“The one-two punch of a defined benefit plan and Roth conversion is a useful estate planning tool for high-net-worth clients.”

 Roth IRAs have gained popularity over the past few years, and for good. However, one thing most media commentators fail to address is that sometimes the people who could benefit most from a Roth conversion are the ones for whom such a conversion could carry the highest tax liability. Peter McDougall takes stock of the issue in a recent Wall Street Journal posting, and offers the potentially powerful cocnept of a one-two punch with defined benefit plans and Roth conversions that can help take the sting out of such conversions.

If you are wealthy and planning your estate, a traditional IRA can become cumbersome because of the required minimum distributions (RMDs). RMDs are taxable income, and thereby become a tax liability, and they deplete the assets you may prefer to pass on to your family. A Roth IRA has the advantage of allowing you to escape RMDs by paying the tax upfront. But, if you’re wealthy enough to be saving your IRA for your family then you are also likely to be in a higher tax bracket and in the line for e a hefty tax hit if you don’t play your cards right. The one-two-punch wisdom comes into play if you also have a defined benefit plan to which you make regular contributions. Those contributions are also tax deductible and can be used to offset the tax-cost of the Roth conversion.

Indeed, there are a number of tricks in the article’s specific anecdote, but the essential wisdom lies in the one-two punch of recognizing a means of finding enough tax deductions to off-set the tax-hit of the Roth conversion.

 

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