Posted by Ridge Dickey on Sat, Mar 06, 2010
The thesis of this article is that a Roth conversion demands serious consideration for those owners who won't need distributions from part or all of an IRA during their lifetime (or the lifetimes of a married owner and his or her spouse). Projections I've run for previous articles and several clients lead me to this conclusion.
This article examines a hypothetical scenario. Jack age 75 is married to Jill, age 78. They have two children ages 50 and 48. Jack has a traditional $750,000 IRA. Not including the IRA, Jack and Jill have more than sufficient retirement income to maintain themselves for the rest of their lives in the standard of living they desire.
The assumptions are that Jack will live to age 87 and Jill 88; they are in the 33% bracket in the Roth conversion years; thereafter they and their children will be in the 28% bracket; the investment return on the accounts is 7% compounded annually; and inflation is 5% compounded annually.
The table below compares the net present value at the death of Jack in 2022 (Jill passed the year before) of the RMDs to the children assuming:
- No Roth Conversion
- All of the IRA is converted to a Roth in 2010 with the tax on the conversion paid with outside assets
- All of the IRA is converted to a Roth in 2010 with the tax paid from the IRA
The other assets in the No Roth Conversion column is a combination of accumulated RMDs during Jack's lifetime and the amount of the conversion tax paid with earnings. The conversion tax with accumulated earning is $434,434 which is also the amount of other assets in the Roth Conversion Paid from the IRA. The value at Jack's death of this fictitious asset is subtracted out across all three columns to arrive at a net present value comparison.
In this hypothetical, the Roth conversion with the income tax on conversion paid from other assets results in 36% more on a net present value basis paid out to Jack and Jill's children.
The chart below shows that 155% more is distributed to all beneficiaries using dollars at each distribution date. With no Roth conversion, $843,583 is distributed to Jack and Jill's children. With a Roth tax paid with outside assets, it's $3,970,627, which is over four times more than with no conversion.
Click here for
2022 date of death distribution tables. I also ran projections on what happens if Jack and Jill die in a common accident in 2012. If the IRA were liquidated and lump sums paid out to the children, the value would be about the same whether or not there was a conversion. The reason is that to make a valid comparison, the computation of net present value in 2012 must take into account the income tax on a lump sum distribution to the children from a non-converted IRA. That tax is essentially the same that Jack pays on the conversion.
Another significant result with a simultaneous death in 2012 is that if the account is paid out over the life expectancy of the children, the net present value of the Roth conversion tax paid with outside assets is more than 20% greater than with no Roth conversion.
The conclusion I draw from these computations and others I have run is as stated in the first sentence of this article:
- A Roth conversion demands serious consideration for those owners who won't need distributions from part or all of an IRA during their lifetime
Naming a separate trust for each of the children to receive the RMDs leverages the tax free aspect of the distributions. More of each distribution can be accumulated in the trust resulting in:
- Protection the resulting assets from each child's creditors
- Protection the resulting assets from a bad marriage
- Reducing estates taxes on each child's estate.
Posted by Ridge Dickey on Mon, Mar 01, 2010
This article examines a hypothetical scenario. Doris age 60 is married to a 63 year old named Dan. She has a traditional $500,000 IRA. Doris will require distributions from her IRA to maintain Dan and her in a reasonable standard of living after her retirement at age 65, taking into her and her husband's other financial resources and fixed retirement income. It's a second marriage for both and both have children by a prior marriage. Doris's oldest child is 35.
The table below is based on annual distributions of $24,000 in today's dollars adjusted by a compounded 5% inflation rate. It compares what happens with 7% and 5% investment returns. It also compares the differences between no Roth conversion, a Roth conversion paid out of other assets, and a Roth conversion paid from the IRA.The assumed dates of death are 2034 for Doris and 2040 for Dan.
I also ran projections on what happens if Doris and Dan die in a common accident in 2012. The net present value to Doris's heirs is essentially the same whether or not she converted her IRA to a Roth. The reason is that to make a valid comparison, the computation of net present value in 2012 must take into account the income tax on a lump sum distribution to her heirs from a non-converted IRA. That tax is essentially the same that Doris pays on conversion to a Roth.
As to those who will or may need distributions from their IRA, the conclusion I draw from these computations are:
- Relying on generalizations in making a decision about whether or not to convert to a Roth may result in lost opportunities.
- If a generalization turns out to apply to any particular set of circumstances, it applies by chance.
- Everyone with traditional IRAs and other qualified retirement plans should consult with a knowledgeable CPA, financial planner or other professional in arriving at a decision about converting to a Roth.
Posted by Ridge Dickey on Tue, Feb 16, 2010
The graph to the right results from compuations that:
- assume the IRA owner converts to a Roth and dies two years later, and
- the RMDs will be paid out over the life expectancy of the owner's only child.
However, this computation does not by itself answer the question as to whether or not the owner's child will receive more from the IRA if the owner converts to a Roth if the owner dies two years after the conversion. That was the question left hanging in the article dated February 13.
The common hypothetical set of facts and assumptions in this article and the February 13 article are summarized as follows:
A single person presently age 70 owns a $500,000 IRA. The owner is 99% sure no distributions will be needed from the IRA to maintain the owner in the owner's desired standard of living for the remainder of the owner's life.
The assumptions are: the owner will die in 2012 (instead of 2030); the owner's only child (presently age 45) will live to 90; each is presently in the 33 percent bracket; the adjusted gross income of each will increase 3% each year; inflation throughout the lives of both will be 3% compounded annually; inside and outside investments will grow at 6% compounded annually; the income tax rate on the investments will be 15%.
The table below sets out the elements of net present value at the owner's assumed date of death in 2012 assuming:
- No Roth conversion;
- A Roth conversion with the tax on the conversion paid with outside assets; and
- A Roth conversion with the tax paid from the IRA after conversion.
In all three scenarios, the IRA is either stretched over the life of the child after the owner's death or taken as a lump sum distribution on the owner's death.
In the No Roth column, the Other Assets figure is a combination of the RMDs to the owner and the value of the outside assets that would have been used to pay the Roth conversion taxes, plus the earnings on both. In the Roth paid with outside assets column, the Other Assets figure is the 2010 RMD net of income tax plus earnings. In the Roth paid with inside assets column, the Other Assets figure is a combination of the 2010 RMD net of income tax and the value of the outside assets that would have been used to pay the Roth conversion taxes, plus the earnings on both. The value at death ($161,372) of the assets used to pay the income tax on the conversion is a fictitious asset. The software adds it in to make a meaningful comparison as a percentage. I subtracted it out to arrive at net present value. It's fictitious because it was paid to the IRS.
Comparing the net present values of the elements at death results in an apples-to-apples comparison of doing or not doing a Roth conversion.
Even if the Roth owner dies soon after death and the child takes a lump sum distribution, there is no significant difference in the amount of the lump sum distribution to the child net of income tax irrespective of a Roth conversion. The reason is that the tax paid by the owner on conversion and the tax paid by the child on taking the lump sum distribution are about the same.
I ran projections with the only change reducing the AGI of both the owner and the child from $170,000 to $100,000, and the results were essentially the same.
Please note that if the child chooses to limit distributions to RMDs throughout the child's life, there is a meaningful increase of about 15% net present value to the child with a Roth conversion and the tax on conversion paid with outside assets.
I read an article online published by AARP that stated that it takes 10 years to make-up for the income tax paid on the conversion. The fault in that statement is that it doesn't take into account the income tax that would have to be paid at any point in time after the conversion on taking a lump sum distribution. An article in the near future will analyze the merits of a Roth conversion assuming the owner will need RMDs or other distributions to maintain a desired living standard.
If the account declines in value soon after the conversion, the Roth conversion may not look as promising. However, a Roth conversion can be reversed. The deadline on the reversal is the deadline for the owner filing a 1040 for the year of conversion (April 15 of the following year, or October 15 of the following year if the owner files an extension). However, there are strategies going into the conversion to reduce the probability of a decline, such as investing the Roth in less risky assets or leaving risky assets in that portion of a traditional IRA that's not converted.
When considering a stretch IRA, whether traditional or Roth, consider naming trusts as beneficiaries of the IRA rather than designating the heirs directly. The Texas Trust Code provides that an amount equal to only 4% of the value of an IRA at the end of an accounting year must be allocated to the income portion of distributions from the IRA to the trust during that year.
Properly drafted, the trust can accumulate distributions thereby protecting them from bad marriages, children from a prior marriage of a deceased spouse, and creditors. Converting a traditional Roth can leverage the income tax free character of distributions to trusts held for the benefit of the owner's heirs. A future article will address trusts as beneficiaries of IRAs and qualified plans.
Posted by Ridge Dickey on Sat, Feb 13, 2010
I've read several articles using calculations to demonstrate the financial viability of a Roth Conversion. After constructing numerous spreadsheets, I decided about two months ago to acquire software. The spreadsheets required too many changes each time I needed a new value for a variable such as the assumed date of death of the IRA owner.
The software I bought produces all sorts of tables and charts, and is flexible and therefore powerful. But there was nothing in the documentation that provides any insight as to how interpret the charts-tables in terms of legitimate comparisons between doing and not doing a Roth.
It occurred to me when I was constructing spreadsheets that the valid method to compare not converting a traditional IRA with converting to a Roth is to determine the values of the elements as of the date of the owner's death. This approach works if the owner will not need distributions during his or her lifetime to provide for the owner's desired standard of living.
The elements to include are the values at the owner's death of the balance of accumulated RMDs paid to the owner net of tax if no Roth conversion, assets preserved by not converting to a Roth (the value of the assets that would be used to pay the income tax on the conversion), the net present value of RMDs to the heirs, and the net to the heirs if the accounts are distributed lump sum at the owner's death.
Below is a table that sets out the elements of net present values of a $500,000 IRA owned by a hypothetical single person presently age 70. The owner is 99% sure no distributions will be needed from the IRA to maintain the owner in the owner's desired standard of living for the remainder of the owner's life.
The assumptions are: both the owner and the owner's only child (presently age 45) live to 90; each is presently in the 33 percent bracket; the adjusted gross income of each will increase 3% each year; inflation throughout the lives of both will be 3% compounded annually; inside and outside investments will grow at 6% compounded annually; the income tax rate on the investments will be 15%.
The table below sets out the elements of net present value at the owner's assumed date of death in 2030 assuming:
- No conversion;
- A conversion with the tax on the conversion paid with outside assets; and
- A conversion with the tax paid from the IRA after conversion.
In all three scenarios, the IRA is either stretched over the life of the child after the owner's death or taken as a lump sum distribution on the owner's death.
In the No Roth column, the Other Assets figure is a combination of the RMDs to the owner and the value of the outside assets that would have been used to pay the Roth conversion taxes, plus the earnings on both. In the Roth paid with inside assets column, the Other Assets figure is the value of outside assets that would have been used to pay the Roth conversion taxes plus the earnings thereon. The value at death ($395,073) of the assets used to pay the income tax on the conversion is a fictitious asset and is subtracted out to arrive at net present value.
Comparing the net present values of the elements at death results in an apples-to-apples comparison of doing or not doing a Roth conversion.
The Roth conversion paid with outside assets is the winner. Using the net present value of the RMDs as an element demonstrates the tax benefit of the owner's child receiving them income tax free, especially if RMDs are stretched out over the life of the child.
Even if the owner's child takes a lump sum distribution shortly after the owner's death, the Roth conversion results in more available for the child. The child will pay considerable income tax in the year of the lump sum distribution, which reduces the net present value at the owner's death considerably.
If you want to view a table of distributions for each of the three scenarios assuming a stetch over the life expectancy of the only child, click :
Single age 70 DOD 2030 6 3 distirbutions.pdf I have run several projections with this hypothetical set of facts, changing only the assumed rate of inflation and the rate of return. Even with inflation and the rate of return equal at 3%, converting or not converting is a push per the following table:
Keep in mind that the hypothetical owner is considering the Roth conversion to maximize the account for the owner's only child. A different set of calculations in a future article will explore the suitability of a Roth conversion where the owner may or will need distributions during the owner's life.
An essential question in analyzing whether or not a Roth conversion "will work" is: What happens if the owner dies soon after the Roth conversion? The next article will use the same hypothetical set of facts as this article save for one: the assumed year of the owner's death in the next article is 2012 instead of 2030.
Posted by Ridge Dickey on Wed, Dec 30, 2009
Congress adjourned before Christmas without passing legislation that would have prevented estate tax repeal for calendar year 2010. The estate tax will reappear in 2011, but with the rates and exemptions in effect in 2001.
Please keep in mind that the federal gift tax remains in effect during 2010 with the lifetime $1 million exemption and the annual exclusions ($13 thousand for both 2009 and 2010).
Not only is the federal estate tax cloaked for 2010, but also the "step-up" in basis rules will not apply with limited exceptions. Rather carryover basis rules with important exemptions will determine the income tax basis of a decedent's heirs. This article will discuss how the suspension of the step-up in basis rules that will apply to the estates of decedents who die in 2010 impact testamentary documents
As the law reads until January 1, 2010, the federal income tax basis of assets of a decedent take a new basis equal to their fair market values at death. So if a 2009 decedent owned 100 shares of a stock that cost $10,000 but have a value of $30,000 on the date of death, the tax basis is $30,000. The result is to decrease the taxable gain or increase the loss on a subsequent sale.
As to decedents who die in 2010, there are two exceptions to the carryover basis rules.
1. All Decedents. For all decedent's whether single or married, the personal representative may allocate an "aggregate basis increase" of up to $1.3 million to the basis of the decedent's assets. The $1.3 million is an allocation of additional basis on top of the decedent's basis.
The $1.3 million aggregate basis increase is further increased by the decedent's:
- unused capital loss carryovers;
- unused net operating loss carryovers;
- the inherent losses in assets that would produce certain types of losses if sold by decedent (incurred in trade or business, transactions entered into for profit, casualty losses).
To illustrate, assume a decedent had an asset worth $2 million at death with a cost basis
of $.5 million. He also had an unused capital loss carryover of $.1 million. Allocating all of the $1.3 million aggregate basis increase plus the $.1 million loss carryover to this asset
would give it a tax basis of $1.9 million.
2. Bonus for Married Decedent's: Aggregate Spousal Property Basis Increase. Now is the time to pop the cork on the champagne and let its affect counter the mind-twisting concept of the "aggregate spousal property basis increase."
Actually, the aggregate spousal property basis increase is only a number, and that number is $3 million. But there are other defined terms and of course operating rules.
"Qualified spousal property" means "outright transfer property" and "qualified terminable interest property."
The term "outright transfer property" for the most part is self explanatory (I won't get into the a couple of potential pitfalls here).
As to qualified terminable interest property, it's the same concept as QTIP property under the federal estate tax regime. The primary requirements are that the property pass from the decedent, the surviving spouse gets the income for life, and no person other than the surviving spouse can appoint the property to anyone other than the surviving spouse during the surviving spouse's lifetime.
So up to $3 million can be allocated to qualified spousal property to increase the basis by $3 million. This basis increase is in addition to the aggregate basis increase of $1.3 million (subject to increase by certain losses).
The carryover basis rules care contained in section 1022 of the Internal Revenue Code. It contains a unique rule for community property which reads as follows:
Property which represents the surviving spouse’s
one-half share of community property held by the decedent and the
surviving spouse under the community property laws of any State or
possession of the United States or any foreign country shall be treated
for purposes of this section as owned by, and acquired from, the
decedent if at least one-half of the whole of the community interest in
such property is treated as owned by, and acquired from, the decedent
without regard to this clause.
It appears this rule would operate to allow a surviving spouse's interest in community property to receive an allocation of the the decedent's $3 million spousal basis increase. I don't think this statutory provision can be construed as allowing a basis increase of up to $6 for community property.
Estate planning practitioners and their clients weren't suppose to have to deal with all this technical, complex mess because Congress was going prevent the estate tax from lapsing in 2010.
One ameliorating factor is that many testamentary documents in place for married persons provide for a Bypass Trust (sometimes called a "Credit Shelter Trust" or "Exemption Equivalent Trust") and a Marital Trust. The Marital Trust is almost always drafted as a QTIP trust. Where these instruments are in place, they can be patched up with a bandaid to hold them over until 2011 (or until Congress retroactively reinstates the estate tax for 2010 which may result in constitutional challenges).
In general, the way it works is to make sure the patch is drafted so that the aggregate basis increase is allocated first and that the property to which it's allocated goes to the Bypass Trust. If there is appreciated property in the decedent's estate remaining, then allocate the aggregate spousal property basis increase to property going to the Marital (QTIP) Trust.
All of the other property that would have passed to either the Bypass Trust or the Marital Trust if Congress had not let the estate tax lapse, goes to the Bypass Trust.
Posted by Ridge Dickey on Sat, Dec 12, 2009
The Texas Medicaid numbers for 2009 pertaining to financial resources, the income cap, and six other factors to determine eligibility are set out below. The penalty divisor was increased effective September 1, 2009, from $122.50 to $130.88
|
- Income cap. If a Medicaid client's monthly income exceeds this amount, then a Qualified Income Trust will need to be established.
| $2,022 |
- Penalty divisoror penalty factor. The total value of all uncompensated transfers (gifts) during look-back period isdivided by the penalty divisor to determine the penalty period, which is measured in days roundeddown to whole days.
| $130.88
|
- Monthly minimum personal needs allowance.
| $60 |
- Resource allowance for a single client.
| $2,000 |
- Resource allowance for a married client.
| $3,000 |
- Monthly maintenance needs allowance- community spouse at home.
| $2,739 |
- Minimum community spouse protected resource amount.
| $21,912 |
- Maximum community spouse resource allowance.
| $109,560 |
Posted by Ridge Dickey on Sat, Dec 12, 2009
The federal estate tax may be prevented from disappearing in 2010 by Congressional Democrats appending an amendment to the defense spending bill. That's about the only remaining piece of legislation likely to be passed by December 31.
If passed, the legislation may extend the current $3.5 million exemption for only one year. The House Democrats are presently divided on what the exemption should be for 2010.
The 2001 Act that abolished the federal estate tax for 2010 did not eliminate the federal gift tax for next year. Rather it raised the exemption to $1 million. The $1 million exemption on taxable gifts continues into 2010 and beyond. However, the gift tax rate beginning in 2010 will be the highest marginal individual income tax rate. Presently that rate is 35 percent.
Posted by Ridge Dickey on Wed, Nov 18, 2009
If you are not financially able or you are unwilling to pay the premium for a Medigap plan, then enroll in a Medicare Advantage plan that requires no premium.
The reason is simple. Original Medicare A and B have gaps in coverage. If these gaps aren't filled with a Medigap policy or a Medicare Advantage plan, a chronic or major illness or serious injury could result in a catastrophic financial loss.
Medicare Advantage plans are available that include Part D drug coverage and require no premium payment. You must continue your Part B premium. The result is to get protection against a catastrophic financial loss and Part D coverage without having to pay more for this additional coverage.
This result may sound too be good to be true. The question is, how can the an insurance company pay the health care providers if it isn't receiving premiums for the coverage? The answer is that the federal government is in effect paying the premiums. The fed is paying the insurance companies to pay the benefits and for administration costs. Whether Advantage plans will be a part of the Medicare program in the future remains to be seen.
Just because you can enroll in an Advantage plan premium free does not mean that Advantage plans are for everyone or even most people who live in a geographical area covered by an Advantage plan. This article is speaking only to those people who are unwilling or financially unable to enroll in a Medigap plan. Adequately comparing the coverages and costs of the different types of Medigap plans to the different types of Advantage plans would take thousands of words. You're talking about dealing with hundreds of rules that have to be understood and essentially memorized to come up with meaningfull comparisons. That's way beyond the scope of this article.
But in analyzing and deciding on a Medigap or an Avantage plan, here are a few issues to consider:
- Does the plan provide the coverage I need (for example, what if I'm abroad and have a medical emergency)?
- How much will it cost me for deductibles and copays with a particular Advantage or Medigap plan if I am faced with an expensive health issue?
- Do I want to have the choice of who my physicians and other health care providers will be?
- Do I have physical or mental health therapy needs that I want covered by my Medigap or Advantage plan?
One other point. If a person enrolls in an Advantage plan during their open enrollment period, no Medigap insurer can require health underwriting if the Advantage plan enrollee decides to go back to original Medicare within the first twelve months of enrolling in the Advantage plan. If you didn't enroll in an Advantage plan within your open enrollment period, you won't have this guaranty.
So again, if you are unwilling or financially unable to pay the Medigap premium, enroll in a premium free Advantage plan even if you didn't sign-up during your open enrollment period.
Posted by Ridge Dickey on Tue, Nov 17, 2009
The financial product industry and others are utilizing the 2010 Roth conversion changes as a marketing tool. However, for many if not most traditional IRA owners, a Roth conversion may produce negative financial results.
An owner pays tax on the Roth conversion. The cost of the conversion is the tax paid plus lost future earnings on the capital used to pay the tax.
Major tax benefits of the Roth conversion are that neither the owner nor spouse is required to take distributions during their lifetimes, and neither they nor any other beneficiary pays tax on distributions as long as the distributions are made five years or more after the conversion.
A prime strategy in tax planning is to defer paying tax. A Roth conversion is a hybrid strategy. Pay tax on conversion, but eliminate any future tax on distributions.
Generally speaking, the marginal tax on the Roth conversion will be higher than the marginal tax on distributions from a non-converted IRA. This dynamic would indicate that in most situations, paying the tax on the Roth conversion and receiving distributions income tax free would be financially unsound.
However, because there is a deferral element in a Roth conversion in that the owner and spouse are not required to take distributions during their lifetimes, the Roth conversion may make sense in some situations.
Sure enough, spreadsheets computations reveal that if no taxable distributions are taken from a Roth conversion for a long enough period of time, then there will be a larger accumulation than if the IRA had not been converted.
For us lawyers, advising a client, especially a single client, to convert is risky. The reason is that the law imposes on us a duty to the owner's heirs to properly plan the owner's estate. If in the eyes of a judge or jury we don't do so, the heirs can collect from us for allegedly faulty estate planning. If a single owner client dies a couple of years after a Roth conversion made in reliance on our advice, we would be a fish in a barrel.
As an attorney, I don't sell financial products. Neither do I gaze into crystal balls. There is the aphorism about a bird in hand is worth two in the bush. Maybe not paying tax on a Roth conversion is both safe and prudent, while doing a Roth conversion is not prudent because it's a bet on the come. Betting on the come is something to do in a casino, not in an IRA.
On the other hand, for an owner who has considerable wealth, converting a portion of a traditional IRA might preserve more of that portion for the owner's heirs. In that situation, the owner owns the casino and can control who wins which is always the casino.
In the next article, I'll have tables comparing several scenarios. At least one scenario will involve an owner who will need IRA distributions in retirement, and at least one who has more than sufficient wealth to take care of their needs during their lifetime irrespective of the success or failure of a Roth conversion.
Posted by Ridge Dickey on Sun, Nov 15, 2009
Photo by RodBegbie
The last article analyzed a hypothetical situation toward the end of concluding one way or the other whether a traditional IRA owner should convert it to a Roth IRA. The abbreviated facts are that the owner is 59 years old as of January 1, 2010, at which time the traditional IRA had a value of. He has has a 31 year old daughter and is pondering the merits of converting the IRA to a Roth IRA.
The last article took into account projections assuming the owner converted at age 59 and would live to age 90.
Assuming the owner takes no distributions from the converted Roth during his lifetime, the federal income tax cost of the conversion will exceed the tax benefits of the conversion well into the owner's eighties. Assuming the facts are representative of future reality, the conversion would make financial sense only if the owner was sure he was not going to need distributions from the converted Roth during his lifetime, and if the Roth conversion would leave more of the IRA for his daughter.
So the question is, if the Owner takes no distributions during his life from the converted Roth and lives to age ninety, will the Roth conversion benefit his daughter? First of all, a review of the distinguishing characteristics of a Roth are in order:
- Distributions from a Roth IRA are not taxable to the owner or to his or her spouse or to any other beneficiary.
- Distributions from a Roth IRA to either the owner or his or her spouse are not subject to required minimum distribution (RMD) rules. Thus a Roth IRA can accumulate earnings tax free even if the owner or his or her spouse lives forever.
- Distributions to any other beneficiary are subject to the RMD rules based on life expectancy of the beneficiary. But again, the beneficiary does not pay tax on the distributions from the Roth IRA.
To reiterate, the assumptions are as follows:
| Annual Compounded rate of return inside and outside the plan | 6.0 Percent |
| Rate of return net of income tax on accumulated RMDs | 5.1 Percent |
| Age of daughter when owner dies at age 90 | 62 |
| Effective income tax rate on conversion | 25.0 |
| Tax on conversion paid with outside assets | |
| The owner and daughter accumulate all RMDS |
|
Spreadsheet projections produce the following results:
| Balances at Daughter Age 80 | 15% Tax on RMDs | $25% Tax on RMDs |
| Unconverted IRA daughter age 80 | $5,512,955 | $ 5,064,979 |
| IRA converted less cost to convert | 6,395,766 | 6,395,766 |
| Difference is the gain on the conversion | $ 882,811 | $1,330,787 |
Gain on Conversion Over Time | | |
| Tax rate on distributions if not converted | 15% | 25% |
| Gain daughter age 62 (Dad dead on year) | 4,579 | 121,023 |
| Gain daughter age 65 | 62,656 | 206,314 |
| Gain daughter age 70 | 213,495 | 419,615 |
| Gain daughter age 75 | 466,233 | 766,956 |
| Gain daughter age 80 | 882,811 | 1,330,787 |
If the hypothetical facts including the tax rates and investment returns are representative of future reality, this illustration produces the following conclusion:
If the owner takes no distributions from the IRA during his life, the daughter will benefit substantially from the Roth conversion. If she allows the RMDs to accumulate until she reaches 80, there will be substantially more available to her at that age. If she spends each annual RMD and accumulates nothing, she pays no tax on the RMD from the converted IRA and can buy more stuff than she would be able to if there had been no conversion.
If a traditional IRA owner is confident they will never need a distribution from an IRA from a portion or a portion, then a Roth conversion of part or all of it may make sense. However this illustration covers only one set of many possible hypothetical sets of facts. Should anybody’s projections produce results that are consistent with what actually happens in the future, the consistency is purely coincidental. There will be all kinds of future events, most of which are beyond the control of the owner and the owner's beneficiaries, that will have an influence on whether or not a conversion turns out to be beneficial.
And don't forget to ask yourself the question, will the cost of a Roth conversion ever be recouped if the owner dies within any of the first several years of the conversion?
And thus a disclaimer. The above projections are not to be relied upon by any visitor to this website in deciding on whether or not to convert a traditional IRA to a Roth IRA. Seek the counsel of your tax adviser before implementing a Roth conversion.