Are Roth Conversions Necessary? | Cody Garrett and Sean Mullaney | Ep 581

26:40Are they going to have well over 200 ,000 of after-tax cashflow measured in$2026? Yes, they are going to be fine. They didn't need to do the Roth conversion. Yes, if they had done the Roth conversions in their 60s, they would have reduced that traditional IRA balance, which would have reduced the RMDs, which most likely would have reduced RMDs that would have been otherwise subject to the 32 % tax. By the way, that single is still going to have probably some RMDs maybe in the 12 % bracket, certainly in the 22 and 24 % bracket. So they're not going to get crushed. But yes, they absolutely have an inefficiency if they don't do the beneficial keyword Roth conversion.

27:21But even for that person who is rare, even for that person, I wouldn't call Roth conversion a necessity. And I'll also mention that if an RMD of about 4 % of a traditional retirement account is more money than the retiree needed to live, what does that tell us about not just their current situation, but also their previous situation? What I find is those who are most concerned about the need to do Roth conversions not only are financially successful, but they're actually over-saved and over-worked. Again, I'm a big proponent of financially independent recreational employment. Even when I'm financially independent, I'll probably still work.

28:00I'll probably still save and invest. But I do need to note that if I'm worried about RMDs in the future, it's probably because I actually over-saved and invested for my retirement. So those who are concerned about the future RMDs way exceeding being multiples of what they actually spend in retirement, they either over-saved, over-invested, over-worked on the path to retirement, or they're under-spending and under-giving in retirement. So just not that any of these things are bad, no shame or judgment, but I do think that if we're concerned about Roth conversions, it means that we're financially successful and that maybe we're actually even more successful than we initially thought we would be.

28:34Cody, can I just throw in something on that? So my 60-year-old with his or her$5 million IRA, They're single. They can do beneficial Roth conversions, say, through the 24 % bracket. But he or she might want to step back and say, well, wait a minute. The 24 cents on the dollar I'm going to give to the IRS this year to avoid giving 32 cents on the dollar to the IRS in 15 or more years, maybe that's better spent today, visiting friends and family, giving to charities, you know, doing some living while there's some living to be done, right? So like I have this little saying, nobody goes to the tropics for the first time in their 80s.

29:14Now, look, you don't have to manage to go to the tropics. But my point is, maybe it's better off to do more modest Roth conversions in our 60s and take what we would have spent on taxes essentially in our 60s on a Roth conversion and do some living while there's some living to be done. Maybe that's travel, maybe that's visiting friends and family. Maybe that's helping family. Maybe that's charity. You got to do you. But I think this idea that we're going to spend a lot on taxes and potentially sacrifice benefits in our own lived experience in our 60s so that our 70s and 80s year old self has slightly better tax outcomes may not be the best idea.

29:59Yeah, Sean, this reminds me of like, you know, put on your oxygen mask before helping others. Also going back to what you were saying about how one of the main potential benefits for people as a use case is you're essentially prepaying the tax for your heirs who are going to get this windfall. So I like this line of reasoning and I wanted to kind of take a holistic step back and just say like, that's what we're talking about here. These are all just potential strategies. Of course, we don't know exactly what your situation looks like, but if you're talking about, you've already filled up the standard deduction and And you're actually, you're making a decision to make this conversion and actually pay tax in the current year.

30:36Well, I think the guys are trying to present to you that, all right, maybe it doesn't make so much sense. And Cody, this goes back to what you said maybe five minutes ago, just about generally, like there are all of these things that people say, right? That like generally accepted that like one, for instance, even though we're talking about Roth IRAs, but like one is Roth IRAs are always better than traditional. Roth is always better than traditional. I think all three of us would say, I don't think that's exactly true. That doesn't mean there aren't instances where Roth are better, but this crazy blind devotion to Roth doesn't look at facts of the situation.

31:13I think another one you also talked about is your income is going to be much higher in retirement and therefore your tax levels are going to be higher. What? I struggle to think of an example where that would be true. The beautiful part is, and I'm sure there are examples clearly, but to a large degree, we control a lot of this aspect of what our taxable income is going to be in retirement. And that's one of the beautiful parts about the path to FI is I've always used the phrase, control what you can control. And I think that's why I like getting tax deductions in my current years. So I like putting money in broad terms.

31:51Again, I'm not blind about this, but in very broad terms, if I can put into a pre-tax vehicle and get a tax deduction now. Well, I know what my tax rate is now. I know what my marginal rate is. A lot of this is fear mongering and prognosticating on something we can't possibly know, which are tax rates are going to go up, right? Like you hear that over and over and over again. You guys have alluded to it. Like, do you know that definitively? Does anyone who's saying that know that definitively? Of course not. You could guess anything you want, but just it's the same as guessing is the stock market going to go up six months from now is going to go down.

32:25You could come up with any kind of compelling case. Talk to 100 experts. You're going to hear 100 different opinions. Give me a break is ultimately what it boils down to. We do not know. So that's why I think you use the sense that you have and control what you can control based on what you're seeing on the ground today. And I think we should ask, I mean, I love the optimization. You know, like I'm all about it. I'm all about the spreadsheets. But I do think we should be more intentional about understanding. You know, we have even a chapter in the book we call Return on Hassle. There's this idea that we often think about opportunity costs as financial, purely quantitative.

32:59But I do want to step back and consider, if you're listening and you've been thinking about Roth conversions, and kind of think about the time and energy spent thinking about them. You're not just on the path to the Roth conversion, but even afterward, there's a regret avoidance and a lot of, there's a lot of therapeutic things that come into play. Also, I find that sometimes when there's a lot of focus on something like a tactic of a Roth conversion or tax gain harvesting, sometimes it goes beyond the optimization as really a form of procrastination. One thing I'm finding a lot is people, especially moving into retirement, like newly into retirement, they've just flipped that switch from saving and investing and accumulating right now to like spending and giving and distribution and drawdown.

33:38There's already so much fear and anxiety. You know, the anxiety I call the fear of future uncertainty when flipping that switch into retirement. I find that a lot of people, especially within our community, our way of dealing with stress and anxiety is actually going deeper into the spreadsheet, adding a few more sheets to our spreadsheet of our analysis. And I will say that optimization can actually be a form of procrastination. And the way I kind of phrase this is procrastination is you're avoiding pain and you're pushing it into the future, right? And I think that just stepping, I know that we kind of step back qualitatively sometimes and just say that, yeah, Roth conversions, like, yes, do the math, but just don't let yourself spend so much time and energy stressed about something that's primarily out of your control.

34:20And I'll just add that we have to think about predictions about the future. And there have been plenty of them. And I think it's revelatory to see just how successful or not they've been. So we've heard for years now, taxes are going up on retirees, taxes are going up on retirees, taxes are going up on retirees. There's only one problem with those predictions. It's that they keep being exactly wrong. Right. And at some point we have to say, well, those who are predicting taxes are going up on retirees in the future, maybe we shouldn't be listening to them when they keep getting it wrong. So what I mean by that is the future keeps happening and Congress, whether it's Democrats or Republicans, they keep cutting taxes on retirees.

35:03I'm not here to say that's a good idea or a bad idea, but I'm here to say, well, when we actually play the game, the game keeps having tax cut after tax cut after tax cut for retirees. I'm not here to say they're just going to keep doing that. But I think that's revelatory that despite the very high national debt and deficits, they keep cutting, not increasing taxes on retirees. They've cut taxes so much so in the last decade or so on retirees. We had to distill it into a table. We call it the litany of tax cuts for retirees because we couldn't go into chapter and verse on it or would have made the book too boring for the reader.

35:40So I'm not here to say that retirees are never going to have a tax hike. But boy, it's interesting that they keep cutting taxes on retirees, but commentators keep saying they're going to increase taxes on retirees. That doesn't add up, in my opinion. So one thing I did want to ask was, why does everyone push Roth conversions? And now, to be clear, I have talked about the Roth IRA conversion ladder as a strategy for years, but I don't think by any stretch would I say I've been pushing this. I think it's a really fun potential strategy, but there are a lot of people in the general finance world that really push these things.

36:22Like you guys said, and really the whole cause for this episode is this is not something you have to do, but yet people have that sense. And it seems as if there are personalities that are pushing that. Yeah, Brad, I think you have to step back and you have to say, what is the master of reason? And oftentimes the master of reason is motivation. Your motivation tends to drive your reason more than you would like to think. So we have to step back and say, well, what's our motivation? And for some commentators, for some advisors, the motivation is relevance. Okay. So you don't get a lot of relevance by saying, hey, there's this tactic out there and it might be beneficial for you, but it's no big deal.

37:07And if you don't do it, you're still going to probably be okay. So you get relevance and that's what motivates you by pushing things and saying, hey, this is a necessary thing. This is a very important thing. And so you have to ask what are the people's incentives and what might be driving their reasoning and it might be their motivation and what's their motivation. So that's one thing. The other thing, frankly, is we've had outdated thinking in this space. So even last year, 2024, you could very reasonably argue, well, you should be doing a lot more in the way of large Roth conversions because taxes are going up.

37:45And that was nominally true. You looked at the Internal Revenue Code, the tax cuts from 2017, the higher standard deduction from 2017, that was all scheduled to go away. Well, it didn't go away. In fact, they increased the standard deduction a little bit. Okay, fine. But my point is, I think in this space, there's a lot of outdated thinking. Folks have not come to terms with the fact that the standard deduction is now permanently higher. The brackets went down and they've made some other changes, right? It used to be RMD started at age 70 and a half. Now they started age 75. They increased life expectancies on that RMD table.

38:23So that lowers RMDs. I do think for whatever reason, a lot of folks just haven't updated their thinking in this space. And to add to that, I think, you know, there's a lot of excitement about, you know, I mentioned that financial advisors, they're typically expected to do things. It's kind of ironic that sometimes they'll talk with somebody about their relationship with their advisor. And even, you know, around the holiday dinner, it's just like, hey, like, what did your financial advisor do for you? You know, whether it's like returns or like, you know, like buttons to click. Like, I think in the advisor world, there's this idea that for financial advisors on average to kind of prove their value, they have to show that they've been actively doing something.

39:01And if they're not actively trading, which we know typically results in reduced performance, a lot of advisors talk about these value ads. Like, what can I do? Like, what can I do to show clients that I'm working for them and I'm worth the cost? So I do think a Roth conversion, again, us saying that a Roth conversion might not make sense. Like, it doesn't sound very exciting. There's the idea of, you know, hurry up and do nothing, right? There's this excitement about all this optimization, the Roth conversions, tax gain, harvesting. Even in ChooseFI, we have to be careful, right? And a lot of these tactics are really exciting.

39:34But I know, Brad, you constantly remind people just because this exists doesn't mean it applies to your situation. So I think we like to kind of collect this bag of tricks. A few years ago, it was, you know, the I-bonds were real hot. People were talking about tips ladders this last year or so. So again, now it's kind of like it's the time of the Roth conversions. Like every year has its theme where everybody, there's a fear of missing out, whether it's on a specific investment or an investment strategy. So I think right now the strategy that's real hot is Roth conversions. And kind of ironically, there's actually kind of a debate.

40:05If you look at the thumbnails on Roth conversions on YouTube, one thumbnail will say, convert it all now before it's too late. And the next thumbnail will say, don't convert anything. So unfortunately, there's kind of a binary take of like all or nothing thinking within personal finance. So I think bringing more of a balanced approach doesn't really get as many clicks. Yeah, I'll just add, you know, one in our book, we literally have a concept called the tailored taxable Roth conversion, which is a modest Roth conversion that could potentially be federal income tax free. So we're not against Roth conversions where we tend to ask a lot of questions, be a lot more skeptical as for the large scale Roth conversions.

40:42And I also just want to add, you know, around this concept of maybe potentially some outdated thinking out there. If we look at 2026 and we look at the married filing joint tax bracket, we can get with the standard deduction and assume we're under age 65 for this. We can have up to one hundred and thirty three thousand dollars of income and not a penny of that income will be subject to the 22 percent bracket or more. Right. All that income is going to be subject to the zero percent because of the high standard deduction, 10 percent or 12 percent bracket. That's screaming, big picture, spread out income, spread out income, spread out income.

41:19Do what you can to spread out income over your lifetime because you have the 10 % and 12 % bracket, you have the high standard deduction. So then you apply that to a large Roth conversion. What's a large Roth conversion doing but concentrating income into a single year? So if the planning environment tells us, hey, spread out income, spread out income, isn't that a sign to us that maybe a large Roth conversion may not be a good idea in most cases? I'm not saying every case 100%, but I'm saying the vast, vast, vast majority of times, we want to spread out income as much as possible. And one of the ways to do that is maybe question those larger Roth conversions and maybe instead do more modest Roth conversions and just understand back to the fundamental concept, even the modest Roth conversion is most likely to be a beneficial tactic, not a necessary tactic.

42:14Right. Yeah, I love that. And I'm glad you slowed down actually on that, the 2026, because I'd love to have us just spitball this. And I know we didn't prepare for this ahead of time, but I think this would be an interesting way to sum up this episode, because while we've talked about Roth conversions not being absolutely necessary, they are an option, right? And we're not, as you guys have both said repeatedly, we're not saying to not do Roth conversions. We're saying situationally, they can be great, but it's the drumbeat of you have to. Anytime you hear a drumbeat of you have to for anything, you really, really need to take a step back and ask, as these guys said, what's the incentive?

42:55What's the motivation of why this person is saying it? Do I believe this? Does anything in my experience lead me to believe that this thing is an absolute necessity. And this is not to say, like you guys mentioned, Cody, the I-bonds, right? Like that's not to say X number of years ago. I don't even remember four years ago that I-bonds were a bad suggestion. They might've been perfectly fine then. I remember I, I even bought whatever the limit was. It was, you know,$10 ,000 or something. You get your 9 % for a few months. Yeah. And it was great, you know, but does that mean that I closed my brain and I just kept putting money into I-bonds thinking it's the greatest thing since sliced bread.

43:29No, of course not. Life changes. This is how the world works. Things constantly change and we need to update our thinking. Okay, guys. But I think what would be really helpful and illustrative is just to kind of talk through. All right. We know people have fears, right? We've talked about this episode. People fear higher taxation in retirement for some reason. I don't know why, but Sean just said, okay, in 2026, let's say this was retirement year for you and you're married filing joint, you could have$133 ,000 of income. That's the actual income. And then you take out the standard deduction and the remainder is taxed in either the 0 % tax bracket, the 10 % tax bracket, or the 12 % tax bracket.

44:14Guys, I haven't done the math, but I assume on that 133, the effective tax rate is probably somewhere, if I had to guess, 5 % to 8%, somewhere plus or minus, seems fairly standard, which a 5 % to 8 % effective tax rate on $133 ,000 of income is astonishing, right? I mean, how many of us need$133 ,000 of income to live off of in our five lives? I can't imagine there are that many of us. So just the back of the envelope just proves like, I don't think you need to fear the high taxation like most people are fearing. And so anyway, that is a very long way of saying, let's talk through what can make up for people in early retirement.

44:55You guys see clients, et cetera, like what makes up this income? Because I think a lot of people just don't even have a sense like capital gains distributions, dividends are obvious ones that like interest income, things that by virtue of having a significant net worth, you're going to have a baseline quote unquote income. But those are just three right off the top of my head, but I'd love for you guys, the actual experts to talk through how should people think about this? Because again, I think a lot of people are thinking, oh, I don't have any W2 income. My actual income is zero. So I get to fill up the entire standard deduction with Roth conversions.

45:32And I laugh all the way to the bank, right? Like not a bad strategy if that were the case, but let's throw it over to you guys to talk through just sort of real high level, how someone should think about what is my income actually going to look like? Yeah. And Brent, now we're getting into drawdown tactics and strategies, even just separate from the Roth conversion. And I think it's beneficial to start with for many in the FI community, you get to an early retirement, what's the first spend assets? It's the brokerage accounts, it's the taxable accounts and you don't have to take RMDs. So your income is going to be maybe a little bank account, so a little interest income, but we're in a 4 % yield world.

46:11So maybe that's $2 ,000 interest income. Okay. That doesn't eat through the standard deduction or barely does. And then you have this brokerage account and it spits out dividends. But what do we live in? We live in a low yield world, domestic equities, my goodness. As we record this in December of 2025, a well-diversified domestic equity index fund is yielding something like 1.2%. So a million dollars will kick out about$12 ,000 of taxable income. Oh, by the way, 90 plus percent of that is going to be so-called qualified dividend income. So even if you have a million dollars of a taxable brokerage account going into retirement plus a small bank account, your initial taxable income is about$14 ,000.

46:53Single married, you're not going to pay any taxes on that. Now you'll probably then sell some of those brokerage accounts, trip capital gains income, which is very favored. And now, yeah, maybe you trip 50 ,000, 60 ,000, 100 ,000 of capital gains income, but even that might be taxed at 0 % or maybe a little bit of that. Some of that might be taxed at 15%. So you just saw a very affluent, either single or married person would pay maybe zero federal income tax, or maybe they'd pay a little bit on the capital gains, but that's 15 % of a little piece. And then what happens is, so you asked about sources of income.

47:31Well, then let's fast forward it to later in life when we've spent down those brokerage accounts. So we spend down the brokerage accounts, they're pretty much gone. And now we're taking social security and we have the so-called requirement of distribution out of the traditional IRA. Well, okay, let's do our tax return. Interest income from our, we still have a bank account, fine. So we get a little interest income. Let's call that$2 ,000. We get our social security. That's generally going to be 85 % taxable. For some people, it'll be less than 85%, but let's just call it 85 % for our more affluent listeners.

48:06And then we have our RMD from our retirement account. You know, okay, that could be a big number. I did an example recently. It's on my YouTube channel, but I also separately have the spreadsheet where I posit a 81-year-old widow in the dreaded, they call it the widow's tax trap. Everybody worries about this. Oh no, we're married, so we don't pay a lot of taxes because married filing joint. But then one of us dies and now we're in the terrible, the dreaded widow's tax trap. Okay. So I posit this widow, she's 81 years old. So her RMD is just a smidge over 5%. And I posit her with a$3.68 million traditional IRA.

48:49Most financial planners are going to tell you that is the worst, the worst, the worst possible outcome. Well, I run through her numbers. I even say she still has a bit of a taxable brokerage account because she and her husband took RMDs that were in excess of their needs. So what I find is, okay, so she's doing the RMD as an 81-year-old, and she's got this horrible, terrible, awful$3.68 million traditional IRA, by the way, a position most Americans would - Right, good problem to be had. Yes. But what I find is that she takes$189 ,700 RMD, which is an RMD level most Americans will never sneeze near, but let's go with it.

49:28All right. So she has this almost$200 ,000 RMD. Her total income for the year is almost 250 ,000 with social security, with some dividends, a little interest income. That's her tax return, right? It's not all that complicated. And on that, she pays 45, 46 ,000 federal income tax. And there's a little bit of, they call it net investment income tax. Two years later, she'll have this Medicare surcharge at $6 ,500 to her when she's worth more than$4 million, no big deal. And what I find is, so her effective rate, even if we include the IRMA as a wildly financially successful widow is about 21.3%. And that includes that IRMA surcharge.

50:12And that's two years down the road, but let's just include it because it is an effect of today's taxes. But what I find is the first thing is her after-tax cash flow in 2026, so not including the IRMA, but otherwise it's$201 ,000. So in the widow's tax trap, paying 32 % on some of the RMD, she does have after-tax$201 ,000. She's doing fine. Her RMD, that 189 ,700, almost 15 % of it is subject to the 12 % tax. So in the widow's tax traps, he still has an RMD that goes off a bit at 12%. A bunch of that RMD is going to be taxed by the 22 % bracket. And about half the RMD, almost 51%, is taxed in the 24 % bracket.

50:58Of that 189 ,700 RMD, a little bit more than 10 ,000 is taxed in the 32 % bracket, about 5 % to 6 % of the RMD by my quick and dirty numbers here. And Brad, I can share this spreadsheet with you. We could post it. I'm fine with folks looking at it. But my point is that in this dreaded widow's tax trap, this horrible, horrible widow's tax trap that people fear taxes in retirement because they're going to be so high. Well, okay, let's posit a widow. Let's posit that she has almost 4 million in a traditional IRA. Her RMD, most of it is taxed at 24 % or less. 6 % of it, let's round up, is taxed in the 32 % bracket.

51:41And oh, by the way, her after-tax cashflow is$200 ,000. She's doing fine. So yes, the IRS gets the win on IRMA. It's not technically the IRS. Let's call it the federal government. The IRS essentially gets a win. She probably could have done some more Roth conversions, had less IRMA, but let's call it a win on IRMA and let's call it a win for the IRS on that RMD hitting the 32 % bracket, those are what I refer to as garbage time touchdowns. And Brad, I will say this. I don't like the term expert. I really don't like that term. I never use it, but I'm going to make an exception. If there's one thing Sean Mullaney is an expert at, it's garbage time touchdowns.

52:24Why? Because I've spent more than a third of a century rooting for the New York Jets. And as a Jets fan, if you know something, you know about garbage time touchdowns. The offense scores a touchdown where it puts points on the board, but it has no impact on the ultimate winner or loser of the game. This widow, probably she and her husband should have done some Roth conversions and maybe they would have been taxed at 22 or 24%. Well, okay. They didn't do those Roth conversions. And what happens? The IRS scores some garbage time touchdowns. She pays a higher tax when she can easily afford to pay the higher tax.

53:04And let's think about the tax planning arc of this widow who has this$3.68 million traditional IRA for a second. This widow, she and her husband deducted into a 401k, call it 24 % saved. So they're winning against the IRS at work, but we know that that's fine. Then they get to retirement and maybe they spend down some taxable accounts first and they're paying hardly anything in federal income tax. And they might even be doing some small Roth conversions. I say they don't here. Let's just say they don't. So they win against the IRS in the working years. They then win against the IRS to spend down the taxable brokerage accounts.

53:39They might be paying zero federal income tax for a few years spending those things down. Then they're married and they start having RMDs. The RMDs are mostly going to be taxed in the 12 and 22 % bracket. While they're still both alive, they're married. So the arc of their tax planning life is win against the IRS while working, win against the IRS in the early part of retirement, win against the IRS when they start taking the RMDs as a married couple. And only in the late fourth quarter, when I call her Jane, she's 81 years old, she's a widow. Only in the late fourth quarter does Jane start giving up some garbage time touchdowns to the IRS.

54:19The IRS starts winning. By the way, even in that phase, 14 % or 15 % of the RMD might go against the 12 % bracket in my numbers. So even then, they might still have some Ws against the IRS. But yeah, paying 32 % on some of the RMDs is a loss, but it's a garbage time touchdown that the IRS wins. But that doesn't change the fundamental tax planning arc of her life. It's win against the IRS after win against the IRS after win against the IRS. And then late in the fourth quarter, a few garbage time touchdowns to the IRS, but she's still doing great. Sean, I love, I love the garbage time touchdown.

54:57So a little fun fact for the audience is we grew up about 10 minutes apart on Long Island and our high schools were actually 1.6 miles apart. We didn't know each other. That's right. That's really 1.6 miles. And we're both long suffering Jets fans, you much more than me and New York Mets fans. So yeah, we're used to some pain, needless to say. But yeah, I love this as a worst case scenario. So again, there's so much fear. And yet when you come up with examples, it's hard to do worse than this. And we say that kind of dripping with sarcasm because as we said, this woman is doing wonderfully in your example.

55:35She has millions and millions and millions of dollars. There's no world. She paid a 20 % effective tax rate, which for everybody out there, effective tax rate is just tax liability divided by the gross income that we're talking about here. So in this instance, if she had$250 ,000 of gross income, 20 % of that would be 50 ,000. So if she had a 50 ,000 tax liability, the effective tax rate would be 20 % on this$250 ,000 of gross income. It's really important in our graduated income tax system that you understand that there are tax brackets, but that is the first X number of dollars, depending on your filing status, are at 0%.

56:11Then the next Y number of dollars are at 10%. The next Z number of dollars are at 12%. That's how it works. But the smartest way to look at it is your overall tax burden is your effective tax liability. So that's why we refer to that. But it's important that you understand the definition. So yeah, Cody, I know you wanted to jump in, but I wanted to just touch on that in that this is the worst case scenario. And it's still fantastic, right? Like we're talking, as Sean said, about garbage time touchdowns. And for most of us, our effective tax rates in retirement, in early retirement or other retirement, traditional retirement are going to be well less than 10 % because we control most of this.

56:47And that's the beautiful thing. Like as Sean said, you get to play with your taxable brokerage at first. And a lot of that is long-term cap gains. And Cody, you've talked eloquently on the podcast before about how there's a significant, a huge percentage. We get showered with benefits on long-term cap gains up to, I don't know what the exact number is in 2026, but it's something like probably 98 or a hundred thousand dollars are taxed at 0%. Like this is crazy. That's the gain. That's not the amount of money you pulled out, right? It's the actual gain. So for most people, you can play around with this and your, your effective tax liability is going to be almost zero or under 5%, under 8 % in retirement.

57:29Like there is nothing to worry about at all. Well, my one fun pushback for Sean is you're going to have listeners of this podcast yelling at their podcast player saying, but Sean, I want to be able to control taxes, not just during my lifetime, but I want to control those taxes from the grave. So I want to mention this idea that if she passed away after this scenario, her heirs, by the way, her heirs could also include charitable organizations that pay$0 in tax on that money inherited. If they inherited$3.7 million. A lot of the concern within our community is, but aren't those kids, maybe her adult kids, maybe even in their highest earning years, they just inherited 3.7 million.

58:07They're going to have to pay a ton of taxes on that. And from hearing on both sides, we talk about the regrets of the dying a lot, right? Of saying, oh, I wish I would have had more experiences and had more memories with the people I love while I was alive. Guess what the regret of the heir is? First off, they inherit$3.7 million from mom or grandmother. They're like, wow, that's amazing. That is life-changing money. By the way, even$3.7 million hit with taxes after tax, that's still an incredible inheritance. But I'll also mention that the air is most likely, yes, maybe they're paying a little bit of taxes on that money.

58:39But the most common story I hear when somebody inherits a large amount of money is, I wish my mom would have been able to spend this money while she was alive. And I wish we could have spent that money to enhance our experiences together, staying right on the beach rather than a few blocks from the beach. My grandma never got to go to Norway. By the way, true story. My grandmother, her whole life, she talked about how much she wanted to go to Norway, never went. So when we inherit a million dollars from grandmother, right, our initial thought isn't, oh, I have to pay taxes on this money. It's, oh, man, I wish my grandma would have been able to spend this money to go to Norway when her physical and mental health was in a good place.

59:13So I know I kind of pushed back on Sean that if somebody told you, but what about the kids paying taxes? What's your response, Sean? So a few things. First of all, we have to ask a fundamental question. What is the job of any retirement account, traditional, taxable, Roth, any retirement account? I argue the job of a retirement account is to get me and my spouse to and through retirement period, full stop. It is not to manage the tax liability of someone else. So that's the first thing I will say to that. In this case, this widow is doing fine. Her and her husband, presumably, while he was still alive, were doing fine with$3.68 million at 81 years old.

59:54So the retirement account did its job. Second thing is, okay, so you're worried about the taxes of a person who just had a windfall. So that's not the most compelling financial planning concern, particularly when we're doing our own financial planning. Third, are you sure your heir or heirs are going to pay a lot of taxes on this? So this can happen in different ways. One, maybe you only have one heir, but they inherit the 3.7 million IRA. And now they're like, they're going to do an early retirement. So they're going to primarily spend this down over the 10 years. And they're going to use their own early retirement to reduce the taxes on it.

1:00:31So that's a possibility. And then lastly, I'll just give you an option. You know, if you got a$3.7 million IRA and you're worried about your heirs paying taxes on it, well, you spell my last name M-U-L-L-A-N-E-Y, right? You can just name me as the primary beneficiary and I'll take care of those taxes. Your heirs don't have to worry one bit about them. Oh, goodness. I love that, Sean. And I want to just clarify also, because, again, a lot of people, it's just lack of knowledge. A lot of people fear taxation. as we've talked about this entire hour, for the vast majority of heirs, of estates, and also recipients of gifts.

1:01:12I think it's important to clarify that recipients of gifts and heirs, in very rare cases, pay tax on the receipt of those gifts or the estate, right? Because there's a massive exclusion for estates that is a lifetime exclusion. So we're talking about something distinct here, which is, and guys, I want you to clarify, because obviously, again, you know this much better than I do, but there is a massive exclusion. So again, people worry like, oh, I'm going to get this windfall from my parents' estate. I'm going to immediately have to turn around and sell everything and pay taxes on it. Like, you know, the quote unquote death tax and all this nonsense, like the vast majority of people, 90 X percent of people pay$0 on receipt of us?

1:01:55Well, so let's talk about two different taxes, right? One is the estate tax. And in this case, most likely, most estates in the United States, even very affluent folks, even people worth$10 million, there'll be no estate tax at the time of death. And that is incurred, you know, the estate pays that and that's paid, you know, within the first year after death, generally speaking. So that's one concern. Then the other concern is a very legitimate concern. And I was joking a little bit. I'm not against folks who want to prioritize the kid's tax. And maybe the kid is in the 37 % bracket and you're in the 22 % bracket and you just want to short the IRS 15 cents on the dollar and you're doing fine financially.

1:02:38I'm all for it. Go for it. There's nothing wrong with that. But I also don't find that all that compelling. If the kid's already at 37%, they're doing just fine. They can more than afford tax. The other thing too is, so yes, the traditional IRA creates taxable income to the heirs. It might be that there's one heir, but maybe they're early retired or maybe you got five kids. Well, now you've just sliced and diced that IRA into five different tranches. The other thing, I wrote a blog post about this years ago or not that long ago, but it's called the church IRA. Maybe you just add your church or favorite charity as another kid.

1:03:12And so you slice and dice that so that IRA is smaller and smaller when it's inherited, because maybe the church gets a sixth or a quarter or a third, and you're taken away from the kids, but you're also taking the highest taxed amount away from the other kids. So that's a thought. There are different ways where this can be good, but just think about it. If it was a single heir and they're taking out$400 ,000 a year, it's generally going to have to be taken out over 10 years. So maybe they start taking out$400 ,000 a year. Well,$400 ,000 is wildly in excess of the income of the vast majority of Americans and may even be in excess of the income of the vast majority of most listeners to the ChooseFI podcast, which tends to be a more affluent audience.

1:03:54So yeah, I get it. There might be some tax inefficiencies there, but it's tax inefficiencies on somebody who is doing remarkably well financially. So look, I'm not here to say you can never do tax planning, including Roth conversions to benefit the next generation. Far from it. But I think we have to step back and say, what is the fundamental job of that retirement account? And the fundamental job of that retirement account is not to manage someone else's tax liability. It's to get you and your spouse to and through retirement with financial success. I think that's the perfect way to leave this episode.

1:04:29Gentlemen, this has been fun. So I mentioned your book earlier, Tax Planning to and through Early Retirement. I highly suggest it to everybody. Cody, people can find you at measuretwicemoney.com. Sean, you have your firm at malaneyfinancial.com. Is there anywhere else you guys wanna send people? For me, you can go to my blog, fitaxguy.com. It's sort of my internet home. You can find articles I've written, links to the book, all that sort of good stuff. And for me, you can go to also the YouTube channel, measuretwicemoney.com. You can see some step-by-step calculations of how these types of things work.

1:05:03Watch real retirees talking about their retirement and all these fears and anxieties that come with it. All right, guys. As always, thank you. I think you might be our two most frequent guests ever on the Choose a Vite podcast. Love having you both on. Love your expertise. Sean, I know you don't love that term. But nevertheless, I love your expertise. So I'll put that word in your mouth for you. But as always, to everyone listening, this is really important stuff. And I think it's important to seed your brain with just this knowledge. Okay. This might not be applicable to you today, but it's the mindset of there's no imperative.

1:05:35There's nothing you have to do in FI or early retirement or traditional retirement. There are a range of options and your life is going to be different than mine is different than Sean's is different than Cody's. And you have to do what works best for you, but not listening blindly to influencers who were telling you, you have to do X because this is the tax planning item du jour, right? Like it doesn't work that way. You just need to understand the whole range of options. And again, not let fear guide you. And I think that's what these guys did so wonderfully this episode. I think this is a really valuable one.

1:06:09And as always, thanks for being here along the ride.