The Wealth Code 2.0: How the Rich Stay Rich in Good Times and Bad

Appendix C: Discounted Roth Conversions

In my opinion, pre-tax retirement accounts may be responsible for a giant leak in your wealth bucket. This leak takes years for you to become aware of and can become increasingly difficult to plug as your pre-tax accounts potentially grow over the years.

Anytime a decision is made to take action which necessitates an increase in taxable income, one must evaluate all possible measures to minimize or mitigate the resulting tax due.

Most CPAs—and many financial advisors, including certified financial planners (CFPs), investment advisors, and even tax attorneys typically view the Roth-conversion equation in a single dimension. How much did you convert, what will the tax be, and how long will it take for the tax-free growth to overcome the payment of taxes in the year of the conversion?

The problem with this single dimension viewpoint is it assumes you will have to pay tax on 100 percent of the Roth rollover amount and thus pay dollar for dollar the tax due. Both of these assumptions are wrong.

With respect to Financial Advisors, Warren Buffett has been quoted as saying “What makes them good is not their predictions, but their strategies for dealing with an uncertain future.” This could be no more true than in this single area of Roth conversions.

Roth Conversions—An Overview

Let’s review what the experts have been saying about Roth IRAs:

• “By allowing Roth IRAs, they also created the single most powerful estate-building and wealth-transfer vehicle ...