Think about compounding growth and over time, how much your retirement accounts continue to grow.

I mean, if you have a 20, 30-year retirement, having stocks in those Roth accounts are going to be tremendously beneficial versus maybe having a diversified bond portfolio or something like that. I’m not saying you should have all your money in stocks, right, Walt? But it’s saying, “Hey, figure out what your right mix is of stocks and bonds or alternative assets or whatever it is.” And then say, “Hey, I want to fill up my stock bucket first with my Roth account.”

Walter Storholt:

There is almost this feeling though, this assumption or this notion that when you get to retirement, you really shouldn’t have any stocks. I feel like that’s out there in the retirement world, right? It’s been very anti, even if it’s not a negative approach or that meaningful, it’s just been, hey, you move out of stocks and into bonds, for example, like to break it down very basically to advice given to people. So it’s not usually viewed as like being in stocks is okay in retirement. I know you guys take a very counter opinion to that for a lot of the reasons we’ve talked about today on top of prior episodes as well. So I think it’s an important distinction. I want to make one last note of something. We talked about the stretch IRA, the backdoor Roth, and the mega backdoor Roth today.

Tyler Emrick:

We did, we did.

Walter Storholt:

It’s a great example. None of those things are a product. None of those things are something you can go and open, right? These are actually terms for a strategy that you would apply underneath of other umbrellas. Am I correct in that?

Tyler Emrick:

You got it.

Walter Storholt:

I think it’s helpful to know that sometimes there’s not always a product called a thing. It’s just a strategy call to thing.

Tyler Emrick:

Yes.

Walter Storholt:

For the longest time, I thought a stretch IRA was something you… I’d like to open a stretch IRA.

Tyler Emrick:

[inaudible 00:34:43]. Yeah.

Walter Storholt:

So I find it helpful to point that out every once in a while, so cool.

Tyler Emrick:

No, that’s a good one.

Walter Storholt:

Well, again, if you’ve got… A great breakdown today, Tyler. Thanks for all of the information. I love how to view this pre-retirement, post-retirement, some of those differences, understanding the strategies behind both, super important. So if you’ve got any questions about something we talked today, again, I’ll reiterate. It’s very easy to have a one-on-one discussion with an experienced advisor on the True Wealth Design team. All you have to do is click the link that’s in the description of today’s show, or it’s simply truewealthdesign.com.

But again, linked in the description of our show. Click the Let’s Talk button once you get there and you’ll be able to schedule a 20-minute call with an experienced advisor on the team, see if you’re a good fit to work with one another, and take next steps from there. Tyler, that’ll be today’s episode. We’ve got one more for the year that we’ll tackle next time around. Looking forward to it.

Tyler Emrick:

Yeah, no, should be fun. Look forward to it as well, man. We’ll see you.

Walter Storholt:

Thanks so much. We’ll see everybody next time right back here on Retire Smarter. Take care.

Speaker 4:

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