Have you thought about the benefits of converting your individual retirement account (IRA) to a Roth IRA?

Our role as an Advisor is to provide advice that makes the most sense for our client and their specific situation. It may be that you have heard advice from a friend or family member that makes sense for their particular situation, but not necessarily for you.

A couple with $10 million in assets allocated roughly three-fourths of their wealth to taxable investment accounts while holding the rest in an Individual Retirement Account (IRA).  An IRA is a tax-deferred retirement account, meaning that an individual pays taxes on their investment gains only when money is withdrawn from the account. Based on investment advice our clients’ friend received, the couple believed that it was in their best interest to spend their taxable investments first and then deduct from the retirement accounts, allowing the IRA account value to grow.  They hoped that the growing balance in their IRA would translate into a meaningful inheritance for their children.   

Establishing a legacy for their children was very important to our clients, so we ran a few projections to determine the amount that they could potentially set aside.  As we looked deeper into their situation, we found that it made more sense to spread their withdrawals across their Investment accounts and IRA. Since their allocations were coming directly from their investment account, they fell into a low tax bracket.  

We saw this as an opportunity to convert their traditional IRA to a Roth IRA.  A Roth conversion can be a backdoor entry into income in retirement that is tax-free. Depending on your personal tax situation, this can be a great way to move money from a pre-tax retirement account (traditional IRA) into an account with the potential for tax-free growth (Roth IRA).  With a Roth IRA, taxes are paid on the initial contributions or conversions versus a traditional IRA, which is taxed when income is withdrawn, including taxes on any profits made during the investment.

A Roth IRA was particularly interesting to our clients because they would be able to retain all future gains. The conversion required them to declare the deductions as taxable income, so we posed two possible options: converting a small amount each year to stay in their current tax bracket or convert the entire balance in one year and prepare for a sizeable tax bill.  We completed the conversion in one year, and our clients now have a meaningful amount of additional assets as a result.

Location

Seattle, WA

Service(s)
  • Client Goal

    Draft an Estate plan for children

  • Years with Freestone

    2 years

  • Actual

    Estate plan drawn with additional savings through IRA conversion

More client stories

Ready to get started? Contact a Client Advisor