Roth Conversions - Fundamentals and Advanced Planning

For most, the only question addressed when considering a Roth IRA Conversion is "how much tax will I owe today".  Coming to grips with the payment of tax on a Roth IRA conversion is the biggest hurdle which exists.  The reality of the tax embedded within the IRA or 401K is that it can be viewed as a form of "debt", and when put into proper perspective, it becomes clear that it is the most malignant and insidious form of debt that can possibly exist!

Debt Perspectives

Consider for a moment the choice between a traditional mortgage, and the following "special" characteristics of a hypothetical mortgage structure:

  1. You do not have to make any payments on the mortgage until you reach age 70 1/2, at which point you begin making payments that will increase every year.
  2. When the first spouse dies, the payments on the debt are increased.
  3. Any balance remaining at your death, or your surviving spouses death, passes to your children along with the asset serving as collateral.
  4. There is no specified interest factor - instead, the amount of the debt each year is proportionate to the value of the asset serving as collateral.
  5. The amount of the debt, as a percentage of the collateral, can be legislatively increased at any time, but may decrease in the future if your total income is below certain thresholds.

What do you think - is this a deal you would sign up for?

When viewed as a debt, the tax owed against a Roth IRA operates exactly as described above.

Since 2009, Integrated Financial has assisted dozens of clients in developing and implementing prudent Roth Conversion Strategies.  In many instances, we have accomplished the objective of delivering Roth IRA Conversions which, when combined with other strategies, have resulted in a "zero" net tax outlay.

Here are the "high level" descriptions of the various measures which can be utilized to achieve maximum tax efficiency in Roth Conversions:

  1. Discounts - utilizing various types of investments within the IRA prior to conversion that are eligible for "asset level" discounts, due to lack of control, illiquidity, and a variety of other factors
  2. Deductions - the use of strategies such as investments in Developmental Drilling Programs, and acceleration of charitable contributions into the current year, to generate offsetting deductions against the income recognized as a result of the Roth IRA conversion
  3. Deferral - Use of PRUDENT debt strategies (as compared to the type described above) such as real estate mortgages or margin balances against non-IRA investment accounts to facilitate the payment of the net tax due as a result of the Roth Conversion.
  4. Pay the remaining tax outright - If the first two strategies can reduce a 30% tax that would otherwise be due on the conversion to 15%, 10% or less, the payment of the tax to the IRS becomes much more tolerable.

We are in the process of converting content from our Roth Conversion workshop series into "current generation" E-Seminars, so check back periodically to this page for updates.

In the meantime, the E-Seminar "Roth IRA Fundamentals" may be viewed below:

 

Roth IRA Conversions PDF Workbook