The Best Candidates For ROTH IRAs And A Case Study

Happy senior couple holding hands and using laptop while having a meeting with financial advisor in the office. Senior man is pointing at something on laptop.

Some of the best candidates for Roth IRA conversions are those that have saved a lot of money (pre-tax IRAs, 401ks, etc) throughout their working years relative to their income. Those that have been a little more frugal than the average person. This oftentimes means that their retirement income can be just as much or more than their pre-retirement income. So, even if prevailing tax rates do not increase, they may still be in a higher tax bracket in retirement than they were prior to retirement. On top of that, tax rates have nowhere to go but up! No, I will not bore you with more statistics about the fiscal situation our nation may be facing.

For these folks like the above—along with many others-it might make sense to pay taxes on that “seed“ today, in order to not pay taxes on the “harvest“ later on. Especially if at harvest time your tax rates are higher. That is what a Roth IRA conversion allows people to do.

Case in point. This week we worked with a single 58-year old client who makes $93,000 per year currently, as he is still working. He is currently in the 22 percent tax bracket that goes up to $100,525 in taxable income. With his standard deduction, he is comfortably below the next bracket, 24 percent. Here is his problem: He has saved for retirement $1.5 million in pretax accounts! He has been able to amass that amount of money for a couple of reasons: 1) He has been frugal and has obsessively saved. 2) He used to make more money than what he is now with his prior job. Anyway, with that large warchest of a retirement portfolio, along with Social Security, he will be able to take retirement income that is well into the six figures and definitely higher than he is currently experiencing while in his working years. He is going to have a great retirement! However, we can help him make it even better.

For this client, the Roth IRA conversion is a perfect scenario! Also note that folks that have retired early and have a “dead period” when it comes to income are also great for Roth IRA conversions, because they are in a low tax bracket.

We are actually doing a lot of different things with his $1.5 million portfolio where we are using annuities, equities, and bonds. The part that I want to highlight for the purposes of this article is what we are doing with the $500,000 that we are putting into an annuity with a GLWB.

We are putting $500k into an annuity company that has a great GLWB benefit (obviously). This annuity will allow us to convert on a “piecemeal” basis $70k per year for the next seven years. With the mere signing of a form, a “mirror“ Roth IRA account is set up and each year we can convert a chunk ($70k) of the traditional IRA into the Roth IRA “Mirror Account.” And most importantly, the GLWB benefit base moves to that mirror account proportionately. This means that the power of the ongoing GLWB rollups will be retained by 100 percent of the client’s money, even as it moves from the Traditional IRA column over to the Roth IRA column. The taxes will be paid each year by money that will come from one of his money market accounts we have set up.

What is the end result of this? In seven years, when he retires, he will have about $60,000 per year in tax-free income that is guaranteed forever coming from this annuity! That, in addition to Social Security, will mean that he will have six-figures of retirement income that is guaranteed forever. Plus he has the other $1 million of his portfolio on top of it that we will also be partially converting as the years go by. He will do all of these conversions on a large part (not all) of his pre-tax portfolio, without ever leaving the 24 percent tax bracket, which ends at approximately $192k.

I would argue that with a six-figure income in retirement, if all of his money was otherwise “pre-tax” he would be in a higher tax bracket than 24 percent with what the future holds. We helped him significantly.

Charlie Gipple, CFP®, CLU®, ChFC®, is the owner of CG Financial Group, one of the fastest growing annuity, life, and long term care IMOs in the industry. Gipple’s passion is to fill the educational void left by the reduction of available training and prospecting programs that exist for agents today. Gipple is personally involved with guiding and mentoring CG Financial Group agents in areas such as conducting seminars, advanced sales concepts, case design, or even joint sales meetings. Gipple believes that agents don’t need “product pitching,” they need mentorship, technology, and somebody to pick up the phone…

Gipple can be reached by phone at 515-986-3065. Email: