Show Me the Money: What is the payoff for converting to a Roth IRA?
Advisors recommending Roth IRA conversions had better be prepared to answer these questions from clients: "For years, you've told me that I should postpone income taxes on my retirement plan as long as possible. Now, you tell me I should do a Roth IRA conversion and pay all of the income tax immediately. Why do this Roth conversion? What's the payoff?" Come 2010, there's no income limitation to stop people from converting a traditional IRA or other qualified retirement account into a Roth IRA. Other articles have addressed the question, how should they do it? But perhaps most importantly, we have to answer: Does the Roth make financial sense?
To help calculate the bottom line, here are a few case studies that compare a Roth IRA's financial results to other strategies.
If there is anything surprising about the results of my studies, it's that a Roth IRA conversion strategy dramatically outperforms every other strategy under a wide range of conditions. One of my case studies shows that for an individual with a "modest" net worth of around $3 million, a strategy that has a Roth IRA conversion with a stretch-out and a Roth bearing minimum estate taxes can produce nearly four times the results compared to a non-deferral strategy and roughly double the value produced by the best IRA deferral strategy. black magic curse spells
For a wealthy person with a net worth of $65 million, the same Roth IRA conversion strategy more than doubles the results of the best IRA deferral strategy. And when multi-generations are involved, it's dramatically better to leave the entire Roth IRA to grandchildren--even if generation-skipping transfer (GST) tax is incurred.
Let me show you how I reached these conclusions.