Making Roth contributions this large used to be more difficult than adding to a traditional account. But then in 2006 Congress made it possible for anyone, including those with multi-million-dollar traditional IRA accounts, to convert them into Roth accounts. There’s one catch to a traditional-to-Roth conversion, however: You need to pay taxes on the amount you convert, just as you would if you withdrew the money normally.
That can be a hard sell, advisers say. “No one wants to raise their hands to pay a voluntary tax to Uncle Sam,” said Gopoian Wirick. However, there are ways to soften the blow: You can time your Roth conversion to coincide with other losses that offset the higher tax bill, or you can pair the Roth conversion with charitable contributions, including to a donor-advised fund that doesn’t need to go out to charity right away.
“A lot of clients are just waiting to hit the button and convert a traditional IRA into a Roth IRA,” said Alvina Lo, chief wealth strategist at Wilmington Trust. The strategy is “a good idea especially if tax rates go up and there’s a long investment horizon.”
One factor holding the wealthy back from fully embracing Roth conversions, Lo said, is high valuations in the stock market, where a sell-off would lower the tax bite. Another concern is that Democrats will follow through and put some limits on mega-IRAs. “We need to be thoughtful about what risks we’re taking,” Wetherby’s Smith said.
This article was provided by Bloomberg News.