Business Innovators Radio - Interview with Bill McDowell, President of The McDowell Agency Discussing Roth Conversions

Episode Date: September 7, 2024

Bill has been in the financial services industry for over 20 years. His goal has been and remains to help his clients achieve their retirement goals, protect and grow their assets. Whether it is to leave a TAX FREE legacy TO THEIR LOVED ONE’S or to provide an income for life FOR THEMSELF AND THEIR SPOUSE. He takes pride in helping achieve people’s specific outcome.He is licensed in approximately 20 states and has protected over 250 Million Dollars in Assets. Unlike the bigger agencies he can provide a more personal level of attention and care. He looks forward to seeing you.Learn More: https://www.mcdowell-agency.com/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-bill-mcdowell-president-of-the-mcdowell-agency-discussing-roth-conversions

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us Bill McDowell, who's the president of the McDowell agency, and we'll be talking about Roth conversions. Bill, welcome back to the program. Thank you, Mike. I appreciate it. Hey, so I know that Roth conversions, if you Google that phrase, you're going to get four trillion bazillion responses and it could be really confusing.

So I'm glad you're here to kind of give us some of these insights. Before we get started into getting into the details of what people can consider, first let's talk a little bit about why would you even be thinking about doing a Roth conversion? I know it has something to do with taxes, but how are you starting to? educate your clients on that. Conversions. I mean, it's whether you want to, I mean,

a lot of people have it in their mind. They're going to get out of paying taxes. You're not going to get out of pay taxes. Okay. I mean, that's, that's the reason that Roth has become so popular because they think it's a way out of them paying any taxes.

That's not true. You're not going to get away from paying Uncle Sam. Okay, first of all, it just, you know, you'll be able to, you'll be able to put an exact dollar amount on what you can if you

do a Roth conversion. Okay. Because right now, I mean, it's either you pay the taxes now or you pay them later. You know, if you pay the taxes now, you know what the taxes are. We don't know what's going to have. You, you know, if you decide to take that income or cash some of those pre-tax dollars in and start using it for income, say, 10 years down the road, we don't know what the tax laws are going to be at that point.

We don't know what the tax brackets are going to be. You know, that crystal ball theory, you know, that comes to play. And I think that, you know, you're exactly right. If you got an advisor that tells you they know exactly what it's going to be run because nobody knows. Nobody knows what tax brackets or tax rates will be. But don't we kind of have an indication that the taxes are probably going to be higher in the future given that deficit?

Because the joke that I always say is, hey, the only way to tame that deficit is for the government to cut spending, which will never happen, or the only other alternative they have is to raise our taxes. And so which do you think is going to be? Yeah. But so what is your, what is your thoughts and perspectives on that? Well, the government is definitely not going to cut the spending down. So, well, and everybody hears that all, they're going to cut Medicare. They're going to cut Social Security. That's not going to happen either. I mean, they're going to, I don't know what the final solution is going to be. And I don't really think there is a final solution. for it, but we're all going to have to adjust to what's happening at that point in time.

I mean, I know what's happening right now with taxes. And I mean, you know, if I was to go on Medicare and Social Security right now, I know I would be getting my check, you know, 10 years down the road, I'm 51 right now, you know, and I won't be going on Medicare and Social Security for another 15 years. But, I mean, I don't know what's going to happen in 15 years. I can't tell you, you know. Yeah. So first of all, when I think about Roth conversions, let's define what is a Roth conversion.

When you put money into a 401k, you are not paying taxes on that money. That is basically as a retirement tool that took the place of pensions. Pensions are something that, you know, if you went to work for a company, I mean, probably your grandparents, if you're listening to this now, depending on your age, if your grandparents were working for a company long enough, they got a pension. Okay. 401Ks have taken the place of pensions. So is what they do is what the 401K does. And basically you don't pay taxes on the money that you're putting into the 401K.

You don't pay taxes on that money until you withdraw it. Okay. So you don't pay taxes on it when you're putting it in, but when you do withdraw, you are going to have to pay taxes of some sort. You know, and all that depends on what tax bracket you're in. And, you know, everybody's got a different situation and not everybody's the same. And you've got what's called required minimum distributions, which at age 73 and a half, they keep changing it, you know, which is good as long as they keep changing as up. But is what that required minimum distribution is, they make you take your required minimum distribution, exactly like it sounds.

They make you take some of that 401K money out. the IRS can tax you on it. Yep. Yeah. And interestingly enough, from what I've heard, when you hit that certain age where you're mandated to take out a certain percentage out of your IRAs or whatever that it is, if you sit down and look at it and go, oh, you know what, I've kind of had a really good year.

I don't need that money, so I'm not going to do it. Well, you could be facing penalties because you must do it. Yes, of course. And the penalties are, I mean, it used to be a hundred. 100% from what it used to be 100%. I think they've lowered it to 50, but that changes all the time. I mean, it's almost like the government is, you know, depending on what day of the week almost.

But if you set up a Roth IRA now, the Roth IRA is different from a 401K. A Roth IRA means you've already paid the taxes on it. Yeah. So if you, and they've got limits on how much you can put into a Roth IRA, but when you're doing a Roth conversion, it means you're taking your 401k money that has not been taxed, and you're converting that into a Roth IRA, which means you're going to have to pay the taxes on that when you convert it. And then when you take that money out later on in life, you won't pay the taxes on it then.

And if you do this soon enough when you're at a young enough age, now the money is growing for a decade or two inside the Roth. and earning a nice rate of return that does not need to be pay taxes on. Correct. And, you know, the Roth conversions is a really hot subject these days, but it depends on what age you are when you start doing the Roth conversion. Yeah. Because, you know, you figure if you're 70 years old and you want to start converting some of your 401K,

you've only got three years to do your conversions. So, you know, you might not be able to take your full 401K and convert it into my Roth, because, you know, you got to still pay the taxes on it and just say, just say you're converting, you know, just say you've got a million dollars in your 401k and you've only got three years to convert it. And you want to convert that whole million dollars in three years. That means you're going to be in a tax category of getting a distribution of 33,000 a year. Or year, yeah. Which is going to put you in the highest tax bracket, you know, or close to it, depending on what your writeoffs and all that kind of stuff are. But, you know, you're going to be in a high tax bracket.

So you're going to be, you know, you're going to be paying a lot of taxes. But now if you started that when you were 50 years old, you know, you could break it down, you know, less than 100,000 a year. You know, you could pay the taxes a little. And it put you in a lower tax bracket. You know, so, you know, everybody, like I said, everybody's got a different situation and a different circumstance. So, you know, that's the reason you got people like me out there to help educate. and guide folks along the way because, you know, you can't believe everything you read and you definitely can't believe everything everybody tells you, especially if they don't, if they are not

in that particular segment of business, then, you know, they don't know. That's what I'm 100%. And you know who else does not know, Google. So be really careful on anything, but especially when it comes to your money, retirement and all that. Boy, Google can be wonderful for some areas, but boy, you can find all kinds of articles and confusing things. So get with someone like Bill who can look at your situation and analyze and present to you a couple ideas. Not that you must do every single one of them, but just looking at options gives you a lot of flexibility. Oh, yeah. I mean, there's all kinds of.

I mean, there's, I mean, Roth conversion is the same, whether you do it at six years. older if you do it at 70. But, you know, it depends if you're trying to convert your whole 401k over into a Roth and you're 70 years old and you got, you know, quite a bit of, you know, just depends on how much money you got in your 401k too. I mean, if you only got 100,000, 100,000, which I'm not saying only 100,000, 100,000 is still a lot of money. But, you know, if you've only, if you've got 100,000, you need to convert into a Roth, it's a lot, your tax is not going to be as much as if you had a million. 100%. So we've talked a bit about some of the benefits of doing a Roth and at the right time and the right kind of process.

Are there any drawbacks of doing a Roth conversion? Well, I mean, well, the drawback would be, you know, when you're doing it. I mean, everybody's not a different situation. You know, I mean, if you started doing it when you're, like I said, 60 years old and, you know, it's all relative to everybody's a certain. circumstance. I mean, the drawback is, you know, some people would have a drawback if they started at 70 years old, of course, because, you know, like I said, if they got a million dollars in there, they're going to put them in a real high tax bracket. And I mean, a million dollars is, you know, that's pretty common these days to have that much in a 401k. And there's, you know, some people

are fortunate enough to have more than a million dollars in their 401k. So you're talking, you know, just saying you've got someone that's got several million dollars in there and they're trying to converted, and they can really be in a big tax bracket. Yeah. Yeah, and I guess you'd at that point, again, like we've said, let's look at the numbers, see what makes sense and whatnot, but what is your age and how much, you know, what's the tax bracket and all those calculations, but what I would venture to say is how much time once it's in the Roth, how much time does it have to then grow?

Because if you pay the taxes on whatever you put in there, then the benefit of having it in a Roth is all of the growth is not taxed. But if you have a very short time frame and you made $100 in growth, then who cares? So what does that look like when you say, okay, you're at age, whatever, 55. You should have X number of years for this money to grow in the Roth, which could be X number of dollars. Now look at how much you're avoiding paying in taxes because Roth money, Roth growth is not taxed. Correct. It's got to stay in there five years, okay? And they do what's called first in, first out. So basically, if you take $100,000 and put it in to a Roth, it's the first money in. Now, if you need to take money out, you know, before, you know, the five-year period's up where it's nothing's taxable, then it's first, you know, they take the first money out, which is basically the original cash that you put in that's already been taxed on is what comes out. So, I mean, If you do have an emergency where you have to pull the money out, there's ways around where you still don't pay any taxes on it.

That's smart. What are some of the misconceptions that people have when looking at Roth conversion? Because I'm certain that people will come to you and go, oh, I've heard of this and isn't this the way that it is? What are some of the things you hear that you have to kind of re-educate and make sure they understand fully? Well, one of the biggest misconception is that they're getting out of paying taxes. I mean, they think that by converting it to a Roth, that they're going to somehow skip the IRS. But that's never going to happen.

I mean, unless you've got a bunch of companies and you've got a bunch of write-offs, I mean, there are certain circumstances, you know, and that's something you've got to talk to your accountant with. Yeah, I mean, you've got to talk to your accountant with those kind of obstacles. but I mean, that's the biggest misconception is that they're going to get out of paying taxes totally. And that's just not the case. Now, you can reduce the amount.

Like I said, you know, if you're taking 100,000 out and convert it, you know, depending on how much income you're making that year, you know, it's all based on your tax bracket. But if you take out, if you take a $300, $400,000 conversion, that's definitely going to put you in the highest tax. bracket out there. So, you know, the earlier you try to do the Roth conversion, the better. I mean, you know, I've got one gentleman.

He's, he had quite a bit in his 401K. I mean, and he was, he was looking at that his required minimum distribution when he was 73 years old was going to be about $220,000 a year, which that was what the government was going to make him take out. Okay. So that right there puts him in a high tax. bracket. Okay. So he was trying to, you know, roll some of this into a Roth, but he was, you know, he was 70 years old. And, you know, he, I mean, there was some obstacles in that

particular situation. We got him taken care of. And I mean, we did the best we could for him, but he wasn't able to do the whole 401K, of course, because if he did, you know, he would have been paying half of it into the IRS. Yeah. That's not what you want to do. And, and like you've said before, we can't ever eliminate those taxes because they're owed. We can just mitigate them or lessen them and having some of these, you know, proven strategies that have been around forever in a day. This is not something new. This is not something risky.

It's just a strategy that if it works for you and you run the numbers and it makes sense, then you move forward. If you run the numbers and it doesn't make sense, then you go, okay, well, let's check the box that we look and it is not a good move. we're going to just do a different thing. So I think that's the way that you approach the way that you've been explaining many of these topics. It's just so comforting to realize that you're not pushing one way or the other because it doesn't matter to you. You just need to help people understand their options.

Correct. Correct. You know, I mean, some people can actually take the hit on the taxes and some people would, you know, because I mean, some people, they would rather take the tax hit now because they know exactly what the tax is. is going to be right now. You know, like I was saying earlier, 10 years down the road, you know, we don't know what the tax brackets are going to be. I mean, there's there's no telling in what they could be. I mean, so I mean, like I said, everybody's got a different situation, different circumstances.

And that's what I, when I talk to every one of my clients, I'm not one. And I've never had two exactly the same. Let me put it that way. Yep. Yeah. that's a that is a accurate statement everyone is different everyone's goals are different everyone's strategy can be different so I think it's like what we've said before it's like you know you need to know and and you don't know what you don't know and once you meet with someone

like yourself Bill and that you can say you know ask the right questions to say what does retirement look like for you and how much are you going to need and how much will you have and here's a gap or all of those things now you can determine is a Roth conversion the best move for me now. And you don't know that until you run the number. So I think everything you've mentioned is just so powerful. This is a topic that someone has heard about. And you wanted to clear the air to go, hey, you can't avoid the taxes.

You can just, you know, not pay tax on the growth. So let's see if this makes sense for you. So if someone is interested in learning a little bit more and maybe reaching out to you and seeing what it would look like for them, what's the best way that they can do that? My website is www. McDowell-dashagency.com, or they can call me at 336-987-29333, or my email address is McDowell manage at gmail.com. And McDowell is spelled exactly like it sounds, MCD-O-W-E-L-L. E-L-L-L.

Excellent. Well, Bill, thank you so much for coming back on. It's been enlightening to learn your perspectives on Rothconversions. Thanks, Mike. I appreciate it. Yep, good afternoon. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes,

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