In this episode, Jim Maffuccio and Ben Fraser are joined by guest Craig Wear, a Certified Financial Planner™ with 32+ years of experience and the author of two Amazon #1 Best Selling books, Paying the Piper, and Roth Conversion Secrets, to discuss maximizing retirement savings and avoiding hidden tax traps in 401k and IRA accounts. Craig shares expert advice on minimizing taxes and avoiding penalties associated with RMDs, early withdrawals, and investment options. Tune in for practical tips on optimizing retirement savings and minimizing tax liability, whether you’re just starting out or looking to optimize existing accounts.
Download “Roth Conversion Secrets” for free https://info.craigwear.com/ILAB
Connect with Craig Wear on LinkedIn https://www.linkedin.com/in/craigwear/
Connect with Jim Maffuccio on LinkedIn https://www.linkedin.com/in/james-maffuccio-77440813/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode. Today we have a really fun guest, Craig Wear and we’re talking all about Roth conversions. So this is something I’m sure you’ve heard of and maybe have mixed . Opinions on it, but Craig has just a wealth of knowledge.
He used to be a CFP I think for 20 or 30 years. He was a financial planner. He was in the traditional financial system and he left that a little while ago and then just went specifically into this niche and has found some really cool ways to save investors money. So he calls ’em the IRA millionaires and those that have, million dollars plus in their IRAs.
This is something you need to be listening to and hearing because he says he has saved over 850 million in taxes for his clients. So definitely a cool conversation. Something I think is very relevant for a lot of our listeners. Hope you enjoy it and always appreciate your feedback and reviews in sharing this podcast with your friends and family.
Thanks so much.
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We are joined by Craig Wear and very excited to have this conversation. So Craig has created expertise in Roth conversions and through his company and his program and all the secrets he teaches his clients.
He is collectively saved. They’re estimating at least 850 million in taxes over the past several years. So that’s a big number and that’s something that a lot of people would love to do less of, which is pay taxes and. As we’re sitting here recording this episode, it’s about a week before you gotta pay the piper.
Craig has written a few books. One called Paying the Piper. Look at that little nugget there, and Roth Conversion Secrets. This is the latest book and teaches people how to do these conversions. So this is something I’m very interested in and I know our listeners are gonna get a lot of value out of.
Craig, welcome to the show.
Craig Wear: Hey, man, I’m glad to be here. I’ve been looking forward to getting to visit with you, so thanks for having me on. Hopefully we’ll be able to disseminate some good info for folks.
Ben Fraser: Oh, I know. We will. And before we dive into it, give a little bit of background on you and color, and I think it’s fun.
You gotta give the nugget that you’re living the nomadic lifestyle in, in your rv. I just think that’s so fun. So talk a little bit about that.
Craig Wear: Yeah, we’re homeless and jobless as I like to say, right? Yeah. Yeah. No. I had the traditional oh, independent financial advisor experience for 35 years and sold that practice actually about six years ago to a guy that was number two seat and thought we would just go off into the sunset.
We bought this great big bus, decided to sell the house, and most of our belongings and retire at 55, but it wasn’t all, it was cut out to be right. I went out and did some things and realized I needed to get back to work. So I had this little outline of a book in my mind of principles that we use with clients for probably a decade.
And I thought heck, let’s just do something with that. And that’s the seed that started all kinds of stuff. We wrote the book, then we did a few little ads and all of a sudden it blew up. And now we have this big staff and CFPs all over the country that are helping people. And it’s been a tiger by the tail man.
It’s been a lot of fun. That’s,
Ben Fraser: That’s so cool. So these are the kind of tactics and tools that you used when you were a financial advisor, but now you’ve created a system and a program that other financial advisors are leveraging for their clients. Or talk a little bit about how you’ve set up your business now.
Craig Wear: For the most part we just go direct to the consumer. We do have a wholesale network that we’re developing for other advisors and CPAs because we’ve found that we’ve developed a specialty niche. You guys have been around the financial industry long enough to realize that there aren’t many of us that have specialized.
Most everybody is really a generalist and they’ll do whatever they, whatever the client really needs them to do. So I like to draw an analogy of we’re just very specialized. We do one thing, we do it really well. We believe we do it better than anybody else in the nation does it.
But we’re just really good at helping people really maximize or optimize their retirement assets and minimize the amount of taxes that they pay off of those for the rest of their life. So that’s our deal. And we have a, it’s technically, we have to be a registered investment advisor to be able to offer advice in those areas.
But we don’t sell products. We don’t produce products, we don’t want to manage people’s money. We just want to help ’em with good old fashioned blocking and tackling.
Ben Fraser: That’s great. So you have one tool in the tools yet, but it’s a really good tool, right? You’re really good at using it.
Craig Wear: Yeah, it’s worked really well for us.
It’s it worked really well and, our clients are seeing some really great results and we’re just, we’re having a lot of fun educating people that there’s a right way to get Roth to do Roth conversions, and then there’s every other way that really leaves, easily leaves a million dollars at the doorstep of the IRS.
Our typical demographic that we write that we believe really can benefit from Roth conversions are what I call an IRA millionaire. So they’re the men and women that have worked for quite a long time. They’ve saved really well, and they wake up one day and they don’t have any, some of ’em don’t even have a clue what is about to happen to them.
They start withdrawing money out of those accounts, and we just try to help ’em to see it a little bit more clearly.
Ben Fraser: So take a step back and help explain the framework of the retirement landscape. So for those that maybe are less familiar with what a Roth IRA is and how it compares to a traditional IRA a 401k, just lay the landscape a little bit and then talk a little bit about, the problems to your point of people don’t realize some of these RMDs or they don’t realize some of these other issues down the road that they’re not really ready for and are actually leaving a lot on the table.
So just set, set the stage for us here.
Craig Wear: Yeah, so that’s a really good question. In an IRA most, the, most people work a lifetime and they do the typical 401k or if they’re a teacher, a 403b plan. It’s whatever the company retirement plan is. They put their money away.
The company puts some matching in there. They leave it alone and they wake up one day and boom, they got a million bucks in there or more and they’re going, wow, this is great. And a lot of them don’t really need that money. We’ve found that a lot of people now, there certainly are a lot of folks out there that need it immediately and they start withdrawing a significant amount of money out of it.
They’re probably not good candidates for Roth conversions, but the people that we visit with are folks that have other income, they got a pension, they got social security, and they’re just not gonna need that. Need the IRA for anything other than just the big stuff in life. The problem is, At some point you have to, as you said, you gotta pay the piper.
And that happens anytime you reach into that IRA and you pull it out, you got taxes to pay, and if you don’t need it, and you end up to age 72 or three or five, with this new law, depending on how old you are, is when you have to, when you’re forced to take it out. So when that happens and you have those required minimum distributions, now all of a sudden you have to have it.
You have to take it, and it’s all taxable. So the problem that it creates is, let’s say you got a million bucks when you retire and you leave it alone and you get to 73 years old, and that 1 million becomes 2 million. This is the classic story. This was Mr. My Mr. Leonard story. This is the first guy that came to me with this problem.
He retired from the oil company at age 60, at 72. He came into me, as we say, in the south, mattered more than a wet hen because now he had to take $80,000 out of taxable income per year. Per year. That was his first year. And he is okay, I get it, but I don’t need the money. I said Mr. Lynn, I’m sorry, but that’s the deal you made.
Now it’s just time to pay the piper. That’s all I knew as a financial advisor.
Jim Maffuccio: So just to fill in one, one little gap here, and this is, again, this is super basic, but that’s where I’m at with this whole world. So the reason the person all through their career contributed to. A traditional IRA, a 401k program was to get a tax deduction, right?
So they reduced their taxable income by that amount, plus to get the re return based on the employer’s match. And there’s really not much time and energy spent on what vehicles that money invested in.
But all of a sudden,
at the end of the, at the end of the day, you’ve got this big pile, it’s grown to 2 million.
And now the pay, the piper piece is you didn’t, you got a tax deduction. All those years now it’s time to start taxing you as you pull that money out. Is that right?
Craig Wear: Yeah, that’s right. Yeah, that’s right. And all of a sudden, that’s the first domino though, Jim, because the next domino is for a lot of people that now causes 85% of their social security to be taxed.
And in addition to that, now they go to a new, what’s called an Irma bracket where you know Medicare Part B and Part D are income-based premiums. Yes. So now all of a sudden, instead of $167 a month, they’re at 500 bucks a month for each one of them. You know that story. Yeah.
Jim Maffuccio: We’re close to $700 each.
And I, looking for, before getting on Medicare, it’s oh, this is gonna be great. This stuff is cheap and it covers almost everything. I didn’t know that much about Irma. Well, I’m at my best, I’m 66 years old. I’m in my best earning years ever, so I’m just getting right, getting hosed. Big time.
But anyway, go ahead.
Craig Wear: So the way that the, but the way that comes full cycle for people who’ve got these massive IRAs out there, is that the only. I mean, to your point, Jim, what they did right, was they saved taxes their whole life. So, I like to tell people, look, that’s a great habit. You did great at it.
You probably saved taxes at a higher marginal bracket during your life, then it’s gonna cost you to do what we’re talking about on a marginal basis, because tax rates today are at 50 year lows. So the only way to accomplish that is you have to take control over when you pay the taxes. You have to deter.
You have to decide on your terms, what rate you’re gonna pay, what tax rates you’re gonna pay, and you gotta get after it. And you do that by converting from the IRA to a Roth IRA. And some people think I make too much money. I can’t make a contribution. But we’re not talking about a contribution.
No, we’re talking about a conversion. And the IRS today says you can convert an unlimited dollar amount every year you want to from your IRA to your Roth IRA as long as you’re willing to pay the tax. And that one last little sentence is what keeps most people from accomplishing millions of dollars of AVO of tax avoidance over their life because they still are in the mindset of avoiding the tax.
There comes a point in time in your life where you have to transition your tactic and you have to choose to pay tax now so that you don’t pay an incredible amount of tax later when the RMDs start coming in. That makes sense. Does that kind of fill in some gaps?
Ben Fraser: Yeah. And just to add a couple, a little bit more color.
So just for those that are less familiar with some of the verbiage. So you have your traditional 401k and that’s to your point, tax deferral. So you’re getting a tax deduction now, but you’re deferring when you actually have to pay the piper, tell del down the road. And then a Roth, you basically can grow tax free.
So if you’re contributing to a Roth forever, yeah, you’re contributing to a Roth, you have a set amount that you can contribute every year. And you don’t get a tax deduction for doing that in the year you contribute. But down the road, if that, as that grows, that’s tax free. What you’re saying is maybe you’re too high of an income earner, because there’s limits on how much you can convert or contribute to a Roth, but you can convert an unlimited amount into Roth from a traditional.
So talk a little bit about some of the mechanics.
Maybe use some, just some simple numbers so we can just get a grasp, while we’re listening here to understand the impact of this. You’re making the point, hey, you can just put your head in the sand and wait till you’re required to pay these minimum required minimum distributions.
And now it’s time to pay the tax bill. Or you can be a little more proactive with it. Plan on how much taxes you’re gonna pay based on now you time it too. I’m assuming there’s some, probably some unique ways to time it if your income fluctuates year by year. And so there’s different ways you can manipulate this, but talk a little bit, just some kind of, some a case study or so.
Craig Wear: Okay wow, man, I could, we could be here for like hours in case studies, right? It’s a simple one that so elaborate people would understand. Yeah. So here’s the basics. So then I’m coming out with a memory. So let’s just gimme a little bit of grace on the numbers, but I had a couple clients, I use this in some of our webinars.
These people had about a million and a half dollars. They’re in their mid sixties. They just retired. So Jim, they were about your age. They had finally hung it up. They had about a million and a half dollars between them and two 401 K accounts, and let’s assume they said, we’re gonna earn about 6% a year for the rest of our life on average out of our investments.
Let’s just pick that number . It’s not irrelevant, but for what our point is, it’s not that big of a deal. I’ll just, I’ll
Jim Maffuccio: just throw in. They need to come see us if that’s really their goal.
Craig Wear: But anyway, go back. You’ll be surprised. You’d be surprised how many people will tell me four or five or 6% is all they’ve been getting, so we need to have ’em come see you.
Yeah. So they’ll do the, they’ll have a million and a half and they’re in their mid sixties and they’re, they said to me, look, we can live off our social security. We don’t need any of the money outta the ira. We’re gonna leave it. Cool. So the living off of local social security, we’ll call it $80,000 a year.
That money at 65 is gonna continue to grow tax deferred. And they’re living large. They’re only got, they only have their social security. By the time they have their standard deductions, they are paying hardly any tax. They just retired. They’re thinking life is great. It’s phenomenal.
It’s good we got all this money. Let’s go have some. But the projections show that if they do that, what’s gonna happen is when they start taking required minimum distributions. Can you
Ben Fraser: explain that real quick, Craig? Just for those that don’t know what RMDs are.
Craig Wear: So the i r s says, you can leave it deferred as long as you want to until you reach a certain age, and we wanna make sure we get our cut before you die.
And in fact, we, they published this table, then it’s a standard table that has this percentage of an amount that you have to distribute each year. And the way that table works is they assume that every year you get older you’re one year closer to dying. And so they want a little bit more money each year.
And so the percentage of how much you have to take out goes up each year. So you start at a good number of around 4% of whatever the balance is. The year before is what you have to pull out the first year. But within, with the magic age, is it a set. When do you have to start taking the distribution? With the new secure Act 2.0 it changed, but it could be either age 72, 73 or for folks that are 64 and under its age 75 for them.
Okay. Okay. So let’s say it’s 4% the first year and Reign Me in if I get off track here on the question, but. If they got $2 million sitting there down the road and it’s a 4% number the first year, they gotta pull out 80. This particular couple, by the time they had to take their first R M D, it was just a little bit south of a hundred thousand dollars is what they had to take.
But remember they told me two sentences before they can live just fine off of their social status. So the real, the magic question is , what would you do this year if another hundred thousand dollars came into your tax return? Choke is the answer, right? Remember next year, as long as your accounts don’t crash, you have to take out more than the prior.
And then again, more so it’s every five years, that amount increases by about 25%. So we looked at their situation, we did some basic financial planning on them, and we discovered that their total cumulative required minimum distributions over both of their lifetimes was gonna be an excess of 3 million of taxable income.
On a million and a half in I. Wow, that was gonna generate X amount of tax because now all of a sudden the hundred thousand. Caused their 80,000 of social security to be taxed at 85%. So now 85% of their social security is fully taxable, and it’s added to the required minimum distribution of a hundred grand.
So they went from zero taxable income the year before RMDs, to now 185 minus their standard deduction the very next year. Does that begin to paint a picture of how big the problem is? Yep,
Ben Fraser: absolutely. And if you think about it, I’m sure you probably have some great charts in your presentations.
But the law of compounding, right? Once you get to bigger numbers, if you’re only four, five, 6%, that’s one thing. If you’re in 10 to 15%, which is very reasonable. You’re compounding bigger and bigger in numbers. So if you all of a sudden have to stop that and you’re paying out your principal balance, you’re required to, you put a big wrench in the whole compounding equation, right?
Yeah. So it’s not only just the taxable, but now it’s the growth side of this. And so I’m probably stealing the punchline here, but if you go back and. Do the Roth here? Yeah. Tell us what that scenario looks like with that client.
Craig Wear: Yeah. You know what part of what we’ve done is we’ve developed proprietary software where we go in and we look at every option possible.
Most people think they should stop doing the conversions at the top of their current tax bracket, which if they’re what we call the IRA millionaire, that’s a recipe for disaster. They’re not, they won’t even know it. They think they’re doing great, but they’re gonna end up probably putting more money in tax out the door.
Then if they accelerated it, like what we teach, but we go. Every tax bracket possible and shades of gray in between to try to find what is the optimal strategy for this family to do two things, avoid the most amount of tax legally over their lifetime and have the highest amount of net worth. A lot of people believe that by paying the tax.
Upfront, they’re gonna have a lower net worth. And this podcast is not the time to do that, but it’s a false paradigm. They will not, all they will do is kick the can down the road and they’ll just have a greater contingent tax liability for their heirs or their spouse to give Uncle Sam later. This couple, we found the optimal tax bracket for them, and for them it meant we needed to take them.
Two full tax brackets of taxable income each year. Now think about that. You do that through the conversion mechanism. Yeah. You do that by taking more at the
Jim Maffuccio: conversion. Is that’s a taxable event you, that’s
Craig Wear: right. Yeah, that, that’s right. That’s a good piece of missing information. So when you decide to convert, you’re saying, I volunteered to have more taxable income because it’s gonna help me and it’s gonna be better for me later.
So now that becomes taxable income. And now all the same problems exist. Your Medicare is more, your social security is taxed more, but for them it was a seven year journey. And at the end of the seven years, Jim, guess what happens to their Medicare premium? Right down to the minimum for the rest of their life, right?
What happens to the taxability of their social security right down to zero again for the rest of their life. Now, of course, people may have large pensions and things that are gonna make that not possible for them, but in total, these people were able to avoid about a million $300,000 of taxes during their time.
And they put their heirs in a position of avoiding $890,000 of taxes when mom and dad left them, whatever they were, let, whatever that they were done with, that’s just basic financial planning projections that we came up with. And is that,
Jim Maffuccio: That last piece, is that because. Of the exemption from estate tax.
Craig Wear: Oh. It’s because a Roth IRA is never taxable to you or to your heirs.
Jim Maffuccio: Okay. So you could pass that on. It’s okay. Wow. Okay. Now,
Craig Wear: So imagine if your listeners who invest in your programs were able to get the kinds of returns that you guys do, and imagine if that was tax free forever.
Just keep going. Yeah. Yeah. It keeps compounding. So instead of leaving the kids with a million dollar tax bill, they’re gonna leave them with this enormous amount of wealth that’s totally free of any tax. And it’s just a much more efficient way to invest in almost anything, but especially in things that create a really nice rate of return.
Now that’s assuming
Jim Maffuccio: that you’re below that, that the gift tax exemption limit, right? This still, this, that Those appreciated values of that Roth account that’s gonna pass on to the heirs, that’s gonna be valued, that’s gonna be, that’s gonna be worth something. It’s gonna have a numeric value.
Does that count against you? Your estate tax gift exemption?
Craig Wear: Oh, for sure. That’s right. Okay. Alright. So yeah, absolutely. Okay. It’s, yeah, it’s still part
Jim Maffuccio: of, we have 26 million or more that you’re going to be passing on to your estate. You’re not gonna get around being taxed. Okay. I just wanted to make sure it wasn’t outside
Craig Wear: of the boundaries of that.
Okay. Yeah, no, you’re still gonna have the inheritance tax on it. But think about if all of us had parents who passed on to us a few million dollars in a Roth, I. That’s a whole lot better position than many of my clients who are settling the estates of their parents and now they’re having to deplete those estates to pay the taxes on what they inherited.
Okay. Wow.
Ben Fraser: Yeah. This, I’m assuming they’re, the side by side scenarios, not only are they paying less taxes and avoiding estate taxes, With their, to their errors, but they’re also probably passing on a lot more. Because you’re not required to pull this money out and slow down the compound and
Jim Maffuccio: gross, it’s free.
It’s free to grow untethered once you. That’s right. Once you paid the piper early.
Craig Wear: That’s right. Yeah. And a lot of the clients that we have are people that are, that have a real strong charitable intent also. So they know that during their life, they’re gonna make charitable contributions to their church or some 5 0 1 organization.
If they have the right set of circumstances, let’s say they’ve got a million dollars sitting out in a brokerage account someplace, and they know they’re gonna give money over their lifetime. You can use what’s called a donor advised fund, right? You can go put a half a million dollars that you’re gonna give away anyway, that becomes immediate.
Tax deduction of a half a million bucks that you can convert a half a million dollars outta your IRA that year and it, it costs you more tax. Yep. And now all that money is sitting over there in the donor advised fund, and you saved this enormous amount of tax. There’s just, I, as you can tell, I get a little bit excited about this.
That’s awesome. Because of the impact it makes in people’s lives. That’s
Jim Maffuccio: good stewardship. The only thing I’m. I think you’re ticking a bunch of people off that are probably in the middle of that liquidation of an estate and paying the tax. Sorry folks. But there’s always tomorrow,
Craig Wear: there’s moving forward.
Yeah, that, that’s right. We’re fortunate in that we’ve, we’ve put the time in and we’ve had the, we’ve had the bats to really, we believe, really understand this and we developed tools that allow us to prove that these concepts are not what we believe and they’re not.
They’re not just ideas we have and they’re not opinions we have, there’s so many CPAs and financial advisors and that’s not me against other financial advisors. That’s just me saying our industry does not do a good job of getting people really educated about this. Our average client has got a million and a half to two and a half million in IRA assets.
They’re in their mid 60’s. And our average client is gonna save 3.2 million of taxes by getting the right Roth conversion strategy. Whether we help ’em or anybody else does, if they get it right, there’s this massive amount of tax capability there. There also is gonna save 80 to a hundred thousand dollars in Medicare premiums.
And that’s Jim. That goes back to the comment where once they get the conversion process, Boom. Now the premiums go down to the minimums again for the rest of their life or whatever the lowest can be for them, right? If they got other income and they’re making a lot of money for a long time off of investments or whatever, there’s nothing anybody can do about that.
But for most people out there, they’re gonna save a lot of money in that regard too. The challenge in all these guys is not, does the concept work? The challenge isn’t. That they have the, that this is gonna have an impact in their retirement. The people we’re talking to are people that are gonna have, their retirement’s gonna be just fine, whether they do the Roth conversions or not.
We’re talking about your word Jim. It’s really good stewardship. It’s really how do I utilize the things that our government has given us to do legally to create the most benefit for myself, my family, and the causes. And the people that I care about the most. Now, if the people you care about the most are the federal government, do nothing.
Oh, yeah. I love those going to be, they’re gonna be a great inheritor of your money. Yeah.
Jim Maffuccio: Yeah. Talk about good stewards, huh? Yeah. Yeah.
Ben Fraser: That’ll be, I feel like, yeah. The biggest challenge here honestly, is just the counter intuitiveness of choosing to pay taxes. Because you’re taught in your, natural inclination is to want to avoid, avoid, but to your point, like this, you’re. You’re not getting out of it. And eventually it’s going to be an issue. And if you can be proactive about it and plan out, that’s probably the bigger issue is just convincing people that this is the right thing to do. Like what are the things that you have, obviously Roth Conversion secrets.
What other. What are their secrets? Can you tell us, without giving away the whole book, that obviously we’ll talk about at the end here, that you’re gonna give away to our listeners, one of the things you find is just, the kind of secrets in doing this.
Craig Wear: Yeah. We have a lot of people who connect with us that have questions, they.
They push back on my premise and we get a lot of CPAs who call in. We got the engineers, they got all the spreadsheets, and they love doing their own math, and they do their numbers and God bless ’em. We love to take questions from ’em. For that group of people. Most of the people that are probably listening in on these podcasts are folks that value the input of other people who’ve already been through the woods and they want professional input and, but there’s the others out there that love to do their own stuff and that’s great.
So here’s my biggest tidbit to those people. You have blinders probably on the spreadsheets that you’ve created. You have built in. Things that you don’t even, you’re not even aware of. You haven’t even done the math on a 32% tax bracket. You haven’t done the math on a 35% tax bracket. You haven’t done the math on, what if I did a million this year and a million next year?
You don’t, or you wanna limit yourself. Your spreadsheet is built on. I can’t go to the next, I’ll only go to this social security Medicare threshold. I won’t go to this one. And I’ll tell you that, that. Tax paradise happens when you go beyond what your self-limiting beliefs are. You only get the big benefits when you assume that you know nothing about this and you just have to do the math on everything possible.
Then you find incredible things can happen for you. But when you listen to the media, when you listen to most of the financial professionals who aren’t educated about. And we’re the more you get to know me, you’ll realize I’m not the sharpest tack in the box. We just do one thing really well.
So we don’t profess to have any greater acumen than anybody else. We’ve just done the math and the beauty happens in Roth conversions. When you cast off the restraints that are thrown on you by the media and by the typical financial. Mantra and you go explore for yourself what’s best for you.
It sounds like, it’s like most things
Jim Maffuccio: in life when, you could talk yourself out of it using generalities, but when you drill down and get specific and start running the numbers in different scenarios, it’s that’s it’s mathematics at the end of the day. It’s based on a set of assumptions.
Then you change the assumptions, say what if this, and you run the mathematics again. And so it’s a, it sounds like it’s probably a very personalized custom thing for each individual. Am I right about that in terms of like, when to make these conversions? I can see that being a pretty elegant, decision every year, you
Craig Wear: know?
Yeah, it is. And of course, that’s why I had. To spend a whole lot of money developing software that helped make those elegant decisions for people is very unique and very specific. You have to first of all answer the question, how much of my total should I convert? Then you have to answer the question, how much every year of that should I convert?
And what is the optimal tax bracket that I should do that at? So that I get those two things, the maximum tax avoidance and the highest amount of net worth. And what throws most people is when they realize that they have to dig into their pocket and pay some taxes sooner than what they’re used to doing.
But that’s where the beauty starts.
Ben Fraser: Yeah, it feels counterintuitive to Yeah, go ahead. To have max tax avoidance when you’re paying taxes. So it’s, yeah, but you’re looking over a long period of time, this is what you will pay, based on pretty basic math assumptions, but if you do it now, it’s, you’re gonna save a lot of that.
Jim Maffuccio: And if you have an opportunity, to make a contr a large contribution or set up that donor advised fund, something you’re planning to do anyway hey, coordinate that with, okay, we’re gonna, Convert that amount and wash that, wash that deduction or let that deduction, wash that tax away.
Anyway, it’s just, it’s Hey, let me ask you a question Craig, is there any noise out there threatening to terminate the conversion factor? Or is that even on the table anywhere? Cuz it seems like most
Craig Wear: anything that’s good these days is on the chopping block. Is that Actually, no.
To the contrary, Jim. Secure Act 2.0 actually had several provisions in it that really gave a head nod to Roth 401ks and Roth conversions. Okay. They’ve strengthened the Roth account. They’ve made it to where they’re encouraging employers to make matching contributions to Roths. They’ve done it to where you can, you can, if your company has a Roth 401k, you can put $26,000 into that account every.
So there are actually to the contrary, there’s a lot of things going on legislatively that have proven this is not gonna go away tomorrow. They think about it. What does the government need more than anything right now? Revenue. Where do they get revenue from? Income taxes. So what they’re encouraging is for people to get these conversions done because it opens the coffers, it brings the money in.
My attitude is, hey, if it’s their law and it saves my client a couple million bucks, baby, let’s roll,
Ben Fraser: let’s get, let’s take advantage of it. Yeah, that makes sense. Yeah. Maybe a little shortsighted it because they’re keep printing all this money and need to compensate on the other side of it. I have a couple kind of specific questions, so a two ends of the spectrum.
So for someone that’s younger, in my age who’s planning on working for a long time. Does it make sense, I’ll be like a few more years, but does it make sense to, if I have a 401K or traditional IRA to convert now, or should I continue to defer until kind of that, later age bracket and then convert? Is there any, what’s your perspective?
They’re, obviously, they’re speaking generalities, so I’m not holding you to tax advice, but just what do you think about that for someone that’s. Convert
Craig Wear: now. Convert as fast as you can and as much as you can, and never put another dime into a tax-deferred account unless somebody else is putting another dime with you.
Ben Fraser: And what’s your rationale
Craig Wear: behind that? I’ve just done the math. You take that compound, you pay a little bit of tax today on your seed. And you let that grow forever. Totally. Tax free, and you continue to fund that seed with more tax-free money. Whew. Yeah. Let me ask you this, Ben. Do you think tax rates are gonna be 10 years from now or 15 years from now?
Are they gonna be lower than today or higher?
Ben Fraser: Yeah’s a great question. Pro, probably higher. So converting is probably a call option on higher tax rates down the road, right?
Craig Wear: Yeah. And then you can go invest in Yep. In atypical ways to get atypical types of returns and benefits in a way that we’re talking about.
We’re talking about generational types of wealth that you can create. And you’re talking about, imagine being an old guy like Jim and I sitting here with millions of dollars sitting, that’s totally tax free forever. You want to go do something good for humanity? You stroke a check.
You don’t have to worry about the taxes. You wanna pay for your grandkids’ education. You stroke a check. You don’t have to worry about the taxes. You wanna buy something nice for your family or for your or a second home, you stroke a check. You don’t have to worry about it. I can’t tell you how many of my clients over the years before I discovered this, would not buy the new pickup truck as a second home.
The vacation for the entire family because when it came down to me making the distribution from their IRA to pay for it, I asked them, how do you want to handle the taxes? And they balk. Wow. Yeah. So at your age, dude, man. So
Jim Maffuccio: Going back to Ben’s, so back to Ben’s, young,
Craig Wear: young.
Jim Maffuccio: Age that sort of thing.
So the seemingly huge value of getting a deduction against what Toban seems probably right now and is a high, marginal tax bracket that is. The benefit there, it’s a real benefit, but compared to the benefit of untethered growth and compounded growth of a lower amount of, okay, I’m gonna take some of your seed from you right now, but then you can plant that in the most fertile soil and let it just go hog wild for the rest of your life and beyond, and it’ll never get taxed again.
To me, just even intuitively that seems. A way bigger driver of value than getting the tax deduction. Cause darn it, I’m 37%. It is counterintuitive. It really seems the thing to do would be to do go the traditional when you’re in your high tax earning years, but actually the earning capacity of that capital left, unhindered for decades is wildly more significant than that
Craig Wear: short term.
Yeah. And if all you do is leave the money tax deferred let’s go fast forward. Now, Ben, let’s say that you’re 65 years old and you got 4 million in your I, and it will happen fast, Ben, I’m telling you. Hey. Amen, brother. It happens. You blink an eye, right? So let’s say you do really well and you got 4 million bucks sitting in that area.
You open up that statement, 4 million bucks and you’re about to retire.
Does the concept of the, does the concept of how much of that belongs to Uncle Sam even occur to you? No.
Ben Fraser: Yeah, exactly.
Craig Wear: Today it doesn’t, but it will then uh huh. It will then, because that 4 million bucks is not all your money. It maybe comes in a wrapper with your name on it But if tax rates are just the same that they are right now, a million and a half of that is a contingent liability that you built up for Uncle Sam when you could have paid the tax on the front end and you maybe have a lower balance, but it’s all your money.
Yep. Makes sense. And the math will work out. The math will work out. I,
Ben Fraser: I love that. On the other side of the spectrum, so say you have someone that is listening to this episode, they’re already into their RMDs. They are all traditionals. Does it still make sense for them to do this? Or do you, once you hit the RM d thresholds, do that lock you in?
You can’t do conversions or just at a high level, is there still like options for people that are at that stage?
Craig Wear: So there’s a couple of questions, and I won’t go too far in the weeds, but let’s say they’re, we do a lot of conversions for people well into their seventies, but they normally begin.
In their seventies or in their sixties. But if they’re, if you’re 75 ish, then it’s worth doing the conversions if it’s important to you to leave your heirs in a position where they’re not gonna be saddled with a big tax once you pass the money onto them. But if you’re 72 or 73 and your spouse is the same, There probably still are some significant benefits to you during your lifetime to do the conversions.
If you’re 72 or three and you’ve started conversions, but your spouse is a few years younger, you have to realize that you’re planning for both of you and she probably is gonna outlive you. If you’re a guy listening to this and you’re 73 and you had your first R m d, and let’s say you’re married to a woman who’s 65 years old, they normally outlive us.
I have my own theories about that, but they’re gonna outlive us and they’re gonna get the money. So you’re planning for her as well. So I, I can’t say that age is the only determiner unless you’re 75 ish, and I can’t tell you that it’s exactly 75. But in math we’ve done somewhere around 74 or 75.
You’re not ever gonna get back the benefit of the tax you paid. You’re just paying it forward for your errors.
Ben Fraser: That makes sense. And to your point, again, this is a very personalized discussion, right? Because you can talk generally, but it’s gotta, you gotta look at all the factors going in. So Craig, this is awesome.
And yeah I’m gonna go convert right now, so everything I got, but you gotta convert. You gotta cover right here. So talk about a little special little gift for our listeners here. It is just clear, clarify if I’m wrong here, but you have a book that you’ve written on Amazon, it runs for 20 bucks.
And, but you’re gonna give us. Kind of the option to just pay for shipping and for our listeners, or just explain what you got going on here for
Craig Wear: us. Yeah. Now we’ve created a special just a website page for your listeners that you can put down in your show notes that they can just go and we’re just gonna give them the book and it’s a free download.
It’s a full color pdf. They don’t have to wait on shipping. They don’t have to pay shipping. Perfect. Perfect. They just download it. They read the book, they get the info, they. And it’s just my way of saying, look, guys, go do this. Whether it’s us helping you or somebody else that really can demonstrate they know what the heck they’re doing, you have to get this done.
We got tax rates changing in a few years. I just can’t tell you how important enough that this is to not procrastinate on it. And so if a free book is what it takes to get you interested and inspired, then hey, free book on me. Everybody party down.
Ben Fraser: All right. Awesome. So we’ll put that in the show notes for all those.
I’d like to read one a little bit more on this and Craig just really appreciates you coming on and sharing some of the secrets. And I’m sure you’ve got more in the book that we didn’t even cover, so Oh yeah. For anyone that’s intrigued definitely dig into this and really appreciate you coming
on
Craig Wear: Craig.
Yes, thank you. Make sure,
Jim Maffuccio: Just a final thing cuz people may be thinking, Hey, this guy’s living on the road. So you’re not running away from anybody here with three, you’re not running away from any three letter agencies or anything like that. This was a matter of choice, right? You converted, right?
Yeah,
Craig Wear: I did. For sure. Yeah. It’s a lifestyle choice, man. We used to go into our little gated subdivision down the driveway with a gate on it closed. Garage door and only go to church and get to talk to people, and now we’re just out, enjoying life, having a great time seeing America, and meeting some really cool people.
Awesome. That’s awesome. So to my knowledge, nobody’s looking for me, but I haven’t been to the post office late. You look on the wall
Ben Fraser: a little hard to get a hold of you, so
Craig Wear: That’s right. Thank you guys. I appreciate the opportunity to kinda share this stuff and I hope that you’re the folks that listen to your podcast.
I hope they take advantage of the free offer and it’ll be of some help, Tom, I hope. Yes,
Ben Fraser: I’m sure they will. So thank you so much.
Craig Wear: You bet. Have a great time guys. Thank you.
