The biggest issue with Dave Ramsey’s view on Roth Conversions, and most of his advice in general, is his one-size-fits-all approach which costs his listeners hundreds of thousands of dollars.

Dave starts off on the right foot by recommending people pay the taxes up front for a Roth Conversion but then veers off the track pretty quick.

Dave breaks down a hypothetical married couple filing in 2020 doing a Roth Conversion, but makes the mistake of conflating the 24% tax bracket as a trap of the Roth Conversion strategy.

If you have more than a million dollars in your IRA, you will never convert to Roth before tax rates go up for good without taking advantage of the 24% bracket.

Dave then goes on to say that you should never do a Roth Conversion unless you have money sitting in cash to pay the taxes. 

If Dave’s advice were taken by everyone, only 5% of people would realistically be able to take advantage of the Roth Conversion.

Some scenarios require you to pay cash for your Roth Conversion, but that’s not the only choice you have.

If you don’t have the cash to pay the taxes on your Roth Conversion, there is no harm in having the IRS withhold the tax from the Roth Conversion itself. It’s not optimal, but it’s far better than the alternative of leaving your money in your IRA and watching tax rates double over time.

Dave identifies the Five Year Rule on the Roth Conversion, but he fails to tell people that if you are older than 59 ½, the penalty won’t apply to you. This leads people to believe the rule of thumb is everyone should avoid the Roth Conversion unless you are five years or more away from retirement.

Dave Ramsey’s explanation of Roth Conversions is disastrous at every turn. All three of his recommendations are almost completely backwards.

When it comes to making important decisions about your retirement plans you should avoid financial gurus like Dave Ramsey at all costs.

 

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

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