Roth IRA conversions needn’t be all-or-nothing. Dividing a conversion into multiple accounts, by type of investment, can minimize the current tax bill and maximize tax-free income. According to Leon LaBrecque, managing partner at LJPR, a financial advisory and wealth management firm in Troy, Mich., “segregated Roth conversions” facilitate flexibility in clients’ retirement planning, Suppose Alice Smith converts $100,000 of her traditional IRA to a Roth in 2013. Any time until next October 15, Alice can recharacterize (reverse) all or part of the conversion. If that $100,000 Roth IRA grows to $110,000 Alice can leave the account alone, with $10,000 of gains she can access, tax-free, after five years and age 59-1/2. On the other hand, if Alice’s Roth IRA sinks to $90,000, she can recharacterize the account back to a traditional IRA and avoid reporting $100,000 of taxable income in order to have a $90,000 Roth IRA. However, what if Alice had invested that Roth IRA 50-50, stocks to bonds, and one asset class gained while the other lost? No matter whether Alice does a full, partial or no recharacterization at all, she’ll be paying some tax on assets that no longer exist or losing some potentially tax-free gains, or both. By converting to two $50,000 Roth IRAs, one to hold stocks and one for bonds, Alice has the ability to recharacterize the laggard, saving tax, while letting profits ride in the leading Roth IRA.&
Posted on: Mon, 28 Oct 2013 19:21:36 +0000
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