Articles for Financial Advisors

Reverse Roth IRA Strategy

Reverse Roth IRA Strategy

Advisors who have clients converting a traditional IRA into a Roth IRA should consider the following strategy: use several accounts and then cherry-pick at year-end if there are possible tax savings. The IRS allows a taxpayer to “undo” a conversion by October 15 of the year following the conversion to a Roth IRA. 

 
The most common reason to reverse is when the Roth’s account value has dropped since the conversion (because taxes are paid on the original amount converted). For example, suppose a client has $100,000 in a single traditional IRA account. Instead of setting up just one Roth IRA (for the conversion), consider establishing four different Roth conversion accounts and funding each one completely differently (e.g., long-term bond fund, REIT, growth stock fund, and value stock fund), with $25,000 going into each account.
 
Wait until early October of the following year and see what has happened to the account values. Suppose three of the accounts increase (or remain level), but the REIT Roth IRA account drops in value from $25,000 down to $19,000. By reconverting this one account, taxpayer’s taxable income would decrease by $6,000.

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