In my last article, you were introduced to Joe, who was retired with a 401(k) worth $1 million. I wrote how if you want to make Joe a client, you need to separate yourself from your competition in a meaningful way.
One great way to do that would be to share with Joe the consequences of continuing to leave his money in a traditional retirement plan. No one else is talking to him about this topic. All of your competition is arguing that their investment is better than the next guy's. By focusing on the tax implications of his current planning, you are able to separate yourself from the pack.
In this article, I will investigate one way to save Joe significant taxation over time. You might recall from the last article that Joe is on a road where he and his wife will owe tax on $1.8 million of distributions, even though they do not want to pull the money out. But because it's a traditional retirement plan, they have no choice.
In addition, they are leaving a taxable account to their children totaling $1.4 million. So between the taxable distributions of Joe and his wife and that of their children, the family as a whole will end up paying tax on more than $3.2 million of distributions on a retirement plan that is currently worth $1 million.
Our job is to see if we can reduce those taxable distributions by approximately $2 million. How valuable would that be to Joe and his family? What do you think? Would this set you apart in a valuable way?
If we want to help Joe and his family significantly reduce taxation, we are going to have to help them move his account to a more tax-favorable environment. One simple way to do this would be to transition his traditional retirement account into a Roth IRA over a period of time.
For example, what if we converted $147,000 each year into a Roth IRA? If you do the math, you will find that it would take nine years to convert the entire IRA. Once the money is in a Roth IRA, it is immunized from tax for the entire lifetimes of Joe, his wife and their children. It's even tax-free for the rest of his grandchildren's lives if he includes them as beneficiaries.
But if he does this Roth conversion, on how much will he owe tax? The answer is very simple. It is nothing more than $147,000 times nine years. The actual number comes to $1,323,256. Click here
to see the referenced chart.
Assuming that we stay in the 28 percent federal income tax bracket, the after-tax balance ($105,840) would be converted to a Roth IRA. Assuming the same 6-percent rate of return, click here
to see what that would look like.
to see a comparison of the results of Joe's current planning to that of a Roth conversion.
As you can see, a Roth conversion appears to be one very nice solution for Joe and his family. Of course, the problem is that he can do a Roth conversion himself. If he is a "do-it-yourselfer," then you've helped him significantly, but you are not getting paid to do so. This is a win/lose.
On the other hand, if he is looking for an advisor to help him, you clearly have the inside track. This discussion of the tax consequences regarding his planning adds tremendous value, and it's one that your competitors are ignoring.
In our next and final article in this series, we'll investigate another option that even a do-it-yourselfer cannot do on their own.