Roth IRA
IRA’s are designed to be liquidated to zero over time (based on RMD) with no possibility of recovery of principal (and distributions are fully taxable)…this is a major flaw. But, if you designed a mathematical solution which you broke-up the IRA assets into three piles, income, growth, and recovery…you could solve for recovery tax free (and still solve for income). [See: http://www.mutualfundrecoverysolutions.com/]
The income & growth legs would remain IRA’s and be liquidated to zero over a short period (such as 10 years) to solve for immediate income (and solve for RMD).You would convert the recovery leg IRA to a Roth…to solve for recovery of principal (tax free). The conversion tax would either be paid in one year or paid over five years.
By breaking the asset up into three piles, you are able to convert the IRA to Roth and leverage the taxable liability to a much lower figure. Take the example of a $100,000 IRA converted to a Roth (based on a 28% tax bracket), the conversion would cost $28,000 to covert to a Roth…and you would have to wait 5 years before accessing the asset for income. Yet, if you broke the IRA asset up into three piles, income, growth, and recovery…the recovery leg would only have a starting principal of $48,101.71 in the recovery leg. $41,101.71 x 28% = $13,468.47 in conversion tax liability. Would you rather pay $28,000 to covert $100,000 IRA to a Roth, or would you pay $13,468.47 to covert an IRA to a Roth that would grow into $100,000 Roth account…tax free?
The mathematical IRA/Roth solution would solve for immediate income (by liquidating the IRA’s in the income & growth legs) to solve for monthly or annual liabilities…yet solve for recovery (tax free). Truly the best solution for a Roth IRA conversion!
In addition, many people wonder about how an IRA will affect their spouse at death. IRA distributions are taxable regardless if we are talking about a distribution over a lifetime or over a 5 year period. By converting to a Roth IRA, the spouse will enjoy the benefits of a tax free distribution versus a taxable distribution. Would you want your spouse to have a taxable liability or a tax free asset?
Sincerely,
John Bagwell
The Truth About Financial Products.com
www.thetruthaboutfinancialproducts.com