Maximum 24.5% Tax Bracket for Large Roth IRA Conversions

Categories: Retirement Strategies

Do you think clients have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again.

By utilizing the Jagen™ investment strategy, clients may be able to lock in a 24.5% rate on big IRA conversions.

A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?

Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.

For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.

Let’s see how this affects a Roth conversion:

1Discount for illustration purposes only. Actual discounts, if applicable, will vary.
 2Assumes 35% maximum federal income tax bracket.
The effective federal tax rate on the Roth conversion using Jagen™ fund units inside the Traditional IRA is 24.5% ($245,000 tax / $1,000,000 IRA NAV = 24.5%).

What if we were to combine the Roth conversion using Jagen™ shown above ith defined benefit plan contributions, a charitable trust (CLAT, CRAT, etc.), NOL carry forwards, current year NOLs or other tax reduction strategy? We can get the effective tax rate down to less than 20% or even zero depending on specifics. That will be the subject of another blog posting.

Think about which clients would benefit long-term from a Roth conversion and then consider how much more attractive the transaction is when you can determine a reduced tax rate on the conversion. Now imagine another advisor showing this strategy to your client. In order to be a trusted advisor to high net worth clients, you must bring additional value, expertise and cutting edge strategies to the table.

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