What Is A Roth Conversion?
A Roth conversion involves transferring funds from a traditional IRA, 401(k), or similar pre-tax retirement account into a Roth IRA. Unlike traditional accounts where contributions are tax-deductible but withdrawals are taxed as income, Roth IRAs allow for tax-free growth and withdrawals in retirement (provided certain conditions are met, such as being age 59½ or older and the account being open for at least five years).
Why Consider a Roth Conversion?
Roth conversions aren’t for everyone, but they offer significant advantages if your situation aligns. Here’s why many choose this path:
Tax Rate Arbitrage: If you expect higher tax rates in the future (due to policy changes or increased income), paying taxes now at lower rates could save money long-term. With current tax brackets set to expire in 2025, this is a timely consideration—explore projections at Tax Foundation’s analysis.
Eliminate RMDs: No mandatory withdrawals mean your money grows tax-free longer, reducing the risk of outliving your savings.
Protect Against Hidden Taxes: Traditional accounts can trigger taxes on Social Security benefits (up to 85% taxable) and Medicare surcharges (IRMAA). Roth withdrawals don’t count as income for these thresholds.
Legacy Planning: Heirs inherit Roth IRAs tax-free, avoiding the “legacy penalty” where non-spouse beneficiaries must withdraw and pay taxes within 10 years.
Risk Reduction: We identify seven key risks in traditional IRAs, such as inflation, market volatility, and tax hikes—Roth conversions can mitigate or eliminate many.
The Cost of Not Converting to a Roth IRA
Choosing to keep your traditional IRA or 401(k) instead of converting to a Roth IRA may seem like the simpler option, but it comes with significant long-term costs that are often overlooked. At Velomon, we quantify these “costs of not converting” to help you make an informed decision.
Let us help you determine if an IRA conversion makes sense for you.
How Velomon Makes Roth Conversion Simple and Cost-Effective
We specialize in optimizing Roth conversions for high-net-worth pre-retirees and retirees. Our approach focuses on reducing your conversion tax through proven, IRS-compliant strategies—without relying solely on products like annuities.
Our Three-Step Optimization Process
- Decision Analysis: We run a comprehensive Roth Conversion Decision Analysis, comparing costs and benefits. If the ROI is positive, we proceed; if not, there’s no obligation.
- Tax Reduction Strategies:
- IRA-LLC Discount: Structure your IRA as an LLC to qualify for valuation discounts (up to 35%), lowering the taxable amount.
- Tax Credit Utilization: Offset taxes dollar-for-dollar with federal tax credits, often acquired at a discount (adding another 40% savings).
- Optional Annuity Boost: For suitable cases, integrate a bonus annuity to enhance your Day-One Roth Value (D1RV), potentially getting your Roth balance to 90%+ of your original amount.
- Implementation and Support: We guide you through execution, ensuring seamless integration with your existing plans. No need to change advisors or contracts.
Clients typically see 55-65% tax reductions, turning a daunting process into a strategic win. For example, in one case, a $1M conversion cost dropped from $367,040 to $113,163, boosting the client’s starting Roth value by nearly $300,000.
Learn more about tax credit programs at the U.S. Department of Energy’s tax incentives page (as an example of federal credits; consult us for specifics).