The unheralded tax benefit of Roth conversion

By Ken Davis


I know, this topic was beaten to death and went nowhere the first time around the track. But we forgot one major thing in regards to retirees’ tax situations. In my article on ProducersWEB, How Can Line 20(b) Help You Sell More Annuities?, I discuss the taxation of Social Security income and how managing a taxpayer’s adjusted gross income could save taxes each and every year going forward.

Most of the articles I read on Roth conversions never talk about the potential for permanent reduction or elimination of taxation of Social Security income. That potential comes from the fact that future distributions from a Roth IRA will no longer be included in AGI.

And thus the taxation of Social Security income could be permanently reduced. Add that onto the fact that Roth IRA income is not taxable at all and you may have a real winner.

Simply put, at its best this strategy may reduce annual income subject to tax at up to $1.85 per $1.00 reduction in taxable IRA income.

With the real prospect of income tax rates going up, and a fresh look at the added benefit of reducing taxation of Social Security income, it may not be a bad idea to revisit this issue. And, because of rising markets in recent years, the clients may actually have extra cash lying around that they did not have before that could be used to pay for the conversion outside of the IRA.

Just a thought.