Posted on January 13, 2011 by Greg Herman-Giddens

Don't Pay more than 24.5% Tax on Your Roth Conversion

Do you think you have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again.  I have recommend the following strategy to several of my clients.  In most cases, you can stay with your current investment manager.

By utilizing the Jagen™ investment strategy, you may be able to lock in a 24.5*% rate on big IRA conversions.

A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?

Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.

For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.

 Let’s see how this affects a Roth conversion:

 1-Discount for illustration purposes only. Actual discounts, if applicable, will vary.
2-Assumes 35% maximum federal income tax bracket.
 
The effective federal tax rate on the Roth conversion using Jagen™ fund units inside the Traditional IRA is 24.5% ($245,000 tax / $1,000,000 IRA NAV = 24.5%).
It is also possible to combine the Roth conversion using Jagen™ shown above in defined benefit plan contributions, a charitable trust (CLAT, CRAT, etc.), NOL carry forwards, current year NOLs or other tax reduction strategy? The effective tax rate can be less than 20% or even zero depending on specifics.

*Note:  State income tax is additional.

Adapted from blog post by Jagen Investments, LLC.  Used with permission.

 

 

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Posted on August 21, 2010 by Greg Herman-Giddens

IRA Experts Keen On Roth Conversions

Three of four prominent IRA experts have either already utilized a Roth conversion or plan to do so, and the fourth says he plans to if the market gets even worse.

Click here to see what Ed Slott, Robert Keebler, Seymour Goldberg and Natalie Choate have to say about their personal Roth conversion decisions.

While I have attended programs by Slott, Keebler and Choate, I certainly don't have the same status in the tax world as do they (nor their wealth, I would venture to guess).  But for what it's worth, at age 49 I am leaning against doing a Roth conversion for two primary reasons:  1)  Even with the coming tax increases, I believe my tax rate during retirement will be lower that it is presently, and 2)  I don't want to spend my cash reserves paying the taxes that will be due as a result of the conversion.

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Posted on December 11, 2009 by Greg Herman-Giddens

8 Reasons to Convert to a Roth IRA

As most people know by now, the $100,000 income limit on the ability to convert a traditional IRA to a tax-free Roth IRA will disappear next year.  In addition, a taxpayer who does a conversion in 2010 can pay the tax due from the conversion in 2011 and 2012 (by including 50% of the conversion income in each year).  There are innumerable articles about Roth conversions and the math involved, with many differing opinions about the advisability of converting.  Bottom line, make sure you hire the appropriate professionals to crunch the numbers and otherwise advise you before making a decision.  You really need to consult your financial advisor, CPA and estate planning attorney to ensure that you are fully informed.

Here's a quick list from tax guru Bob Keebler, CPA:

(1)  Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, high basis non-deductible traditional IRAs, etc.

(2)  Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder.

(3)  Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

(4)  Taxpayers who can pay the income tax on the IRA from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields.

(5)  Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds.

(6) Future distributions to beneficiaries are generally tax-free.

 

(7)  Because federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free.

(8)  Ability to recharacterize a Roth IRA conversion is a significant tactical advantage because it provides the taxpayer the benefit of 20/20 hindsight (by allowing the taxpayer to specifically choose which conversions to keep)

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