Printable Version - Click Here.

Roth IRA Conversions -- Yes or No

From the Desk of
Robert B. Ritter, Jr.
President/CEO, InsMark, Inc.

Release Date: April 2011

The conversations have heated up regarding if and when a Roth IRA conversion makes sense. Some say yes; some say no; some say maybe -- but we say, “you can’t tell until you test and compare the alternatives using Wealthy and Wise^® by InsMark.”

Let’s examine the case of Aaron and Susan Tyler, ages 60/55. They intend to retire in five years and are in a 35% marginal income tax bracket. Their estate totals a little over $6,100,000 and includes the following liquid assets (the balance consisting of their home and personal property):

$ $

1,000,000 2,000,000 1,000,000 800,000 500,000 5,300,000

Aaron’s tax deferred IRA - assumed yield of 8.00% (RMDs* required) Equities - assumed yield of 2.00% dividend; 6.00% growth Certificates of Deposit - assumed yield of 4.00% Municipal Bonds - assumed yield of 3.00% Deferred Annuity - assumed yield of 8.00% Total

*Required Minimum Distributions

It will cost the Tylers $350,000 ($1,000,000 x 35%) in income taxes to convert Aaron’s IRA to a Roth IRA. The conventional wisdom is that a Roth conversion makes sense only if funds other than an IRA withdrawal are available to pay the tax. Let’s follow this logic and, in Scenario 2, we’ll use $350,000 from their Certificates of Deposit to provide the cash flow for the income on the conversion.

With scenario 2, their beginning liquid assets are as follows:

$ $

1,000,000 2,000,000 650,000 800,000 500,000 4,950,000

Aaron’s tax free Roth IRA - assumed yield of 8.00% (no RMDs required) Equities - assumed yield of 2.00% dividend; 6.00% growth Certificates of Deposit ($1,000,000 - $350,000) - assumed yield of 4.00% Municipal Bonds - assumed yield of 3.00% Deferred Annuity - assumed yield of 8.00% Total

Is the conversion to a tax free Roth IRA worth the loss of $350,000 paid to the IRS? Let’s see . . .

Note: Although Aaron’s current IRA is sizable, the strategy outlined in the following pages will work with a traditional IRA of any size provided other funds are available to pay the income tax.

Note: The analytical tool for the graphics on the following pages is Wealthy and Wise^® by InsMark.

Even though there is an immediate loss of $350,000 in conversion taxes paid, the Roth IRA increases long-range Net Worth by almost $5,400,000. Wealth to Heirs by over $3,200,000.

Long-range Wealth to Heirs increases by over $3,500,000.

Calculations throughout this presentation include the same spendable retirement cash flow for Aaron and Susan -- $150,000 a year increasing by 3.00% as an inflation offset.

In order to improve Wealth to Heirs, an alternate approach uses the increase in Net Worth to fund annual gifts of $30,000 to pay for $1,000,000 of trust-owned survivor life insurance producing long-range Net Worth in Strategy 3 on a par with Strategy 1.

Long-range Wealth to Heirs in Strategy 3 is $8,700,000 greater than Strategy 1 and $6,200,000 greater than Strategy 2.

Roth IRAs coupled are indeed compelling in that their efficiency allows for significant wealth planning in other areas – such as more to heirs and less to the IRS even after taking the conversion tax into account.

Below is another way to look at the powerful results.

You will continue to hear various opinions of the validity of Roth IRA conversions, many of them made without taking into account their effect on overall Net Worth and Wealth to Heirs. There are no hard and fast conclusions that make the analysis easy. You have to test the financial dynamics for each client -- and, to our knowledge, no program does as well as Wealthy and Wise^®. There is a multitude of IRA owners who will welcome such an evaluation which, in most cases, justifies a fee for the analysis in addition to product compensation.

Click here to download the actual Wealthy and Wise^® reports. This involves 77 pages of output from the software which includes all possible reports; however, licensees who use this System should use their own judgment as to which reports to include.

The value of the extensive reports in Wealthy and Wise^® is that we back up every number that appears throughout so that you never have to worry when an analytical CPA or attorney asks, “Where did this number come from?” Many licensees put the backup reports in an Appendix.

CPA/Attorney James Lange, has a terrific book, Retire Secure: Pay Taxes Later - The Key to Making Your Money Last (2nd Edition). Available on www.amazon.com, it covers Roth IRA Conversions in Chapter 7 and confirms the conclusions reached in this Marketing Alert.

Note re Data Entry for Wealthy and Wise Licensees: For the Roth IRA scenario, we copied the first scenario named “1. Current Plan” and named the new scenario “2. Roth IRA Conversion”. In this new scenario, we eliminated the Retirement Plan entry under the Pension tab. We schedule a $350,000 item on the Desired Cash Flow tab named “Income Tax on Roth Conversion. We then entered $1,000,000 on one of the Tax Exempt sub-tabs and customized it as “Roth IRA”.

If you are not licensed for this Wealthy and Wise^® and would like more information, please contact InsMark at 1-888-InsMark (467-6275). Institutional accounts should contact David A. Grant, Senior Vice President – Sales, at 1-925-543-0513.

Important Note: Examples and case studies are for illustration purposes, and actual results may vary. Legal and tax information is for general use only and may not be applicable to specific circumstances. Clients should consult their own legal, tax and accounting advisors to assist in the evaluation of any potential transaction or strategy.

IRS Circular 230 Disclosure

In order to comply with requirements imposed by the IRS which may apply to this document (including any attachments, enclosures, or referred material) as distributed or as re-circulated, please be advised that the material contained herein is not intended or written to be used, and it cannot be used, by anyone for the purposes of avoiding any penalty that may be imposed by the Internal Revenue Service under the Internal Revenue Code. In the event that this document (including any attachments, enclosures, or referred material) is also considered to be a “marketed opinion” within the meaning of the IRS guidance, then, as required by the IRS, please be further advised that the material contained herein is written to support the promotions or marketing of the transactions or matters addressed by the material contained herein, and, based on the particular circumstances, you should seek advice from an independent tax advisor.

© Copyright 2009 and 2011, InsMark, Inc.
All Rights Reserved