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Are you interested in a tax plan that can save you tens of thousands of dollars in the future? You may want to consider a ROTH IRA conversion to help grow your wealth and provide significant income tax savings.

If you expect your income taxes to be higher in the future than they are today – due to planned increases in federal income tax rates and your required distributions from your traditional IRA – this strategy can provide significant tax savings for you. How is this possible? By converting all or a portion of your traditional IRA to a ROTH IRA now at today’s income tax rates you can reap a number of benefits.

The main income tax benefits:

  • Paying a lower income tax on the ROTH IRA conversion.
  • Lowering your income taxes on distributions from your traditional IRA in the future.
  • Providing income tax-free distributions to your heirs with the ROTH IRA.

Here is how the ROTH IRA conversion strategy works. Mr. and Ms. Smith have a traditional IRA worth $10,000,000 and a ROTH IRA holding $10,000. The Smiths are not currently receiving IRA distributions. Their federal income tax rate is 24%. The couple has consulted with their tax and investment advisors and has decided to convert (transfer) $25,000 per year from their traditional IRA to the ROTH IRA for the next ten (10) years.

Conversion is the process of transferring money or securities to the ROTH from a traditional IRA. If the Smiths convert/transfer $25,000 per year, they will be issued an IRS 1099-R distribution form that reports taxable retirement income of $25,000 for each year of a transfer. At the 24% federal tax rate, they will owe $6,000 in tax annually on each year’s conversion.

The Smiths anticipate their federal income tax rate will be 32% or more upon their retirement in 15 years. If that is the case, they will owe $8,000 in federal income taxes on a $25,000 distribution from their traditional IRA. With the conversions over ten years, they are saving $20,000 ($2,000 x ten years of conversions) in federal income taxes, but more importantly they are growing their wealth tax-free within the ROTH IRA over the long-term and they (and, eventually, their heirs) will receive distributions free of income taxes.

The goal of the ROTH conversion is to pay income taxes now at a “discount” (current income tax rates compared to expected higher rates in the future) to provide significant benefits in the future.

Important considerations include:

  1. In the future, will your average income tax rates increase? If the answer is a definite ‘yes,’ then a ROTH conversion strategy can be a powerful tax saving plan.
  2. In addition, do you plan to take only Required Minimum Distributions (RMD) from your traditional IRA in the future? The IRS requires RMDs for all taxpayers with traditional IRAs after the age of seventy-two.

An additional benefit of ROTH conversions is that your RMDs will be lower for your traditional IRA in the future, due to the transfer of funds from the traditional IRA to the ROTH IRA.

How is this so? IRS mandates RMD distributions which are computed by taking the balance on your prior year’s IRA and dividing it by your IRS life expectancy tables. Referring to the previous example, when the taxpayer reaches the age of 72, he will be required to take RMDs, and the traditional IRA balance is $10,000,000.  The RMDs are computed by dividing the $10,000,000 balance by the person’s life expectancy.

Presume the taxpayer’s income from his RMD is $500,000, then his income tax due is $98,997. If his RMD drops because of his ROTH conversions in the past ten (10) years of $250,000 ($25,000 x ten years), then his income from the RMD is $375,000. His income tax will be only $36,446, an income tax savings of $62,530.

Additional ROTH planning note:  Future tax savings depend on the timing of ROTH conversions per year. An annual tax bracket management strategy with ROTH IRA conversion is a critical component to save big over the long-term. The strategy monitors the amount of the annual ROTH conversions to prevent the traditional IRA distributions from pushing you into a higher income tax bracket.

Investment considerations in a ROTH IRA:  The wealth you are creating is impacted by the way you are investing the ROTH IRA portfolio. It is important to consider investments with the highest growth potential in your ROTH IRA account, because the account will grow income tax-free and future distributions will not be subject to income tax.

An important estate planning note:   A ROTH IRA can be an important part of your estate plan. Your heirs are not taxed on their distributions when they inherit a ROTH IRA making it the ideal tax-advantaged gift for loved ones.


We welcome your comments on this topic and offer a complimentary meeting to discuss your questions on these important tax and wealth management plans.

IRS link for ROTH IRA information:

Annual tax tips for taxable, brokerage accounts:

This article is for informational purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors before attempting to employ any concepts stated herein.

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