Roth Conversion

The Most Important Financial Decision You'll Make for the Rest of your Life!

Should I convert my traditional IRA/401k - to a Roth IRA?

The decision is made by a simple ROI Analysis.

  • If the cost of conversion is less than the cost of not converting - then convert!
  • If the cost of converting is more than the cost of not converting - don't' convert!

The challenges is that knowing each of the two cost components is elusive.  

Why?

Two reasons.  

  1. There are ways to discount the conversion tax itself - which means the 'investment' can be lowered - often significantly.
  2. There are actually 8 different retirement taxes that must be accounted for in the 'return' equation (discussed below)

If you don't know what your cost of conversion will be - and you don't know what your cost of NOT converting will be, you'll never arrive at an informed decision about conversion.

That's why the starting point is having us do a Roth Conversion Decision Analysis.

It will show you - in black and white - whether there's a positive return on your 'investment in Roth conversion - or not.

And - it will tell you the exact return either way. 

If you ARE certain about conversion, skip the line and let us show you how we can reduce yoru conversion tax and get on your way!

Reducing the Roth Conversion Tax

Are there ways to actually reduce the Roth conversion tax?

I mean reduce it - not offset it with some investment or depreciation, or annuity bonus, or some other product-centric scheme?

Yes!

Once you have determined that Roth conversion isn't justs an idle musing or consideration that could go one way or the other - but a financial imperative that is an urgent priority, we'll show you how to reduce the conversion tax itself.

How much?  

In most cases, by up to 65%.

How?

By utilizing two strategies. The first employs an IRA-LLC that will discount the conversion value by up to 35% - meaning a tax reduction of at least 35%.

The second strategy allows us to pay the reduced tax with discounted tax credits (dollar-for-dollar offsets against your tax liability) we have access to.

When combined, most clients will see a 61% - 65% reduction in their conversion tax - meaning their beginning Roth value can be as much as 90% of their current traditional account value.

Federal Income Taxes - sounds obvious, right?  

But here are some things you may not be considering:

  • Future tax rates may be higher than current tax rates.
  • RMDs (Required Minimum Distributions) force withdrawals at a percentage of the account's compounding value - meaning higher taxes on withdrawals, whether mandatory or voluntary
  • Higher withdrawals or RMDs can push total income into a higher tax bracket - increasing taxes

All this can (and usually does) lead to a significantly higher tax bill through retirement compared to the cost of conversion.  

State Income Taxes - are assessed against retirement income in most states.  

Fortunately, many states do not tax retirement income depending on the source and your age. 

You must know how state income taxes will impact your spendable money in retirement

Paying Investing Fees and Commissions on Money that's not yours!

Part of the balance of your retirement account doesn't belong to you - it never did - and it never will!

Its the tax liability that's embedded in your account balance - on which you've been paying investing fees, costs, and commission all your life.

Those fees are like a 'tax' on your retirement account every year, becuase conversion purges that tax liability, and reduces investing fees accordingly.  

This means tens of thousands of dollars over retirement - money that comes out of your lifestyle account - only to make Christmas better for your Advisor.

Taxation of Social Security Benefits

Many people don't know that Social Security benefits are tax-free - unless you cross an income threshold imposed by the government.

Exceed that threshold, and up to 85% of Social Security benefits are taxable.  

Often, distributions taken from tax-qualified plans like IRAs, create the income that pushes total income past that threshold.

Take money out of a Roth IRA - and it does not count against that threshold - meaning a Roth IRA can immunize Social Security benefits from taxation altogether - or at least - minimize the impact.

Medicare Premiums

Medicare premiums are deducted from our Social Security checks before we receive the balance.  

Problem is, Medicare premiums are growing at over 7%/year while Social Secuity checks grow at less than 3%/year.

What's more, withdrawals from traditional qualifed plans like IRAs can trigger a Medicare sur-tax known as IRMAA (Income Related Monthly Adjustment Amount). IRMAA penalties can as much as QUADRUPLE our Medicare premiums.


The Widow's Penalty

There are actually two widow's penalties.  

First, while a surviving spouse inherits their deceased spouse's IRA without a tax consequence, the surviving spouse will still have to take RMDs, but will be taxed as a 'single' filer - meaning higher taxes on the same withdrawal.

In addition, the income threshold at which the Medicare IRMAA penalty is triggered is cut in half - forcing many surviving spouses to absord the IRAMAA penalty premium

The Legacy Penalty

When the remainder of our qualified account is passed on to those we love, the remaining tax liability passes with it.

Problem is - the tax must be paid over 10-years, and is added to the beneficiary's normal income.  

Not only does the compressed tax-payment timeline mean higher taxation, it could cause the beneficiary's regular income to be taxed at a higher tax bracket.