Roth IRA Conversions: “What you need to know but may not have known to ask…”
Roth IRA Conversion Case Studies
Case studies 1 and 2 serve to prove that for high net worth individuals and and savers who won’t outlive their retirement nest eggs, “It’s all about time.” The graphs in the case studies that follow make it simple to see why I came to this conclusion. However, “simple” is not a term I’d use to describe the background information one must comprehend to draw this conclusion.
To access background information relevant to this conclusion, go to: Save to Retire: Pre-tax, After-tax or Roth?; Stretch v. Super-stretch; Pre-tax v. Roth Estate Tax Issues (considers Income in Respect of a Decedent); Roth 401(k) Case Studies
Case Study 1:
The variables considered are key to proving the conclusion. This particular case study considers the variables shown below along with the Federal estate tax related information provided on the deduction for Income in Respect to a Decedent (IRD).
| Pre-tax IRA Owner Age/Gender | 66/Male |
| Year/Amount of Conversion/MTR | 2010/$2,000,000/35% |
| Side Fund Contribution for Comparison | $700,000 (tax paid on conversion) |
| Owner Age at RMD start | 71 |
| Owner MTRs receiving RMDs | 3 shown: 28%, 35%, 42% |
| Owners Age at Death | 82 |
| Spouse Age/Gender at RMD start | 80/Female |
| Spouse Age at Death | 87 |
| Spouse MTRs receiving RMDs | 3 shown: 28%, 35%, 42% |
| Spouse Age at Death | 87 |
| Children Ages/Gender when RMD start | 61/Female; 58/Female; 56/Male |
| Children MTRs receiving RMDs | 15% (their effective MTR considering the IRD deduction) |
| Children Ages at Death | 83; 82; 78 |
| Life Expectancies based on Social Security Table (except for Spouse) | |
| RMDs Payments are based on the applicable IRS tables | |
| Rates of Return on Investments (ROR) 7% blended rate of return for Pre-tax and Roth IRAs (60% stocks earn 8%, 40% bonds earn 5.5%). 5.68% blended rate of return for side fund (60% stocks earn 8% taxed at 15%, 40% bonds earn 4% tax-free). | |
Commentary What’s the old saying… “a picture says a thousand words;” for the Roth, I’d say… “a picture says a million dollars (or more)!”
The heirs receive more money if the pre-tax assets are converted to a Roth IRA whether the IRA owner’s MTR decreases, remains static or increases. Keep in mind that this outcome assumes that both the IRA owner and his/her spouse, as the primary beneficiary, receive the required minimum distributions from the pre-tax IRA based on the 3 different MTRs shown, and then reinvest these distributions in the side fund. The outcome further assumes a conservative MTR of 15% for the children beneficiaries to reflect the available IRD deduction.
Copyright © 2009 Barry R. Milberg All Rights Reserved
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[...] you well, if you want to learn more about how and why I came to these conclusions, read my article: “Roth IRA Conversions: What you need to know but may not have known to ask…” and access the background information provided in the Roth IRA Conversion Knowledgebase; [...]
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I understand that at age 70 1/2, I have to take an RMD from a ROTH 401(k) (unlike a ROTH IRA). Question: Can I rollover all the funds in the ROTH 401(k) to a ROTH IRA without terminating the 401(k) plan? I still want to contribute to that plan.
The law permits one to take an in-service distribution of one’s 401(k) account upon attainment of age 59 1/2 9which can be transferred to a Roth IRA; however… your individual plan must permit such action (in-service withdrwal at age 59 1/2).
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