November 21, 2024 • 23 mins
Ever wondered if there's a magic trick to converting your tax-deferred retirement savings into tax-free wealth, completely sidestepping income taxes? Maybe you've seen social media ads promising the "secret" to turning your traditional IRA into a Roth IRA without paying taxes and thought, "Am I missing out on something amazing here?" Imagine growing your retirement savings tax-free and sailing into your golden years with financial freedom. Sounds too good to be true? Spoiler: it often is.
In this episode of Bullshit on Stilts, we’re breaking down the bold promises behind social media Tax-Free Roth Conversion advertisements. We’ll explore the strategic use of Roth IRAs—what they can actually do to minimize tax burdens and maximize tax-free growth. Through a lively, humor-filled discussion packed with expert insights, we’ll help you separate fact from fiction and empower you to make smart financial decisions for your future.
We’ll also tackle some of the most common myths about Tax-Free Roth Conversions, shedding light on what really happens with those damn taxes. And don’t worry, we’ll guide you through the what is known as “tax-neutral” and whether the claim of “tax-free” is accurate or not.
Lastly, we’ll emphasize the power of asking the right questions and challenging your financial professional to get the advice you deserve. Whether you’re a savvy investor or just dipping your toes into retirement planning, we’ve got you covered.
So, tune in and join the conversation. Let’s develop your BS detector with the tools, knowledge, and confidence to secure a prosperous—and well-informed—retirement.
We love to hear your thoughts, questions, and ideas. Send us a text!
Developing your financial bullshit sniffer one episode at a time.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
So let's set the table on thetax-free Roth conversion.
(00:45):
So it's interesting, right?
The whole name sounds prettycool Tax-free.
I love that, right, and so itkind of helps to suck you in,
right?
When it comes to subject lines,they're critical to get an
individual to say, gee whiz,what's that all about?
So, tax-free Roth conversion.
(01:08):
So first of all, let's figureout what is a Roth conversion in
the first place.
So first, a Roth conversionitself never mind the tax-free
concept or scheme, but just aRoth conversion is when an
individual has a traditionalretirement account and has a
(01:30):
Roth retirement account.
In the Roth conversion theindividual wants to move the
money in the traditionalretirement account.
We presume it's pre-tax dollarsthat went in there, so the
dollars never got taxed whenthey went in.
It's kind of a benefit from thetraditional retirement account.
We want to take those moniesout and we want to move them
(01:55):
over to the Roth.
We want to convert pre-taxretirement dollars into
after-tax retirement dollars,hence Roth conversion.
An example would be let's say,you've been working for a long
time, you've put money into inthis example, just to be simple
a traditional retirement account, a traditional IRA, and every
(02:18):
year you put money in, you wereable to take the beneficial tax
deduction, meaning the dollarsthat went in there.
Guess what?
You didn't have to pay taxes onthose dollars as a form of
income tax deduction, also knownas pre-tax dollars.
Here's the catch.
It's really cool because thetraditional IRA grows
(02:40):
tax-deferred, meaning every yearI make money, every year I earn
dividends, every year I earninterest.
I don't have to pay taxes onthat.
But in retirement and we'represuming over the age of 59 and
a half for this discussion whenI take the money out of my
traditional retirement account,guess what?
I have to pay income taxes onthe amount I take out of the
(03:02):
account.
Aw boo, Let me say that again,I have to pay taxes on the
amount of money I withdraw outof my traditional retirement
account.
Essentially, the IRS views thatas a paycheck and as a result,
like we all know, with everypaycheck we got to pay taxes.
That's what the traditional IRAsets up for us.
(03:25):
So pre-tax dollars goes in, Ihave tax deferred growth for a
long time and then at a certainpoint, when I take money out of
that account, I'm going to paytaxes on that.
And, by the way, with atraditional retirement account,
I have to begin taking a littlebit of that money out every year
, beginning at my age of 73.
(03:49):
So I really am going to beforced someday, when I'm older
at least, to start taking moneyout and creating income taxes in
my world, and that's notnecessarily a good thing or bad
thing, but that's just the factsof the matter.
When it comes to a traditionalretirement account the Roth
(04:10):
retirement account and, againsimplified, just the Roth IRA
account well, guess what?
It's sort of the completeopposite, in that when I put my
money in, those dollars I putinto the Roth contribute to the
Roth are after-tax dollars.
They've already been taxed.
I got paid for my job.
My employer took my taxes outof my paycheck and the money
(04:34):
that's in my checking accountafter-tax dollars I get to put
that money into my Roth IRA.
Well, why would you do that?
Why don't you take the taxbenefit up front, like the
traditional IRA has?
Well, the answer is that overthe life of the Roth IRA, and in
my case, over the remainingtime of my life, the dollars in
(04:59):
there grow tax-free.
The dividends I receive, Ireceive tax-free, interest I
receive, I receive tax free.
And oh, by the way, I never,ever, ever have to take money
out.
I'm not going to be required towithdraw a small percentage of
the money when I'm 73.
Not at all.
I can keep that money in thereand never touch it.
(05:19):
I don't have to withdraw it.
And lastly, when I do withdrawmoney out of my Roth IRA, guess
what?
I don't pay a dime in taxes.
The IRS does not view it as apaycheck.
So that's a pretty cool thing.
So a Roth conversion is simplyseeking to move pre-tax dollars
(05:42):
that I have in my traditionalIRA, move it out of the
traditional IRA.
Guess what?
I withdraw the money, so I'mgoing to create an income tax,
but I can move those dollarsfrom the traditional IRA.
I have to pay a tax when I dothat.
And then the dollars that enterthe Roth IRA.
(06:03):
They are now after-tax dollars,meaning I never have to
withdraw them ever in my life,and when I do withdraw them,
they're tax-free.
So long as I follow a couplesimple Roth IRA rules.
That's a really good deal andwe're not going to get into that
right now.
So that's the setup.
So the target market for thetax-free Roth conversion are
(06:23):
going to be folks that have alot of money in traditional
retirement accounts and they aregoing to be essentially
convinced that the best thingfor them to do is move some or
all of that money from thetraditional IRA into a Roth IRA.
That's what a Roth conversiondoes.
(06:45):
The selling points are you moveit from taxable retirement
monies.
You move that over to tax-freemoney in retirement when you
withdraw it into the Roth.
That's the sale.
And then to support the sell,what the financial service
professional will do is create astory.
Right.
Storytelling sells a lot.
(07:06):
They create the story aroundprojections of future income tax
rates.
Promises that when you retire,income tax rates are going to be
much higher.
So paying lower income taxes aday is a smart idea.
So in general, the Rothconversion conversation.
(07:29):
So that conversation with afinancial service professional
is going to focus you oncreating urgency around doing a
Roth conversion, that it'sbetter for you long term in
terms of the amount of tax youpay and that they have a great
solution for you in the processof doing your Roth conversions.
(07:51):
Okay, so we have a little bit ofa basic foundation of what the
Roth conversion is, what thepoint is, who might be a
candidate to speak to about aRoth conversion?
Now let's move over to theadvertisements around tax-free
Roth conversions.
But wait a minute, kelly, youjust said that when I do a Roth
(08:13):
conversion, I create a taxableevent when I withdraw money out
of my traditional retirement,and the survey says that is the
correct answer.
True, the sales concept, theadvertising concept, is tax-free
.
You don't have to pay taxes.
You get around taxes.
You get to be smarter than theaverage bear.
(08:34):
Everybody else is paying taxes,but you don't have to right?
That's what it sort of suggests.
So how does a financial serviceprofessional get away with
advertising tax-free Rothconversions?
Let's get into this.
When you see tax-free Rothconversion, start thinking
(08:55):
pretty quickly that it's aninsurance agent that is behind
the advertising.
In fact, if you set up a15-minute free consult, if you
want to do a call, if you wantmore information about 90 plus
percent likelihood maybe morethan that, 100% likelihood it's
going to be an insurance agenton the other end of that
(09:16):
discussion.
Nothing wrong yet Just knowthat you'll be talking to an
insurance agent.
Remember, insurance agents getpaid money.
They earn a living once and ifyou purchase a product In this
case, the tax-free Rothconversion product that's behind
the curtains is going to bemost likely a fixed indexed
(09:40):
annuity plus a bonus that theannuity pays you.
Now, that sounds delicious,right?
This bonus?
In this example that we'regoing to use today, we're going
to assume a 20% bonus.
Wow, that sounds fantastic.
So let's set up an example here.
(10:01):
Wow, that sounds fantastic.
So let's set up an example here.
I have $100,000 in traditionalretirement account.
I'm talking to a financialsales professional and in this
case, an insurance agent about atax-free Roth conversion,
because it makes sense.
I don't want to pay taxes whenI'm older, so, yeah, this is
something I kind of want to findout about.
All right, in the discussion forthe tax-free Roth conversion,
(10:24):
the conversation will eventuallyget to a recommendation around
a fixed indexed annuity thatpays you a bonus.
Here's how that works.
If we move or do a Rothconversion of all $100,000 of
our traditional IRA, that$100,000 of our traditional IRA,
that $100,000 is withdrawn fromthe IRA and we're going to
(10:45):
assume a 20% tax rate on themoney, meaning we owe the IRS
this year now $20,000 in taxes.
$100,000 withdrawn from mytraditional IRA to do a Roth
conversion triggers an incomepayment to my house of $100,000.
(11:07):
That's the way the IRS sees it.
And if I have a 20% tax rate inthis case, at the end of the
year when I do my tax return I'mgoing to have to make sure I
come up with $20,000 to pay thattax bill.
$20,000 to pay that tax billwhen that money moves into the
(11:27):
Roth IRA.
That money is now after tax,remember, because I'm going to
pay the tax bill for thewithdrawal.
Now I have $100,000 in thisexample now being withdrawn from
my IRA, putting into the RothIRA and now I got $100,000 there
.
We'll get back to why it'sstill $100,000 in a moment.
So 20% bonus on $100,000 is$20,000.
(11:55):
So I got a new fixed indexannuity that I put $100,000 of
after-tax dollars into it andthe insurance company bonuses me
$20,000 on top of the $100,000.
Boy, that sounds sexy, thattastes good, I'm telling you.
But there are some yeah buts inthis whole storyline.
So let's examine that.
And before we examine thatstoryline, I want to digress for
a second and just mention this.
(12:17):
When it comes to a Rothconversion never mind tax-free
or any other type when it comesto a Roth conversion nevermind
tax-free or any other type aRoth conversion there are two
ways that an individual paysthat income tax bill.
One way is to take moneyoutside of the retirement
accounts, like in your checkingaccount or a trust account or an
investment brokerage account,anything that's outside of
(12:38):
retirement.
That money can be used to paythe tax bill and on average,
that's the recommended course ofaction.
So the recommended course ofaction when I do my $100,000
Roth conversion here is toconvert $100,000, withdraw
$100,000 out of the traditionalIRA and move that $100,000, all
$100,000 of it, to the Roth IRA,all the while knowing that I'm
(13:02):
going to end up writing a check,in this example, out of my
checking account for the $20,000tax bill.
So I pay it, but I don't takeit out of my Roth conversion
monies, I take it from somewhereelse.
That way, all $100,000 gets tobe slapped into a tax-free
investment account called a RothIRA and grow tax-free for the
(13:26):
remainder of my days on the faceof the earth.
And, by the way, thebeneficiaries that I assign to
my Roth IRA get to take themoney out when I pass away
tax-free as well.
Pretty slick.
The other way to pay for thetaxes is to take it out of the
$100,000, put it in the bankgetting ready to pay tax on it
(13:47):
later in the year, and then move$80,000 over to the Roth IRA
and in this case, a 20% bonus on80 grand is 16,000, not 20,000.
Big difference, okay.
So back to our storyline Onceagain.
We got 100 grand in traditionalIRA.
We want to do a Roth conversion.
We're going to withdraw 100grand out of the traditional IRA
(14:09):
, creating a taxable event of$20,000 in this year because our
tax rate is 20%.
We're going to pay that withoutside money so that all
$100,000 is deposited into theRoth IRA.
Now after-tax dollars.
That's the Roth conversion in anutshell.
(14:31):
Let's go back to the tax-freeRoth conversion and how that all
works.
First of all, tax-free is alittle bit of a misnomer and a
misdirection, because in thetax-free Roth conversion you
still pay the income tax of 20grand the year that you withdraw
or the year you do your Rothconversion.
You still pay that tax, but inthe tax-free Roth conversion
(14:56):
that payment is sort of offsetor is intended to be offset by
the bonus the index annuity paysyou.
So, remember, we put $100,000in 20% bonus.
My contract statement shows$120,000, not 100 grand.
That's pretty slick.
And, by the way, dollar fordollar, if we pay 20% in tax and
(15:18):
we get a 20% bonus on 100 grand, dollar for dollar, it negates
the tax payment.
So it's a neutral situation,not tax-free, but at least tax
neutral when it comes to thepayment.
So, kelly, hey, is that bonusall my money?
And why don't I just put themoney in and then a few months
(15:40):
later take all the money outtax-free?
Hell, yeah, that's what I'mtalking about.
Well, there's a whole bunch ofreasons why you don't.
And, from the productstandpoint, because you don't
really own the $20,000 theybonused you.
Yet what the hell?
Sure, it's on paper, sure, thenumber looks bigger, but it's
(16:01):
not all yours.
See, in most bonus indexannuity products paying 16, 18,
20 plus percent bonus, you'regoing to be locked into that
investment product on averagefor 10 years, a decade.
(16:21):
What do I mean by locked?
These annuities will let youaccess your money every year,
but only a little bit.
See, you only get to take 10%of the value of that indexed
annuity out any one year withoutyou having to pay a penalty to
(16:44):
the insurance company.
If you take $15,000 out on a$100,000 contract, well, that's
15%.
So 10%, 10 grand you got andyou didn't have to pay a penalty
.
But the additional five grandabove the 10 mark you're gonna
pay a penalty, meaning you willsurrender some of your money to
(17:09):
the insurance company becauseyou took out more than 10%.
What the hell?
So you get this tax paymentneutral product.
I paid 20%, you bonus me 20%.
Okay, I'm made whole again.
But you don't have true accessto all your money like you did
(17:32):
in your traditional IRA.
Your access is limited tonormally only 10% of the value
of that indexed annuity any oneyear and for 10 years.
Anytime you take out more than10% of the value of the indexed
annuity, you're going to bepaying penalties to the
insurance company.
(17:53):
Isn't that fun?
They don't want you to knowthat.
By the way, remember that$20,000 bonus and I said it's
not yours.
Guess what.
It'll take you 10 years toactually own outright that
$20,000 bonus.
(18:13):
With its growth you suck.
Let me say that again 10 yearsbefore you actually own 100% of
that bonus.
So every year you own thecontract, the indexed annuity
contract, you get a little bitmore ownership interest in the
bonus they paid you until after10 years you own 100% of it.
(18:37):
So this is some of the thingsone needs to think about before
they pull triggers on long-termlocked up monies like annuities.
What happens if life throws thatcurveball?
What happens in year four, whenlife throws that curveball that
we can't predict is going tohappen and you need to access
(18:58):
more than 10% of your Rothretirement monies?
What happens then?
Well, let's say I needed toaccess all of the money and
let's say I met all the simplerules of Roth IRAs so that I
didn't have to pay penalties, Ididn't have to do any of these
things and that every dollar Iwithdrew was supposed to be
(19:18):
tax-free.
But instead I forfeit whateverremaining amount I don't own on
the bonus I received.
I forfeit that money and I'mgoing to pay some type of
penalties because, remember, Iwant all my money because of
that life event.
I'm going to take out 100%,meaning I blew through that 10%
(19:39):
free withdrawal feature, meaningthat every dollar above 10% is
going to earn a penalty forearly removal.
They don't talk about the yeahbuts when it comes to the
indexed annuity, and listen,those vehicles are pretty cool,
they work pretty well, but mostpeople that own them don't
really understand what they ownand most people that are
(20:01):
speaking to a financial salesprofessional, an insurance agent
, that's creating hooks in thewater when it comes to looking
for their new prospect clients.
And they start with tax-freeRoth retirement conversions.
Sort of interesting how we haveto mislead in order to get you
(20:22):
to talk to us, in which case nowwe can have a conversation to
show you how much we care andwhat products we bring to the
table to help you achieve whatyou want to achieve.
Kind of an interesting concept.
Tax-free Roth conversions are asales tactic to get you in
front of an insurance agent thathas most likely a fixed indexed
(20:44):
annuity that has a big bonus onthe contract to pay you and
they're using that tool toconvince you to do a Roth
conversion.
Now, oh, by the way, they getpaid a nice commission when you
buy that annuity for your Rothconversion.
Hopefully that helps.
Hopefully it starts filteringout some of the things you see
(21:08):
in social media.
There's a lot of advertising outthere from financial services.
The advertising obviously isthe lines in the water.
They're sitting there trying tohook individuals to get
interested in what they have tosay.
It's all obviously fine, butwhen it comes to financial
decision making, most of us it'snot our bailiwick, it's not
(21:31):
what we love doing and gettinginto a conversation with an
expert to convince you to investin the product.
We get back to the bullshit onstilts framework of financial
services as it is.
If you recall, mark speaks towhy so much bullshit on stilts
is out there.
And it's because most financialservice industry discussion
(21:52):
starts with the product.
So we have to make these hugeclaims, these outsized promises
and guarantees and so forth,because we're going to talk to
you about the product that'sable to achieve some of those
benefits.
All right, so that's the Rothtax-free conversion.
(22:14):
So this is about developingyour bullshit sniffer.
It's not all bad agents outthere.
There's some incredible agentsthat do incredible work.
So certainly not demonizing theagents that utilize these
advertisements to speak toconsumers Nothing wrong with
that but you as the consumer,developing your sniffer around
(22:35):
the BS that comes fromproduct-centric conversations.
That's what this is about.
So no, going in Tax-free Rothconversion, I'll put money on it
.
95% likelihood you're going tobe speaking to an insurance
agent that's seeking to positionand sell a fixed indexed
(22:58):
annuity.
Knowing a little bit more aboutit helps you decide.
Maybe there are some bigquestions like do I own the
bonus money outright or not?
Question two when do I own 100%of the contract bonus?
Three, what are earlywithdrawal penalties associated
(23:20):
with this fixed indexed annuity?
Four, what happens to the bonusmoney and the amount I can
withdraw if life hits me in thehead and I need to withdraw
substantially every dime withinthe annuity contract before the
(23:41):
end of the penalty phasenormally about ten years, maybe
longer.
Just some good questions tothink about, know about, wonder
about and don't be shy.
Pose those questions right upfront, ask them and if they
don't explain it to you realwell where you understand it,
hey, ask them again.
Ask them to explain itdifferently.
Test the professional whetherthey can speak in a language
(24:05):
that you understand and thatmight be a professional that's
well fitted to your needs.
Hopefully that helps out thetax-free Roth conversion.
It's out there, it's real, andjust know what you're getting
into when you sign up for moreinformation 15-minute free
consult and whatever Certifiedbadass.
(24:25):
Thanks a lot for joining us.
We'll see you next time onBullshit on Stilts.
Have a great day.
Welcome to Bullshit on Stilts, a podcast hosted by
two guys with vast financialbackgrounds and great bullshit
sniffers who call out the clichecrap, spackle and flap doodle
spewed by so-called expertsacross the landscape of
financial advice, identifying asdoctors of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
(00:24):
to bring you a lively, if notdeadly, mix of bullshitology.
You can count on your esteemedhosts okay, maybe knuckleheads
to bring you a lively, if notdeadly, mix of serious analysis,
hijinks and tomfoolery, allwithin a 99.1% bullshit-free
safe space.
Let's get after it.
So let's set the table on thetax-free Roth conversion.
(00:45):
So it's interesting, right?
The whole name sounds prettycool Tax-free.
I love that, right, and so itkind of helps to suck you in,
right?
When it comes to subject lines,they're critical to get an
individual to say, gee whiz,what's that all about?
So, tax-free Roth conversion.
(01:08):
So first of all, let's figureout what is a Roth conversion in
the first place.
So first, a Roth conversionitself never mind the tax-free
concept or scheme, but just aRoth conversion is when an
individual has a traditionalretirement account and has a
(01:30):
Roth retirement account.
In the Roth conversion theindividual wants to move the
money in the traditionalretirement account.
We presume it's pre-tax dollarsthat went in there, so the
dollars never got taxed whenthey went in.
It's kind of a benefit from thetraditional retirement account.
We want to take those moniesout and we want to move them
(01:55):
over to the Roth.
We want to convert pre-taxretirement dollars into
after-tax retirement dollars,hence Roth conversion.
An example would be let's say,you've been working for a long
time, you've put money into inthis example, just to be simple
a traditional retirement account, a traditional IRA, and every
(02:18):
year you put money in, you wereable to take the beneficial tax
deduction, meaning the dollarsthat went in there.
Guess what?
You didn't have to pay taxes onthose dollars as a form of
income tax deduction, also knownas pre-tax dollars.
Here's the catch.
It's really cool because thetraditional IRA grows
(02:40):
tax-deferred, meaning every yearI make money, every year I earn
dividends, every year I earninterest.
I don't have to pay taxes onthat.
But in retirement and we'represuming over the age of 59 and
a half for this discussion whenI take the money out of my
traditional retirement account,guess what?
I have to pay income taxes onthe amount I take out of the
(03:02):
account.
Aw boo, Let me say that again,I have to pay taxes on the
amount of money I withdraw outof my traditional retirement
account.
Essentially, the IRS views thatas a paycheck and as a result,
like we all know, with everypaycheck we got to pay taxes.
That's what the traditional IRAsets up for us.
(03:25):
So pre-tax dollars goes in, Ihave tax deferred growth for a
long time and then at a certainpoint, when I take money out of
that account, I'm going to paytaxes on that.
And, by the way, with atraditional retirement account,
I have to begin taking a littlebit of that money out every year
, beginning at my age of 73.
(03:49):
So I really am going to beforced someday, when I'm older
at least, to start taking moneyout and creating income taxes in
my world, and that's notnecessarily a good thing or bad
thing, but that's just the factsof the matter.
When it comes to a traditionalretirement account the Roth
(04:10):
retirement account and, againsimplified, just the Roth IRA
account well, guess what?
It's sort of the completeopposite, in that when I put my
money in, those dollars I putinto the Roth contribute to the
Roth are after-tax dollars.
They've already been taxed.
I got paid for my job.
My employer took my taxes outof my paycheck and the money
(04:34):
that's in my checking accountafter-tax dollars I get to put
that money into my Roth IRA.
Well, why would you do that?
Why don't you take the taxbenefit up front, like the
traditional IRA has?
Well, the answer is that overthe life of the Roth IRA, and in
my case, over the remainingtime of my life, the dollars in
(04:59):
there grow tax-free.
The dividends I receive, Ireceive tax-free, interest I
receive, I receive tax free.
And oh, by the way, I never,ever, ever have to take money
out.
I'm not going to be required towithdraw a small percentage of
the money when I'm 73.
Not at all.
I can keep that money in thereand never touch it.
(05:19):
I don't have to withdraw it.
And lastly, when I do withdrawmoney out of my Roth IRA, guess
what?
I don't pay a dime in taxes.
The IRS does not view it as apaycheck.
So that's a pretty cool thing.
So a Roth conversion is simplyseeking to move pre-tax dollars
(05:42):
that I have in my traditionalIRA, move it out of the
traditional IRA.
Guess what?
I withdraw the money, so I'mgoing to create an income tax,
but I can move those dollarsfrom the traditional IRA.
I have to pay a tax when I dothat.
And then the dollars that enterthe Roth IRA.
(06:03):
They are now after-tax dollars,meaning I never have to
withdraw them ever in my life,and when I do withdraw them,
they're tax-free.
So long as I follow a couplesimple Roth IRA rules.
That's a really good deal andwe're not going to get into that
right now.
So that's the setup.
So the target market for thetax-free Roth conversion are
(06:23):
going to be folks that have alot of money in traditional
retirement accounts and they aregoing to be essentially
convinced that the best thingfor them to do is move some or
all of that money from thetraditional IRA into a Roth IRA.
That's what a Roth conversiondoes.
(06:45):
The selling points are you moveit from taxable retirement
monies.
You move that over to tax-freemoney in retirement when you
withdraw it into the Roth.
That's the sale.
And then to support the sell,what the financial service
professional will do is create astory.
Right.
Storytelling sells a lot.
(07:06):
They create the story aroundprojections of future income tax
rates.
Promises that when you retire,income tax rates are going to be
much higher.
So paying lower income taxes aday is a smart idea.
So in general, the Rothconversion conversation.
(07:29):
So that conversation with afinancial service professional
is going to focus you oncreating urgency around doing a
Roth conversion, that it'sbetter for you long term in
terms of the amount of tax youpay and that they have a great
solution for you in the processof doing your Roth conversions.
(07:51):
Okay, so we have a little bit ofa basic foundation of what the
Roth conversion is, what thepoint is, who might be a
candidate to speak to about aRoth conversion?
Now let's move over to theadvertisements around tax-free
Roth conversions.
But wait a minute, kelly, youjust said that when I do a Roth
(08:13):
conversion, I create a taxableevent when I withdraw money out
of my traditional retirement,and the survey says that is the
correct answer.
True, the sales concept, theadvertising concept, is tax-free
.
You don't have to pay taxes.
You get around taxes.
You get to be smarter than theaverage bear.
(08:34):
Everybody else is paying taxes,but you don't have to right?
That's what it sort of suggests.
So how does a financial serviceprofessional get away with
advertising tax-free Rothconversions?
Let's get into this.
When you see tax-free Rothconversion, start thinking
(08:55):
pretty quickly that it's aninsurance agent that is behind
the advertising.
In fact, if you set up a15-minute free consult, if you
want to do a call, if you wantmore information about 90 plus
percent likelihood maybe morethan that, 100% likelihood it's
going to be an insurance agenton the other end of that
(09:16):
discussion.
Nothing wrong yet Just knowthat you'll be talking to an
insurance agent.
Remember, insurance agents getpaid money.
They earn a living once and ifyou purchase a product In this
case, the tax-free Rothconversion product that's behind
the curtains is going to bemost likely a fixed indexed
(09:40):
annuity plus a bonus that theannuity pays you.
Now, that sounds delicious,right?
This bonus?
In this example that we'regoing to use today, we're going
to assume a 20% bonus.
Wow, that sounds fantastic.
So let's set up an example here.
(10:01):
Wow, that sounds fantastic.
So let's set up an example here.
I have $100,000 in traditionalretirement account.
I'm talking to a financialsales professional and in this
case, an insurance agent about atax-free Roth conversion,
because it makes sense.
I don't want to pay taxes whenI'm older, so, yeah, this is
something I kind of want to findout about.
All right, in the discussion forthe tax-free Roth conversion,
(10:24):
the conversation will eventuallyget to a recommendation around
a fixed indexed annuity thatpays you a bonus.
Here's how that works.
If we move or do a Rothconversion of all $100,000 of
our traditional IRA, that$100,000 of our traditional IRA,
that $100,000 is withdrawn fromthe IRA and we're going to
(10:45):
assume a 20% tax rate on themoney, meaning we owe the IRS
this year now $20,000 in taxes.
$100,000 withdrawn from mytraditional IRA to do a Roth
conversion triggers an incomepayment to my house of $100,000.
(11:07):
That's the way the IRS sees it.
And if I have a 20% tax rate inthis case, at the end of the
year when I do my tax return I'mgoing to have to make sure I
come up with $20,000 to pay thattax bill.
$20,000 to pay that tax billwhen that money moves into the
(11:27):
Roth IRA.
That money is now after tax,remember, because I'm going to
pay the tax bill for thewithdrawal.
Now I have $100,000 in thisexample now being withdrawn from
my IRA, putting into the RothIRA and now I got $100,000 there
.
We'll get back to why it'sstill $100,000 in a moment.
So 20% bonus on $100,000 is$20,000.
(11:55):
So I got a new fixed indexannuity that I put $100,000 of
after-tax dollars into it andthe insurance company bonuses me
$20,000 on top of the $100,000.
Boy, that sounds sexy, thattastes good, I'm telling you.
But there are some yeah buts inthis whole storyline.
So let's examine that.
And before we examine thatstoryline, I want to digress for
a second and just mention this.
(12:17):
When it comes to a Rothconversion never mind tax-free
or any other type when it comesto a Roth conversion nevermind
tax-free or any other type aRoth conversion there are two
ways that an individual paysthat income tax bill.
One way is to take moneyoutside of the retirement
accounts, like in your checkingaccount or a trust account or an
investment brokerage account,anything that's outside of
(12:38):
retirement.
That money can be used to paythe tax bill and on average,
that's the recommended course ofaction.
So the recommended course ofaction when I do my $100,000
Roth conversion here is toconvert $100,000, withdraw
$100,000 out of the traditionalIRA and move that $100,000, all
$100,000 of it, to the Roth IRA,all the while knowing that I'm
(13:02):
going to end up writing a check,in this example, out of my
checking account for the $20,000tax bill.
So I pay it, but I don't takeit out of my Roth conversion
monies, I take it from somewhereelse.
That way, all $100,000 gets tobe slapped into a tax-free
investment account called a RothIRA and grow tax-free for the
(13:26):
remainder of my days on the faceof the earth.
And, by the way, thebeneficiaries that I assign to
my Roth IRA get to take themoney out when I pass away
tax-free as well.
Pretty slick.
The other way to pay for thetaxes is to take it out of the
$100,000, put it in the bankgetting ready to pay tax on it
(13:47):
later in the year, and then move$80,000 over to the Roth IRA
and in this case, a 20% bonus on80 grand is 16,000, not 20,000.
Big difference, okay.
So back to our storyline Onceagain.
We got 100 grand in traditionalIRA.
We want to do a Roth conversion.
We're going to withdraw 100grand out of the traditional IRA
(14:09):
, creating a taxable event of$20,000 in this year because our
tax rate is 20%.
We're going to pay that withoutside money so that all
$100,000 is deposited into theRoth IRA.
Now after-tax dollars.
That's the Roth conversion in anutshell.
(14:31):
Let's go back to the tax-freeRoth conversion and how that all
works.
First of all, tax-free is alittle bit of a misnomer and a
misdirection, because in thetax-free Roth conversion you
still pay the income tax of 20grand the year that you withdraw
or the year you do your Rothconversion.
You still pay that tax, but inthe tax-free Roth conversion
(14:56):
that payment is sort of offsetor is intended to be offset by
the bonus the index annuity paysyou.
So, remember, we put $100,000in 20% bonus.
My contract statement shows$120,000, not 100 grand.
That's pretty slick.
And, by the way, dollar fordollar, if we pay 20% in tax and
(15:18):
we get a 20% bonus on 100 grand, dollar for dollar, it negates
the tax payment.
So it's a neutral situation,not tax-free, but at least tax
neutral when it comes to thepayment.
So, kelly, hey, is that bonusall my money?
And why don't I just put themoney in and then a few months
(15:40):
later take all the money outtax-free?
Hell, yeah, that's what I'mtalking about.
Well, there's a whole bunch ofreasons why you don't.
And, from the productstandpoint, because you don't
really own the $20,000 theybonused you.
Yet what the hell?
Sure, it's on paper, sure, thenumber looks bigger, but it's
(16:01):
not all yours.
See, in most bonus indexannuity products paying 16, 18,
20 plus percent bonus, you'regoing to be locked into that
investment product on averagefor 10 years, a decade.
(16:21):
What do I mean by locked?
These annuities will let youaccess your money every year,
but only a little bit.
See, you only get to take 10%of the value of that indexed
annuity out any one year withoutyou having to pay a penalty to
(16:44):
the insurance company.
If you take $15,000 out on a$100,000 contract, well, that's
15%.
So 10%, 10 grand you got andyou didn't have to pay a penalty
.
But the additional five grandabove the 10 mark you're gonna
pay a penalty, meaning you willsurrender some of your money to
(17:09):
the insurance company becauseyou took out more than 10%.
What the hell?
So you get this tax paymentneutral product.
I paid 20%, you bonus me 20%.
Okay, I'm made whole again.
But you don't have true accessto all your money like you did
(17:32):
in your traditional IRA.
Your access is limited tonormally only 10% of the value
of that indexed annuity any oneyear and for 10 years.
Anytime you take out more than10% of the value of the indexed
annuity, you're going to bepaying penalties to the
insurance company.
(17:53):
Isn't that fun?
They don't want you to knowthat.
By the way, remember that$20,000 bonus and I said it's
not yours.
Guess what.
It'll take you 10 years toactually own outright that
$20,000 bonus.
(18:13):
With its growth you suck.
Let me say that again 10 yearsbefore you actually own 100% of
that bonus.
So every year you own thecontract, the indexed annuity
contract, you get a little bitmore ownership interest in the
bonus they paid you until after10 years you own 100% of it.
(18:37):
So this is some of the thingsone needs to think about before
they pull triggers on long-termlocked up monies like annuities.
What happens if life throws thatcurveball?
What happens in year four, whenlife throws that curveball that
we can't predict is going tohappen and you need to access
(18:58):
more than 10% of your Rothretirement monies?
What happens then?
Well, let's say I needed toaccess all of the money and
let's say I met all the simplerules of Roth IRAs so that I
didn't have to pay penalties, Ididn't have to do any of these
things and that every dollar Iwithdrew was supposed to be
(19:18):
tax-free.
But instead I forfeit whateverremaining amount I don't own on
the bonus I received.
I forfeit that money and I'mgoing to pay some type of
penalties because, remember, Iwant all my money because of
that life event.
I'm going to take out 100%,meaning I blew through that 10%
(19:39):
free withdrawal feature, meaningthat every dollar above 10% is
going to earn a penalty forearly removal.
They don't talk about the yeahbuts when it comes to the
indexed annuity, and listen,those vehicles are pretty cool,
they work pretty well, but mostpeople that own them don't
really understand what they ownand most people that are
(20:01):
speaking to a financial salesprofessional, an insurance agent
, that's creating hooks in thewater when it comes to looking
for their new prospect clients.
And they start with tax-freeRoth retirement conversions.
Sort of interesting how we haveto mislead in order to get you
(20:22):
to talk to us, in which case nowwe can have a conversation to
show you how much we care andwhat products we bring to the
table to help you achieve whatyou want to achieve.
Kind of an interesting concept.
Tax-free Roth conversions are asales tactic to get you in
front of an insurance agent thathas most likely a fixed indexed
(20:44):
annuity that has a big bonus onthe contract to pay you and
they're using that tool toconvince you to do a Roth
conversion.
Now, oh, by the way, they getpaid a nice commission when you
buy that annuity for your Rothconversion.
Hopefully that helps.
Hopefully it starts filteringout some of the things you see
(21:08):
in social media.
There's a lot of advertising outthere from financial services.
The advertising obviously isthe lines in the water.
They're sitting there trying tohook individuals to get
interested in what they have tosay.
It's all obviously fine, butwhen it comes to financial
decision making, most of us it'snot our bailiwick, it's not
(21:31):
what we love doing and gettinginto a conversation with an
expert to convince you to investin the product.
We get back to the bullshit onstilts framework of financial
services as it is.
If you recall, mark speaks towhy so much bullshit on stilts
is out there.
And it's because most financialservice industry discussion
(21:52):
starts with the product.
So we have to make these hugeclaims, these outsized promises
and guarantees and so forth,because we're going to talk to
you about the product that'sable to achieve some of those
benefits.
All right, so that's the Rothtax-free conversion.
(22:14):
So this is about developingyour bullshit sniffer.
It's not all bad agents outthere.
There's some incredible agentsthat do incredible work.
So certainly not demonizing theagents that utilize these
advertisements to speak toconsumers Nothing wrong with
that but you as the consumer,developing your sniffer around
(22:35):
the BS that comes fromproduct-centric conversations.
That's what this is about.
So no, going in Tax-free Rothconversion, I'll put money on it
.
95% likelihood you're going tobe speaking to an insurance
agent that's seeking to positionand sell a fixed indexed
(22:58):
annuity.
Knowing a little bit more aboutit helps you decide.
Maybe there are some bigquestions like do I own the
bonus money outright or not?
Question two when do I own 100%of the contract bonus?
Three, what are earlywithdrawal penalties associated
(23:20):
with this fixed indexed annuity?
Four, what happens to the bonusmoney and the amount I can
withdraw if life hits me in thehead and I need to withdraw
substantially every dime withinthe annuity contract before the
(23:41):
end of the penalty phasenormally about ten years, maybe
longer.
Just some good questions tothink about, know about, wonder
about and don't be shy.
Pose those questions right upfront, ask them and if they
don't explain it to you realwell where you understand it,
hey, ask them again.
Ask them to explain itdifferently.
Test the professional whetherthey can speak in a language
(24:05):
that you understand and thatmight be a professional that's
well fitted to your needs.
Hopefully that helps out thetax-free Roth conversion.
It's out there, it's real, andjust know what you're getting
into when you sign up for moreinformation 15-minute free
consult and whatever Certifiedbadass.
(24:25):
Thanks a lot for joining us.
We'll see you next time onBullshit on Stilts.
Have a great day.
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