Roth IRA Conversion

Situation:

Dr. Smith, a retired physician, was 65 and single. The value of his traditional Individual Retirement Account (IRA) was $6,000,000. If the balance in Dr. Smith’s IRA remained at $6,000,000 when he turned 70 ½ (the age at which he is required to begin taking distributions from his IRA) the required distribution would be approximately $220,000. This would put Dr. Smith in a 33% marginal income tax bracket assuming income tax rates stay the same as they are now. Dr. Smith is currently in a 15% marginal income tax bracket and has not taken any distributions from his IRA and lives comfortably on the money he receives from his non-IRA assets.

Solution:

Convert some of Dr. Smith’s assets from his traditional IRA to a Roth IRA. A Roth IRA is an alternative to a traditional IRA. Unlike traditional IRA’s, contributions to a Roth IRA are not tax deductible, but withdrawals are tax-free. Distributions from Roth IRAs do not have to begin once a person reaches 70 ½, like they do with traditional IRAs. In fact, you are not required to take a distribution from a Roth IRA during your lifetime. A person is eligible to convert assets from a traditional IRA to a Roth IRA as long as the person’s adjusted gross income is less than $100,000 in the year of conversion. We are assisting Dr. Smith convert an amount from his traditional IRA to a Roth IRA each year leading up to the year that he reaches 70 ½ that would put him up to, but not exceeding, the 33% marginal income tax bracket. This year, that translates into a conversion from his traditional IRA of approximately $140,000. If we convert $140,000 a year for the next five years to a Roth IRA, this will give Dr. Smith approximately $700,000 in a Roth IRA. He will not be required to take a distribution from the Roth IRA during his lifetime so he can let the funds grow tax-free for the benefit of his children.