Q&A with Wes Moss: Roth Conversion and Diversification

As an extreme example, let’s say you have $1 million in an IRA or 401(k) and want to convert it all to Roth. It’s legal, but is it recommended? Not typically. Typically, there is a significant cost to withdrawing money from an IRA or 401(k) and transferring it to a Roth. Investments withdrawn from these accounts are classified as income by the IRS.

Your taxable income would increase by $1 million and your tax bracket would probably explode. The cost to get these funds in the Roth can be over 40%, depending on where you live.

The basic answer boils down to this: today’s taxes versus tomorrow’s taxes.

Think about what normally happens in your 50s and 60s – progressing into your highest earning years and most likely seeing your highest 401(k) balances or other retirement savings. If you make $200,000 a year and want to convert your 401(k) to Roth, it could push your tax bracket into the highest tier.

Fast forward five years until you stop working and retire. It is not uncommon to fall into a relatively low tax bracket. And if you’re not yet 72, you don’t have to worry about RMDs. Why convert retirement money into a Roth at a 40% tax bracket when in a year or two you could potentially convert to a lower tax bracket? The delayed gratification of one day withdrawing the Roth’s tax-free money doesn’t always justify the immediate pain of investing it.

If you knew your future tax rate would be the same as it is today (and believe me, no one has a crystal ball to predict future tax rates), converting Roth makes sense, and even more so if you convert pieces of it in a tax-efficient way. This is especially true if you have an upcoming pension that could support your level of income when added to Social Security or other additional sources of income.

Everyone’s situation is different, and it’s a complicated question to answer broadly. The key is to remember to compare today’s taxes to tomorrow’s, and let that concept guide you. Quite often it ends up looking like a gradual, large-scale Roth conversion that is done over several years.

Our other question came from Jonathan. He asked, “How does the 4% plus rule work with a diversified income portfolio of domestic and international stocks, real estate investment trusts (REITs), and master limited partnerships (MLPs)?”

That’s a lot to consider, so I think we need to simplify the question down to its core. “How are you supposed to diversify a portfolio using the 4% plus rule? »

There’s no perfect answer, but I think I can come close.

One of my main goals in financial planning is to find a way for people to get the most out of their wallets each year without depletion. We want them to live their best life without breaking the bank.

How much can you withdraw each year? I believe the number is somewhere above 4%, as first explained by the 4% rule, created by William Bengen. In 1994, he calculated real stock returns and retirement scenarios for the previous 75 years and found that retirees who drew 4% from their portfolio in the first year of retirement, adjusting each year inflation, would likely see their money outlast them, assuming a 50% to 70% allocation to large-cap stocks, rebalanced annually with the remainder in bonds.

20 years later, Bengen discovered that if he added small cap stocks, there was a good argument to be made that the figure could be adjusted by 4% to 4.5% – the 4% Plus rule.

Remember, this is only a guide. I think Jonathan understands he needs 50-70% equity, but he wonders what to do with the rest. Specifically, he is interested in REITs, MLPs and international stocks. These parts of the portfolio are riskier than bonds and large-cap stocks, but they are all part of a well-diversified, income-generating portfolio.

REITs and MLPs generally carry a little more risk than large-cap stocks. They are both great for income but volatile like stocks, and sometimes even more. International stocks make sense for most diversified portfolios, but they also fall into this riskier category.

During major market corrections, stocks go down, but so do most of these other risk categories. It would be unlikely that the market would fall 20% without REITs or MLPs following. The fundamental principle is that of risk assets versus safety assets. It is important that every portfolio has the right balance between the two. The beauty of this rule is that it is dynamic and can go up or down depending on the specific situation. We use this rule as a guide to help retirees stay happy because at the end of the day, that’s what I’m here for.

Both of these questions were quite relevant in terms of what investors need to consider when planning for their retirement. Smart planning now can lead to a good life later and sooner than you think.

Wes Moss is the host of the “Retire Sooner with Wes Moss” podcast, available in the podcast app right on your smartphone. He’s been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for over 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the Chief Investment Strategist for Atlanta-based Capital Investment Advisors. For more information, visit wesmoss.com.


This information is provided to you as a resource for informational purposes only and should not be considered investment advice or recommendations. Investing involves risk, including possible loss of principal. There is no guarantee offered that any return, yield or performance of the investments will be achieved. There will be periods of fluctuating performance, including periods of negative returns and periods when dividends are not paid. Past performance is not indicative of future results when considering any investment vehicle. This information is presented without taking into account the investment objectives, risk tolerance or financial situation of any specific investor and may not be suitable for all investors. Many aspects and criteria should be examined and taken into account before investing. Investment decisions should not be made solely on the basis of the information contained in this article. This information is not intended to, and should not, form a primary basis for any investment decision you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. The information in the article is strictly an opinion and it is not known if the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change without notice at any time depending on many factors, such as market or other conditions.

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