Roth Conversions: Convert Everything at Once or as You Go?

The article highlights:

Here are two hypothetical examples of Roth conversions made at different times that show a stark difference in what could be left for your beneficiaries.

• Example #1: Convert everything all at once

  • If you converted a hypothetical $1 million from an IRA (pre-tax) to a Roth IRA (tax-free) at an effective rate of 20 percent in one year, you would pay $200,000 and have $800,000 left over in your Roth IRA. That $800,000 can grow tax-free, distribute income tax-free and pass tax-free to your beneficiaries.

  • However, assuming an annual portfolio increase of seven percent, there would be about $102,000 left in the portfolio, tax-free.

• Example #2: Convert as you go

  • If you had a hypothetical $1 million in a pre-tax account, and you needed annual distributions of $45,000, you would need to take a larger amount to cover the taxes.

  • The gross distribution would need to be $52,941 in order to for you to have the $45,000 you need for income, plus around $7,900 in taxes.

  • The net income target grows at two percent each year.

  • Following this “convert as you go” approach, you would pay around $412,896 in taxes over the rest of your life (from age 60 to 95). Your beneficiaries would pay taxes on what is left.

  • However, assuming an annual portfolio increase of seven percent, there would be about $792,300 left in the portfolio, pre-tax.

• The bottom line:

  • There’s a difference between paying the least amount of taxes overall and taking steps to preserve your estate for your heirs.

Source:

https://www.kiplinger.com/retirement/roth-conversions-convert-everything-at-once-or-as-you-go