Roth Conversion Tax Idea

Transcription

1 Roth Conversion Tax Idea The Concept: Most people do not want to convert to a Roth IRA because of the conversion tax. This program shows the advantages of a surviving spouse using the proceeds of a life insurance policy on the death of the original IRA owner (the insured deceased spouse) to pay the conversion tax. The clients best suited for this concept are those who do not need the required distributions from their IRA because this money can be used to help pay the life insurance premiums. Start by clicking the Inputs button at the top and enter the client data to illustrate. For this example we will assume the clients are a married couple. The current balance in the traditional IRA is $500,000. The owner is currently age 65 and we will assume that he will die at age 85. The spouse is currently age 63 and we will assume that she will die at age 90. 1

2 Click the Inputs button again to hide client data. There are five screens of data to present to your client. Each screen can be accessed by clicking one of the five buttons positioned horizontally at the top of the screen. The first screen is labelled Convert Now. It shows the conversion tax if the client immediately converted to a Roth IRA. The conversion tax in this example would be $165,000. 2

3 The next screen is accessed by clicking the button labelled Never Convert. 3

4 The left side of this screen shows the growth of the IRA over the life of the owner assuming that withdrawals are limited to the required minimum distributions (RMDs). 4

5 The right side of this screen shows the balance of the IRA that would pass to the surviving spouse and the resulting balance at her death. SPECIAL NOTE: This program only displays values in five year increments until the assumed ages at death. In the example above the surviving spouse was age 83 at the death of her husband. The first value shown on the right is age 88, five years after she inherited the IRA. The balance at this time is less then the balance inherited due to RMDs. 5

6 You see the inherited IRA balance at the death of the surviving spouse. This second screen shows the tax liability that would also pass to the beneficiary if the traditional IRA is not converted to a Roth IRA. 6

7 The third screen is accessed by clicking the button labelled Convert at Death. This screen shows the results if the surviving spouse converts the inherited traditional IRA to a Roth IRA at the death of the original owner. 7

8 The fourth screen is accessed by clicking the button labelled L.I. Pays Tax. This screen illustrates the strategy of using a life insurance death benefit to pay the conversion tax. The owner would purchase life insurance on his life and the surviving spouse would use these proceeds to pay the conversion tax. One of the many benefits of this strategy is that the Roth IRA balance could grow significantly due to the fact that no RMDs are required to be taken from a Roth IRA. 8

9 By clicking the button labelled RMDs Pay you can show the percentage of RMD required to pay the life insurance premiums prior to the owner s death. 9

10 The final Summary screen shows the increased after-tax inheritance that could be provided by using this strategy. -END- 10