Welcome back to Cardinal Advisors’ ongoing series on financial planning strategies. In today’s installment, we delve into the compelling topic of Roth conversions, using our familiar example of a couple, Tom and Chelsey, aged 64 and equipped with substantial retirement assets. This video marks the second in a series where we explore comprehensive financial planning scenarios tailored to their needs.
Why Roth Conversions Matter
Taxes play a pivotal role in shaping the financial landscape of retirees. The cardinal rule remains: minimize taxes to maximize retained wealth. For Tom and Chelsey, with $750,000 in taxed savings and $2.5 million split across their IRAs, the challenge lies in optimizing withdrawals while minimizing tax liabilities.
Initially, their plan, pre-Cardinal Advisors, leaned towards relying on Social Security and drawing from taxable accounts to delay IRA withdrawals until mandatory distributions begin at 72. This approach, while common, lacks strategic tax optimization.
The Proposed Strategy: Roth Conversions
Enter our proposed strategy: Roth conversions. By systematically converting funds from traditional IRAs to Roth IRAs, strategically staying within the 24% tax bracket (up to $380,000 for couples), we aim to capitalize on current lower tax rates before anticipated increases in 2026. This proactive approach not only defers taxes but also positions Tom and Chelsey to avoid higher future tax rates.
Using Advanced Financial Planning Software
In our detailed analysis using Monte Carlo simulations and advanced financial planning software, we illustrate the benefits. By converting $250,000 to $300,000 annually to Roth IRAs, the couple stands to save significantly over their lifetime—over $1.1 million in federal taxes alone. This substantial tax savings more than offsets the upfront tax payments required during conversion years.
Long-Term Benefits and Legacy Planning
Looking beyond immediate tax savings, Roth conversions offer robust benefits for estate planning. Assuming a terminal tax rate of 30% on inherited traditional IRA funds versus tax-free Roth distributions to heirs, the strategy potentially enhances the legacy Tom and Chelsey leave for their children by an equivalent amount saved in taxes.
Conclusion: A Strategic Advantage
In conclusion, while Roth conversions may initially seem counterintuitive—requiring upfront tax payments—they offer unparalleled advantages in tax efficiency and wealth preservation over time. By structuring their retirement income to include guaranteed annuity payments and strategic Roth conversions, Tom and Chelsey not only secure their current lifestyle needs but also safeguard their financial legacy for future generations.
Stay tuned as we continue exploring essential financial planning topics, including long-term care, estate planning intricacies, and more. For further details and to explore our interactive financial planning tools, visit our website or check out the accompanying resources linked below this video.
Thank you for joining us in this insightful journey towards financial empowerment. We look forward to empowering you with the knowledge and tools to achieve your retirement dreams.
