Cynthia de Fazio 00:27
Welcome to Retire Smart Austin. My name is Cynthia DeFazio, joined today by Phil Capriotti, Sr. of Empower Wealth and Tax. To our viewers at home, we have a show filled with information for you today. We know that you’ve heard us talk about Roth conversions in the past, but have you ever asked yourself why a lot of advisors don’t talk about Roth conversions? Well, we’re going to peel back the covers a little bit just to see some of the reasons potentially why they’re not discussing those with you if you’re working with someone a little bit different than Phil. Thank you for being with us today, viewers. We love having you. Phil, how are you today?
Philip Capriotti Sr. 01:02
I’m great, and it’s good to be back on the set with you, Cynthia.
Cynthia de Fazio 01:04
Yay! I’ve missed you.
Philip Capriotti Sr. 01:06
I missed you too, hon. I missed you too.
Cynthia de Fazio 01:08
It’s so good to be back.
Philip Capriotti Sr. 01:09
It certainly is, and happy New Year.
Cynthia de Fazio 01:11
Happy New Year.
Philip Capriotti Sr. 01:12
Even though we’re quite, you know, we’re, we’re quite a bit through the first quarter, almost anyway.
Cynthia de Fazio 01:16
Yes.
Philip Capriotti Sr. 01:17
But Happy New Year. It’s, God, the last six years have flown by, haven’t they?
Cynthia de Fazio 01:22
Where did they go? Where did they go? How are we on episode number 224?
Philip Capriotti Sr. 01:27
I don’t know. We both looked at each other and like, wow, 224, my goodness! And thank you, folks, for continuing to watch after 224 episodes. Today’s topic, I think, is, you know, we want to kind of dice things up differently and give our viewers and listeners new content, and, and I’ve had this question asked many times: “Why don’t other advisors talk about Roth conversions?” So I thought it was appropriate for us to do a show to explain to folks why other advisors may or may not talk about Roth conversions. So, gosh, let’s jump right on in there.
Cynthia de Fazio 02:06
Most definitely, and actually, we have just some really interesting ideas to run through. And if someone in the audience, maybe you’re watching for the very first time, and maybe you’re hearing Roth conversion for the first time. Phil, before we dive into this, talk a little bit about what exactly is a Roth conversion, and is it different than a Roth contribution? A lot of people have some misunderstanding concerning that.
Philip Capriotti Sr. 02:28
Sure, right, yeah. So a Roth contribution is when you have the ability to put money into, let’s say, a 401k. There’s no income limit to the Roth, so you can be making 4 or $5 million a year. Doesn’t matter. You can contribute up to 24,500. If you’re above 50, there’s a catch-up that allows you to contribute a total of 32,500 into a tax-free. We’re going to say I want to pay the tax on the seed, not the crop. That’s a Roth contribution. You have to have earned income. You have to, you don’t need an income limit, but you have to have earned income. A Roth conversion is when you know the horse already left the barn. Okay. You already you already saved in this 401k, and, and you know maybe it was your CPA, maybe it was your administrator, said “No, just put it in pre-tax because you know when you retire you’ll, you’ll be in a lower tax bracket.” Well, what we’re seeing with this debt rapidly approaching $40 trillion, and a lot of the newer politicians, I’m going to say, our children’s generation, or maybe even grandchildren’s generation believe everything’s for free. Nothing’s really for free. We know that, but they haven’t paid taxes for the last 50 years like we have. So with this debt, we’re concerned with pre-tax accounts. They’re government-owned accounts. They can change tax rates on distributions at any time. Well, these politicians back in 2010 did us a great favor. They actually agreed on something, you know, the R’s, the D’s, and the I’s, and they passed this ability to be able to do Roth conversions, meaning take money from my 401k or my IRA, pay the tax once, put it into a Roth 401k or Roth IRA, and allow it to grow tax-free for my lifetime, my spouse’s lifetime, and up to 10 years of my children and grandchildren’s lifetime. So I’m paying the taxes on it. Now we’ve have we found many uses for this. What we noticed is that a lot of our elected officials have these beautiful pensions. Well, they also have 401k’s, they also have retirement accounts. So they have CPAs as well, and they’re not dumb. They’re absolutely not dumb. So they, when they passed this law back in 2010, they told us that the debt was too high, and they needed extra tax dollars to pay down the debt.
Cynthia de Fazio 05:05
Wow. Okay.
Philip Capriotti Sr. 05:05
Well, not so much there. But what we did notice is they started, because there was no age limit, because there was no ability to be working, okay, what they’ve done, and what we’ve a lot of us aware individuals have done, is move money and done Roth conversions. Couple reasons why.
Cynthia de Fazio 05:24
Okay.
Philip Capriotti Sr. 05:25
First of all, when you take money out of a Roth and you’re retired, if you, if it’s done right, none of your Social Security is taxable income.
Cynthia de Fazio 05:34
Okay.
Philip Capriotti Sr. 05:35
When you take money out of a traditional pre-tax 401k or IRA, up to 85% of your Social Security is taxable. That’s number one.
Cynthia de Fazio 05:45
Wow. Okay.
Philip Capriotti Sr. 05:45
And many of you folks, if you’ve been watching me for years, you know how I feel. I don’t think anyone should have to pay taxes after age 75 if you’ve worked hard and paid taxes for the last 50, 60 years.
Cynthia de Fazio 05:57
Agree.
Philip Capriotti Sr. 05:58
I think we’ve done our fair share.
Cynthia de Fazio 05:59
Absolutely.
Philip Capriotti Sr. 05:59
But they’ve given us the window. I mean, they’ve given us the law. So with that being said, you also don’t have to take RMDs, required minimum distributions, at age either 73 or 75, depending on whether you were born before 1960 or after 1960. So that’s another thing.
Cynthia de Fazio 06:16
Okay.
Philip Capriotti Sr. 06:17
As we’re going to find, many of these larger accounts, many of the clients come into our office, you know, they have 1, 2, 3, 5, 6 million in pre-tax accounts. Their advisors never talk to them about RMDs. Their CPAs never talk to them about RMDs.
Cynthia de Fazio 06:33
Wow.
Philip Capriotti Sr. 06:34
They don’t even know, many of them, what an RMD is. So when you come into our office, we basically structure your retirement income plan, and if it’s not tax efficient, we make it tax efficient. I want tax free, but we want to at least make it tax efficient. So, we have the law, been on the books 16 years. Folks aren’t using it. And for many folks, they wonder, “Why? I work with this big box retailer.” I won’t mention any names. You all know, you watch the commercials. It might begin with an E. It might begin with a V. It could begin with any, an M. Any one of the letters in the alphabet.
Cynthia de Fazio 07:11
Right.
Philip Capriotti Sr. 07:13
What we notice is that a lot of advisors say they want to know why they haven’t talked to them. Because many times folks are skeptical: “My advisor hasn’t told me anything about Roth conversions.” I said, “Well, many advisors are compensated based on, on product sales and AUM volume. So listen, folks, if you’re taking $100,000 from the IRA and you’re moving that $100,000 over to the Roth, you may have an investment account. You’re going to pull 20% out of that investment account, pay the government. Now, what we do for our clients is we set up quarterly payments.
Cynthia de Fazio 07:50
Okay.
Philip Capriotti Sr. 07:51
So I don’t want to take $20,000 and give it to the government all at once. I want to do a Roth conversion, preferably in January, February, March, 1st quarter, and then set up quarterly payments in April, July, October, and then January 15th, which is the deadline. So it allows the Roth to grow tax-free, and if it’s managed properly, we can recoup most of the taxes during that time slot before we even have to file the next year’s return.
Cynthia de Fazio 08:17
Wow. Okay.
Philip Capriotti Sr. 08:18
If what I’m saying sounds strange or foreign to you, I would pick up the phone and dial 888-818-6557 and set up an appointment. Most advisors are concerned that if you pay the taxes now, the client’s portfolio is going to drop. Therefore, they’ll be managing less assets and earning lower fees with AUM or commissions or mutual funds or what have you. I find that purely selfish. But you’d be surprised, because I have advisors that work with other firms, big box retailers, and that’s one of the concerns. The other concern is that Roth conversions don’t, don’t provide immediate income, immediate growth.
Cynthia de Fazio 09:03
Okay.
Philip Capriotti Sr. 09:04
Okay, because you’re paying the taxes on it. The other, I think, the biggest issue is training and expertise limitations, personally. Many of these advisors, they don’t, may they may not necessarily… if you’re a certified financial planner, you should not lack tax knowledge.
Cynthia de Fazio 09:24
Absolutely.
Philip Capriotti Sr. 09:25
Now, you might be a certified financial planner and got your certification 30 years ago when just about anyone could possibly pass the test. I’m just saying, a lot easier then, and maybe you haven’t stayed current with taxes because maybe you’re not an Ed Slott Master Elite IRA advisor, or maybe you don’t care to. Maybe you feel more comfortable telling your client to check with their CPA. But the funny thing is, Cynthia, the CPAs many times don’t understand the benefit of Roth conversions because they’re not doing retirement income planning. They’re not looking at RMDs. I just did a show on how CPAs need to do their due diligence, and, and what I meant by that was if I don’t recommend a client have long-term care, I can literally be sued by the client’s spouse or their children down the road because I didn’t advise them. We now not only advise them, we have them write out a, we, we have them sign a form that we talked to them about it. We do our due diligence. I think you should do the same with Roth conversions.
Cynthia de Fazio 10:29
Most definitely. And Phil, unfortunately, we do have to take our very first commercial break. But do you have a message to the viewers at home before we do so? I know, where did that go?
Philip Capriotti Sr. 10:38
Feel like I’m the only guy that’s talking, right?
Cynthia de Fazio 10:39
Well, I was nodding.
[LAUGHTER]
Philip Capriotti Sr. 10:41
So it’s, it’s really a pleasure. You know, pick up the phone, dial 888-818-6557. Come on in and meet the staff. We now have seven licensed fiduciaries working in one of our three offices. Whether you’re in Georgetown, whether you’re in Cedar Park, whether you’re out in Horseshoe Bay, we’re getting ready to open up an office down in Great Hills Trail and another one down in Lakeway. Pick up the phone. Come on in for a complimentary consultation, or click the QR code that you see on the bottom, I guess it would be bottom right side of your screen. Come on in. Let’s talk with you about the benefits of Roth conversions and see if you and your family should implement a Roth conversion strategy.
Cynthia de Fazio 11:25
Phil, thank you so much to our viewers at home. Once again, the number is 888-818-6557, 888-818-6557. Phil is offering you the complimentary consultation today. Come into the office and talk about Roth conversions, or click the QR code at the bottom corner of your screen. We’re going to take a very short commercial break here on Retire Smart Austin. Don’t go anywhere. We have so much more about why some advisors are not talking about Roth conversions when we return. Stay tuned.
Philip Capriotti Sr. 11:54
Planning for retirement can be daunting, especially when it feels like the future is full of uncertainties. But imagine a retirement where your biggest worry is deciding which adventure to embark on next, not whether your money is going to run out. At Empower Wealth and Tax, we specialize in tax-efficient retirement income planning tailored to your unique needs. Our experts will create a strategy to ensure your savings provide the lifestyle you’ve worked so very hard to achieve. Don’t leave your retirement to chance. Schedule a complimentary consultation with us today, and take control of your financial future. Schedule now, and let’s make your retirement dreams a reality.
Cynthia de Fazio 12:44
Welcome back to Retire Smart Austin. My name is Cynthia DeFazio, joined today by Phil Capriotti, Sr. of Empower Wealth and Tax. And if you’re just joining us, we’re talking about Roth conversions and why a lot of advisors aren’t talking about them. You’re probably wondering that at home. So thank you for being with us. Phil, so often, I know that you’re meeting clients for the very first time, and you work with a lot of high-net-worth individuals. And when they come in, they’re saying, “Roth conversion. I’ve never heard this before.” We’ve talked about some of the reasons why, but I’d like to continue, please.
Philip Capriotti Sr. 13:15
Yeah. So many of the big box retailers folks have legal or compliance restrictions, they do not want their advisors, or they disallow their advisors from even talking about taxes. And again, remember when you’re working with an advisor that works for a company, a broker dealer, they’re bound by their response, by the rules and regulations of that firm. Remember who’s writing that advisor’s check. Is it coming from an Eddie or something like that, or is it coming from you? So basically, that’s the acid test. Also, I’ve heard a lot of firms say, “We have a no tax policy here.” I’m like, what the heck is that? “We’re worried about being wrong.” I’ve actually had some VPs say, “What if taxes do go down? We could be we could be on the hook or be, be sued.” Now, I to me, for any CEO to say, “What if taxes do go down on pre-tax accounts?” is like putting your head in the sand like an ostrich.
Cynthia de Fazio 14:23
Yes.
Philip Capriotti Sr. 14:24
There’s just no way that taxes are going down. They would have a leg to stand on if we didn’t have a $40 trillion debt.
Cynthia de Fazio 14:31
That is very true.
Philip Capriotti Sr. 14:32
And they know that these accounts are government accounts that have never been taxed. Where’s the first place that these, especially these newer politicians, the 30- and 40-year-old ones that really haven’t worked like we have and put money away, haven’t really… they know that the government owns these accounts.
Cynthia de Fazio 14:49
Right.
Philip Capriotti Sr. 14:50
So the probability, and I like to tell folks, I don’t know whether taxes are going up or down, but the probability of their go, of them going down is minute.
Cynthia de Fazio 14:59
Absolutely.
Philip Capriotti Sr. 15:00
The probability of taxes going up, especially on seven and eight-digit higher net worth, is extremely high.
Cynthia de Fazio 15:07
Of course.
Philip Capriotti Sr. 15:08
So I would rather be prepared for the worst, plan for the worst, prepare for the best, right? Also, they, they’re concerned about documentation barriers. Now I could understand that. So when we do a Roth conversion with our clients, what we do is in the beginning of the year when you come in for your portfolio review, we do a mock tax return.
Cynthia de Fazio 15:28
Oh, nice!
Philip Capriotti Sr. 15:29
So we look at all of your sources of income and we regulate them, okay, we put them in their appropriate spots. And then our software tells us, the client: you can convert $52,500 in the 22% bracket, or whatever, or 12%. You can convert another $200,000 in 24. So we review it with the client. We print it. We have the client initial it, date it, and then we submit it. So we keep it in our in our records, our share file, and we give the client a copy. So this eliminates the compliance issue, but again, you know what it is, Cynthia. It comes down to W-O-R-K.
Cynthia de Fazio 16:13
Yeah.
Philip Capriotti Sr. 16:14
Work.
Cynthia de Fazio 16:15
Yes.
Philip Capriotti Sr. 16:15
And too many folks don’t want to do the heavy lifting. They don’t want to do the hard work. They’d rather short-arm it, so to speak. So the documentation burden is just, in my opinion, an excuse to some CEOs of these big box firms. They don’t get paid on giving tax advice. That’s it.
Cynthia de Fazio 16:34
Okay.
Philip Capriotti Sr. 16:35
But my thought is, if you’re a fiduciary and you truly are held to the highest standards, and you really care about your client’s current portfolio or tax needs, and you should be looking into the future, or at least alerting them so they can make their own educated decision. And this is just, this is a firmly held belief that that I’ve had for the last 20-plus years. So the other, the other, last but not least is fear of IRS scrutiny.
Cynthia de Fazio 17:08
Interesting. Wow. Talk a little bit about that. Fear of IRS scrutiny. What is that?
Philip Capriotti Sr. 17:15
Well, I guess they’re, they’re worried about being audited. But the fact of the matter is, the IRS loves getting extra tax dollars, I hate to break it to you. So when we look at folks that do Roth conversions, they’re actually less likely to get an audit than folks that don’t. And the reason is they know they’re working with a tax professional that’s reviewing not just their portfolio, but their taxes each and every year.
Cynthia de Fazio 17:42
Okay.
Philip Capriotti Sr. 17:42
So we’re actually doing the client’s taxes. I think I told most folks we do them normally for $250 if we’re, if it’s a client we’re working with, either their insurance or their portfolio or something like that. But the fact of the matter, the matter is, yes, we have a CPA that runs our tax department. Yes, you have to have credentials. Yes, you have to have licensed folks that review this. But again, it all comes down to the work. So, with, as far as compliance is concerned, I personally think a lot of these firms are just looking at their bottom line. They don’t really care as much about the client as, in my opinion, they should.
Cynthia de Fazio 18:25
Absolutely.
Philip Capriotti Sr. 18:26
Because they should be caring what the client has to give back to the government. Also, the other thing, and I’ll just add this: remember, on these larger IRAs and 401k’s, these things are growing at an average of 8, 9, 10% a year. Within all your first RMD, you’re only taking about 4%, and as you get older, you have to take 5% of the balance of the account, 6, 7, and so forth. So what happens is not only once you start this engine, your, your life expectancy reduces each year, your portfolio balance grows each year, the RMD grows exponentially over the course of your 10, 15, 20, 30-year retirement lifeline.
Cynthia de Fazio 19:10
Yes, yes.
Philip Capriotti Sr. 19:11
When you pass away, talk to St. Peter, see if you qualified for heaven or not. Okay, and the kids inherit this; they now have to empty this account in a 10-year period, and it becomes a major tax problem for the children.
Cynthia de Fazio 19:26
Oh boy!
Philip Capriotti Sr. 19:27
And the IRS now becomes the primary beneficiary of that, of that pre-tax account. So I’m a big fan of Roth conversions. I believe in attacking a problem now, so it doesn’t become a bigger problem in the future.
Cynthia de Fazio 19:41
Phil, I couldn’t agree more. To our viewers at home, once again, we want to give you the opportunity to call in today and to tackle this yourself. That number again is 888-818-6557. If you’re in the viewing audience and you realize, “No one’s talked to me about a Roth conversion, I need to learn more,” this is the opportunity to call in, book that consultation, once again 888-818-6557, or we’ve made it even simpler. You can grab your smartphone and click on the QR code at the bottom corner of your screen. That’s going to be the fast track to get on the schedule at Empower Wealth and Tax. When it comes to Roth conversions, you need to have the information. You deserve to have the knowledge, don’t miss the opportunity to call in today. 888-818-6557. We’ll be right back so much sooner with Phil in one minute. Be right back.
Philip Capriotti Sr. 20:30
Hello, folks. It’s Phil Capriotti Sr. Imagine reaching retirement with zero worries about taxes. That’s what hundreds of our clients each year have done by executing their annual individual Roth conversion strategy. At Empower Wealth and Tax, we’ve helped thousands of people just like you turn their government tax-deferred retirement accounts into their own personal tax-free Roth IRAs and 401ks. Our clients are now thriving with the peace of mind knowing they’ve secured their financial freedom by eliminating their tax burden in retirement. If you want to know how, call us now, and let’s see if our proven Roth conversion strategies are right for you and your family.
Cynthia de Fazio 21:22
Welcome back to Retire Smart Austin. My name is Cynthia DeFazio, joined today by Phil Capriotti, Sr. of Empower Wealth and Tax. And see viewers home, I told you we’d be back sooner. Here we are! Phil, it’s so interesting to me when I look at this and I’m thinking about some of the other reasons why advisors are not talking to their clients. This one is a little surprising to me, the advisor fear of client pushback, meaning they feel that the clients will feel this is too complex, and perhaps there are certain things that are involved fee-wise, planning fees. They don’t want to deal with that. Talk a little bit about that. Why does that hold someone back?
Philip Capriotti Sr. 21:55
Because some clients are, do not have the knowledge, so they look at, “You mean you want me to pay a higher tax today? Why would I do that?”
Cynthia de Fazio 22:04
Right.
Philip Capriotti Sr. 22:05
And the advisor doesn’t understand what the answer to that question is, because the answer to that question is: Do you trust the government to not raise taxes on the future? Okay. Do you think taxes are going to go down? You have to have a common-sense conversation with them.
Cynthia de Fazio 22:20
Yes.
Philip Capriotti Sr. 22:21
Does it make sense to pay the tax on the seed, break it up into quarterly payments, and let that new nest egg grow tax-free for your lifetime, your wife’s lifetime, and up to 10 years of your children and grandchildren’s lifetime? How about this? How about having this conversation? When you pre- if you predecease your spouse and you’re married, now you go from married filing joint, amazes me that advisors haven’t thought of this common sense, to your wife now is filing a single return, his or her tax bracket doubled, and they still have to take this large, onerous RMD because you avoided tax planning for the years when you could. Many folks say, Phil, when’s the best time? I did a whole program on this to start doing Roth conversions. I would say start at 60 at the, at the early, at the latest.
Cynthia de Fazio 23:19
60, okay.
Philip Capriotti Sr. 23:20
And then allow, allow yourself the next 13, 14, 15 years before your first RMD. So the best time is either while you’re working, if it’s relatively low income, if you’re making 500,000 or so a year, you may still want to have the opportunity of saying, you know, I’m in a 32% bracket, but if I pay the tax on it now, my gains will recoup the tax within a two-year period. You know, my portfolio is averaging 16% a year, what have you. So we have to look at that. So what I would say is, it’s start. Well, first of all, start now. How do you start now?
Cynthia de Fazio 23:58
Absolutely.
Philip Capriotti Sr. 23:59
Turn to your 401k. Call your administrator and tell your administrator you want to switch your 401k contribution from pre-tax to post-tax.
Cynthia de Fazio 24:10
Okay.
Philip Capriotti Sr. 24:11
Meaning from tax deductible, taking that tax write-off for that contribution, to paying the tax on it now. First of all, it’ll start your five-year clock. Number one, you’ll create balance in your retirement accounts. You can’t have 2, 3 million, or whatever number that happens to be, in your pre-tax account and nothing in your tax-free account. You need to, at the very least, create balance, an equal amount of money in your IRA and your Roth IRA or 401k and Roth 401k, so you have the choice in retirement. How much do I want to take into out of my Roth each year to make sure that my Social Security is tax-free, or now am I forced to take money out of this IRA where up to 85% of my Social Security is taxable? It’s hundreds of thousands of dollars in lost revenue by not looking at this now and not understanding all of the nuances behind, and the common sense approach about, let’s go post tax, tax free.
Cynthia de Fazio 25:13
It’s so important, 100%. And honestly, anyone who thinks taxes are going down, I don’t know where they’re watching.
Philip Capriotti Sr. 25:20
And by the and by the way, advisors out there, I’m looking for advisors. Okay, if your current firm won’t allow you to do Roth conversions, I want you to seriously think about how you’re really benefiting your client. Maybe give us a call and come on in, and let’s talk about becoming a partner in one of the many new offices that we’re opening up in and around Austin, and, and I mean that, because we have our own tax team, we have our own estate planning team, and so we circumvent these issues. But do the right thing, folks, for yourself. Help make your family tax-free, tax-efficient in retirement. And advisors, do the right thing for your clients. Explain to them about Roth conversions, the pros and the cons, and again, a Roth conversion may not be the right thing for everyone. But what we’re noticing, it’s the right thing for most people. Especially most of us Baby Boomers that have been working hard and saving for retirement.
Cynthia de Fazio 26:14
Most definitely, and it makes sense when you’re explaining it, Phil, because obviously you’re paying taxes on the seed versus the harvest when you utilize the Roth option. A lot of companies are now offering a Roth 401k to our younger viewers at home. They should ask their employers, wouldn’t you agree?
Philip Capriotti Sr. 26:29
I have all of my children and one of my grandchildren who’s old enough now. She’s working, and I tell them all, yes, contribute the max, at least 5, 10% of your pay, and put it into your Roth 401k. You’ll be retired in twice the time. You’ll be able to retire at 50, 55, and you’ll be able to retire tax free. And, and, and you won’t have to worry about future tax increases in your retirement plan. Pay the tax now. Get Uncle Sam, Aunt Samantha out of your retirement, out of your home, per se. Okay, and just pay them now while we have record low tax rates.
Cynthia de Fazio 27:11
Makes perfect sense, Phil. Thank you so much. To our viewers at home, once again, we want to give you the opportunity to call in today. The number is on your screen. It’s 888-818-6557. You’re being offered a complimentary consultation. Come into the offices of Empower Wealth and Tax. Let them get to know you one on one. Should you be utilizing a Roth conversion, as Phil mentioned, it’s not one-size-fits-all. But you won’t know unless you take the opportunity to come in. 888-818-6557, or you can click the QR code at the bottom corner of your screen. That’s the fast track to get on the schedule of Empower Wealth and Tax. Be safe, be happy, and be blessed most of all. We’ll see you back one week from today. Thank you for watching.