Converting Your Taxable IRAs to Tax-Free Roth IRAs

By: Bruce D. Bullock, J.D.

We have concluded over 35 years and 2,000 family plans that the best retirement plan is risk-free, tax-free and guaranteed for the lives of both spouses.

That is because the vast majority of retirees fear running out of money.  So they take no income at all!  Their greatest expense is taxes at 32.5% state and federal combined, every year.

And many retirees have experienced crippling losses, 49% in 2000-2002, 40% in 2008-2009 and 22% in one day in 1986.  The overall market dropped 20% in 2022 but “came back” 23% in 2023.  But since it takes 25% to offset a 20% loss, at-risk accounts are still below zero for the two years not counting broker fees and expenses.

How the Roth IRA Solves All Three Issues in Retirement

Tax-free Roth IRAs are seldom-used because the IRS makes them so difficult to fund.  Contributions are limited to $7,000 a year and many high earners can’t qualify at all.

But one funding method allows unlimited amounts to go in and become tax-free, the Roth Conversion of existing IRAs, SEP-IRAs and any money in other plans like 401k, 403b or even deferred comp after age 59 ½ or separation from service.

Leading Financial Institutions will now Offset All the Taxes!

Starting in 2023, interest rates skyrocketed over 100%.  After years of bonds paying 2.5%, suddenly 10-year bonds reached 5% and higher.  Some of the leading financial institutions in the country and the world are sitting on multi-billion dollar portfolios at 2.5% which take another decade to phase out.  Some of these institutions have track records of over 100 years of safety and solvency.

They are highly motivated to take in “new money”, IRAs, CDs, brokerage accounts and Roth IRAs so all this can be used to buy billions of dollars of 5% bonds.

Bonuses Wipe Out Taxes

A few of these companies will now credit first year bonuses and high interest rates that totally offset the taxes paid on a conversion.

The typical tax rate in California is 32.5% state and federal up to $388,000 of taxable income for a couple.  A new Roth is credited a 25% bonus and given a 7.5% fixed rate, 32.5% total.

That means a $200,000 IRA becomes a $265,000 Roth IRA in one year earning a minimum 7.5% fixed rate, so it earns $20,000 a year tax-free.

What Does My IRA Earn Now?

Whether in a fixed annuity or brokerage account retirees are told 4% is about the most you should take to avoid “running out of money”.  So a $200,000 IRA, if you take anything, pays $8,000 per year with risk in the brokerage account plus broker fees and expenses.  After 32.5% taxes, $2,600, owners net $5,400.

These new carriers would offset your conversion tax and pay three times that amount, guarantee it for life and you pay no taxes!  The tax-free income can be $15,000 to $20,000 a year.  You choose how much to withdraw.

And after 10 years, the income can be made to increase with a lifetime benefit that goes up every year until the second spouse dies.

A Plan People Will Actually Use

With no risk, no taxes and a lifetime guarantee, Roth IRAs are now vehicles retirees will actually use.  For what?  Vacations, cruises, grandchildren, bucket list dreams . . . the way retirements should be lived.

Need Help?

We welcome you to take advantage of our 60-90 minute free consultation to learn if a Roth conversion is good common sense for your family’s plans so you enjoy what you’ve set aside without risk, taxes, or worries about ever “running out of money”.