In my last post, I talked about a concept called purchasing power. If you missed that post, I’d go back and read it because the information contained in it is the key to understanding the benefits of Roth IRA conversions. In short, it explains why you need to consider more than just the dollar value of Roth and Traditional IRAs, in order to determine if a Roth conversion can benefit you.
Las week, we discussed that, if you measure your accounts in terms of their purchasing power rather than their dollar value, it is quite possible that you and your spouse can benefit from Roth IRA conversions. The greater benefit, though, is likely to be recognized by your children and grandchildren. This is true even if the Death of the Stretch IRA legislation does not pass, although I believe it will.
When Roth IRA conversions were first introduced, I believed that they could provide a huge benefit to my clients who had large IRAs. It wasn’t just a feeling that I had, I did the math to support my position. Unfortunately, many people were still afraid of this new-fangled idea, and they just didn’t want to hear about it no matter how much it might benefit their families. So I thought to myself, how can I get people to believe me? In 1997, I published the very first peer-reviewed article on Roth IRA conversions. Submitting a paper for peer-review is a daunting process. Imagine a team of CPA’s who are just waiting to find fault with everything you say. Well, guess what? After they read it, they all said “He’s right!” – and my article on Roth IRA conversions was accepted for peer-reviewed publication. It was a ground-breaking idea, and I received a lot of attention by the mainstream media because I was a pioneer. Even to this day I continue to advise several prestigious publications on this topic. But for many individuals who have large IRAs, a series of Roth IRA conversions can provide an enormous benefit when used as part of a well thought out estate plan.
Roth IRA Conversions and Changing Tax Law
Some of you may think that a concept that was peer-reviewed twenty years ago has little relevance in today’s world. Well, it’s true that back then, the tax rates were higher than they are now. That means that, back then, Roth IRA conversions offered a greater benefit than they can under the current tax structure. And now we are facing the possibility that the Death of the Stretch IRA legislation will pass, which would accelerate the income tax due on inherited IRAs.
The changing tax rules are the reason that you must measure your IRAs, whether they are Traditional or Roth, in terms of their purchasing power. For many individuals, paying tax on the amount that you convert to a Roth IRA can provide a benefit to you, and an even greater benefit to your heirs. It goes against my grain to pay income tax even a day sooner than I have to, but I put my own money where my mouth is. Years ago, I paid the income tax due and converted a significant amount of both my own and wife’s Traditional IRAs to Roths. I’m glad I did, because those IRAs have grown tax-free for decades.
Roth IRA Conversion Calculators
So let’s talk about those Roth IRA conversion calculators that are available online. Are they accurate? Well, if you want to try one out, please make sure that you find a calculator that uses the current tax rates. Your results will not be accurate if you unknowingly choose a calculator that uses tax rates from ten years ago! When personal computers first hit the scene, there was a popular saying about them: “garbage in, garbage out”. This was the developer’s way of saying that, while their programs were accurate, they couldn’t prevent you from making errors. So if you were preparing your tax return using a well-known software and accidentally checked a box that said you were single when you were actually married, your tax return would still be right – if only you were single.
Ultimately, all an online calculator can do is estimate whether or not a Roth IRA conversion can benefit you. In my opinion, an estimate is not good enough. Before we make the recommendation to a client that they do Roth IRA conversions, our CPAs do actuarial calculations using several different scenarios. They also calculate your tax return (and the tax returns of your beneficiaries) so that we know for certain whether Roth IRA conversions can benefit you. If the Death of the Stretch IRA legislation passes as I believe it will, Roth IRA conversions will likely become a more important part of many estate plans.
Stop back soon for more Roth IRA talk!
For more information on this topic, please visit our Death of the Stretch IRA resource.
P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.
Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA