Underutilized Roth Conversion Strategy Helps High-Income Earners

For years, high-income earners struggled to take advantage of the opportunities provided by Roth IRAs like tax-deferred growth and more lenient access to funds than traditional IRAs. While Adjusted Growth Income limitations for Roth conversions were eliminated in 2010, these conversions typically generated a significant tax bill and new direct contributions into Roth IRAs were still out of reach due to income limitations.

Knowledgeable advisors like PWM Planning have been using an innovative and underused strategy that enables tax-free Roth conversions for high-income investors who participate in an employer sponsored retirement plans that accepts outside IRA rollovers.

Here’s how it works at a high level. First, the client rolls all proceeds from their traditional IRAs that are considered pre-tax into their employer-sponsored retirement plan that accepts outside rollovers. Then, they contribute the desired amount into a non-deductible traditional IRA. This is a traditional IRA where the taxpayer elects not to deduct the contributions on their tax return. After this contribution is made, the client immediately converts the proceeds of the non-deductible traditional IRA to a Roth IRA. Since no growth has occurred between the deposit and the immediate conversion, nothing will be reported as taxable income.

While performing a tax-free Roth conversion might sound easy from this summary, it’s important to engage your PWM Planning advisor to help ensure the proper sequence of steps are followed and that you fully understand the complex Roth conversion rules regarding future access to your assets. Contact your PWM Planning advisor to learn more.