While following a finance-related link on YouTube, several videos popped up in the sidebar discussing the benefits, process, and common misconceptions of performing Roth conversions. Many of them were by folks who represent their financial planning firm, or who shared that they are Certified Financial Planners (CFPs) to lend credence to their recommendations. I watched several and came away confused and disoriented because they all seemed to approach the subject as a problem to solve, and each one had a different approach. All had good scripts and made their point in only a few minutes. They presented the tricky rules and factors to consider, with a subtle hint that solving this problem requires expert help.

However, most of the videos did not address the following;

1.  Roth conversions are part of a retirement tax and estate planning strategy

2.  The decision to perform a conversion is based on predictions of the future

3.  You can pay significantly less total tax by doing the conversions as young as possible

4.  You don’t need a CFP or financial advisor to perform the conversion

Since a Roth conversion moves funds from a tax-deferred account (401(k), Traditional IRA, or Rollover IRA) into an after-tax Roth account, most people think of the action only in terms of taxes. Pay tax now vs. later. Pay at this effective tax rate, or rearrange things for a different tax rate later. That assumption misses two points: you may pay a lot, nothing, or just a little when taking out the tax-deferred money in retirement, depending on the specifics of your tax return, and second, would you rather pay the tax bill or give it to your heirs? Due to tax brackets, standard and senior deductions, your taxable distribution - and even a Required Minimum Distribution (RMD) later - you might not be taxed or only lightly taxed. It all depends on the size of the account, other sources of income (whether taxable), and how much of each.

Then there is the tax impact on what remains. If you direct the 401(k) to a qualified charity, they get all of it tax-free, so a Roth conversion isn’t necessary. But, if you direct it to a non-spousal beneficiary, they must withdraw the entire account by the end of 10 years and treat each withdrawal as income. If they happen to be working and have enough income, they might put off withdrawing the money, which then grows, becoming an even larger tax burden at the 10th year. So, Roth conversions must be considered from both a tax and an estate-planning standpoint.

For years, we have been told taxes are going up, but they haven’t. If they do, it will be somewhere between 3 and 30 years from now. I may not make it another 30 years, so I may or may not face higher taxes. Therefore, Prediction #1: When will there be higher taxes? If we knew the date, that would make a difference in the conversion calculation, but we don’t. Next, Predication #2 - How long will I live? This unknowable answer affects the value of all my retirement accounts for my heirs and me. Live to 100, and I’ll get great value from that Roth tax-free money for many years. Live to 83 (the average life expectancy for a 65-year-old male), and you get 17 years less to enjoy it.

Next, there are the specifics of the tax law. In recent years, the age at which RMDs begin has increased, and RMD factors have been adjusted downward (resulting in lower RMD amounts) because people are living longer. So, Prediction #3 - when will tax rules, thresholds, or brackets change? Again, with taxes, who knows?

Then, remember to consider investment returns. So, Prediction #4 - Will your balance be 10% higher or 10% lower next year? And, the year after that? Since you’ll pay tax on the amount converted, it’s more expensive to convert when values are high and less expensive when they are low. Next, Prediction #5 - If you do not convert or spend your 401(k)s, at what age will you be mentally done dealing with all these investment accounts and complicated taxes? Managing RMDs, maybe QCDs, estimated quarterly taxes, and tax returns can become overwhelming as you get older. So, your children, spouse, or a paid advisor may need to step in to ensure things are done correctly and avoid penalties. Now the Roth looks pretty good.

And finally, what do you want to do with any money left when you’re gone? Will it go to the family or a charity? This is a trick question that becomes Prediction #6 - Will your estate plan change between now and when you die? You could decide to convert half of your 401(k) to a Roth over the next 6 years, only to have a significant event in your family that you couldn’t predict, which ends up changing your original estate plan. As you can see, many predictions are at play. And as Yogi Berra said, “It’s tough to make predictions, especially about the future”.

Next is the large impact of age when converting. Roth conversions are much better the younger you are when converting because of the compound growth of investments over time. For example, you either convert now or 10 years from now, and we’ll assume your previous employer’s 401(k) doubles in size over those 10 years. If you wait, you’ll likely have double (or more) tax due when converting. By delaying conversion, your account grows, which means more will need to be converted and more tax will be due. While converting when in the 12% tax bracket vs. the 22% bracket is better, the difference won’t overcome the larger tax impact of investment growth over time. To get the most advantage from compound growth, the growth should occur in the Roth account rather than in the tax-deferred 401(k). If you’re going to convert, do it as soon as possible.

If you make the decision to do a conversion, it’s a simple process that you can do yourself. First, determine how much you’ll convert this calendar year (I recommend revisiting this amount each year because your finances can and will change). If the amount is more than a few thousand dollars, split it up into 2, 3, or more transactions across the year. You can perform the transactions by phone or online. Online is simple; identify the investment in the tax-deferred account, select an amount to transfer, and transfer to an existing or new Roth account. You’ll be prompted to confirm the amount and select an acknowledgment of the tax implications of the transfer and the irreversibility of the action (I recommend not having taxes withheld, but that’s a personal choice). The transfer will happen immediately, at the current or closing price. Some months later, do another transaction. Repeat until you convert the entire amount you planned for the year. Spreading them out averages the price when converting. Next year, do the same thing: determine the amount, then perform one or more transactions to complete it.

Remember, at tax time, you will include the annual amount as a “taxable distribution”, thus considered income. You’ll receive a 1099 form showing the amount. [Note that since conversions are taxable, include the additional tax amount in your quarterly estimated tax payments. Or increase paycheck withholding to avoid an IRS penalty. A Roth conversion calculator, such as the one I provide, can show how much the conversion will cost in additional federal and state taxes.]

One last important point. Don’t be pressured or feel you have to do Roth conversions. They are a tax and estate planning strategy that can be used if desired. If you don’t, you just deal with the account rules and taxes in front of you from one year to the next in retirement, based on the size and types of accounts. But remember, the reason for conversion has to be your reason for your finances and estate plan. And as stated above, while the math can indicate whether one option is better than another, it’s based on a number of predictions that aren’t all that predictable.

It struck me that while the YouTube influencers are trying to help, they are also trying to make a buck. The ones that go down deep into calculating to the last dollar the true “net” cost of a conversion miss all the other considerations, in my opinion. The videos provide some education and can help you learn about the topic. But you may come away confused and disoriented, and either seek professional help or ignore the challenge to prepare for the future, even if it means paying more tax today in order to pay less tomorrow. Remember, the significant tax savings from the Roth conversion strategy can be a benefit to you and your heirs, so it is worth considering. But as noted, the result of your decision will only become visible many years from now if your predictions come to pass.