Using Roth to maximize your estate - Westfair Communications

“Through careful consideration of tax implications, individual goals and the potential longevity of beneficiaries, Roth conversions can unlock a wealth of benefits that extend far beyond the account holder’s lifetime,” write Chris Kampitsis and Ben Soccodato of The SKG Team at the Barnum Financial Group.

In financial planning, a Roth conversion is a powerful strategy. It offers the opportunity to pay taxes upfront and reap the benefits of tax-free growth for the rest of your lives. This approach becomes particularly valuable in estate planning, providing a lasting financial legacy for future generations.

A Roth conversion follows the principle of paying taxes upfront, minimizing future tax concerns. Within a Roth IRA, funds grow tax-free, and distributions are tax-free. Many people don’t realize these tax advantages extend to beneficiaries, offering a tax-efficient way to pass on assets.

Consider our client, John Smith, a senior in his early 60s with a substantial liquid net worth. When evaluating the potential benefits of a partial Roth conversion, our team modeled the conversion at a 22% effective tax rate. John Smith did not need to tap into his 401(k) plan or IRA for living expenses that year, because he had funds available in cash and non-retirement investments.

Our analysis revealed that the crossover point, where the benefits of Roth conversions outweighed the costs of paying taxes upfront, occurred when Mr. Smith was in his 80s. At this point, his wealth experienced a significant boost due to the tax-free growth within the Roth account. By the end of his life, Mr. Smith’s investments could reach an impressive amount with no additional tax ramifications.

Smaller Roth conversions may have benefits, too

Executing smaller but consistent annual Roth conversions may be an effective strategy as well. It involves converting a portion of traditional IRA or 401(k) funds into a Roth account in increments that keep the converted amount within the top of the 12% tax bracket.

If John Smith employed this strategy, his crossover point would have arrived 10 years sooner. The outcome implies that individuals may find it advantageous to convert smaller amounts sooner. However, if Mr. Smith lived into his 90s, the overall net benefit would be much lower, amounting to a gain of $400,000.

Longer life expectancies translate into more years in retirement, during which the tax-free growth within the Roth account would more likely compensate for the earlier tax payments made during the conversion process.

Roth conversions as a selfless gift

Whether big or small, those Roth conversions start to make even more sense when you think about your heirs. Positioning Roth conversions as a gift to future generations, individuals effectively take on the responsibility of paying the tax bill, sparing their beneficiaries from potential financial burdens. This act of financial foresight allows money to compound and grow tax-free for up to an additional decade after the account holder’s passing.

Prioritizing family and legacy

The act of considering Roth conversions should be a priority for anyone with a family-first mentality or a strong inclination toward leaving a lasting legacy. By embracing the power of tax-free growth and strategically navigating estate planning, you can ensure that your family benefits more substantially in the long and short term.

Ben Soccodato and Chris Kampitsis lead The SKG Team at the Barnum Financial Group of CFPs (Certified Financial Planners) and CExPs (Certified Exit Planners), whose Northeast offices include locations in Elmsford, Stamford and Shelton.  