Read this column and watch Terry’s Roth Conversion Podcast with Economist Larry Kotlikoff, who created the MaxifiPlanner.com software that includes specific advice on Roth Conversions, as described below.
To Watch the Podcast, click HERE!

Would you send the government a big check this year – in return for a potentially far larger future tax break?
That’s the simple and essential premise of Roth Conversions – paying taxes now on regular IRAs, 401(k)s, and other tax-deferred retirement accounts (except those from your current job) in exchange for tax-free withdrawals of those balances, plus all their growth, down the road.

Many Americans have spent the last 40 years growing tax-deductible retirement savings inside traditional 40l(k), 403(b), and IRA accounts. But when you withdraw those funds, the money is taxed as ordinary income at your then-current rates — on top of any other taxable income you may be receiving, such as a pension or even your Social Security benefits.

If you have a traditional pre-tax retirement account such as an IRA, 40l(k), or 403(b) account, the government mandates you take Required Minimum Distributions (RMDs) at age 73 — even if you don’t need the withdrawals to live on. (The RMD age will rise to 75 in 2035.) The government wants to get its share of your tax-deferred savings windfall by forcing these taxable withdrawals. Doing a Roth Conversion now avoids RMDs later.

Consider These Issues
So basically, the big math question is whether you are better off paying those taxes now, out of current savings (and preferably not out of your retirement account assets so they can keep growing), OR, whether you should leave things alone and take your chances on taxes in the future.

Further, you must decide whether to convert all, or just part, of your IRA to a Roth. And then decide whether you should do it all in one year or spread it out over time. Note: if you’re still working, you can’t convert your current 40l(k).
Figuring out whether to do a conversion and precisely how much to convert in each future year is immensely complicated. Here are some of the interconnected decision factors and tradeoffs.

• Tax Brackets. Paying more federal and, potentially, state taxes today will lower these taxes in all future years. That’s a multiplier-type effect, even though we can’t predict future tax brackets.

• Need for liquidity. If you use your liquid savings outside your IRA to pay the income taxes, will you be in a tight position if you need cash for an emergency? (Taking extra money out of the IRA to pay taxes partially defeats the purpose.)

• IRMAA. Because all of the conversion is considered taxable income in the year of conversion, it can raise your Medicare Part B and Part D premiums in the short term. Long-term, these premiums will be far lower because Roth withdrawals don’t impact IRMAA taxation.

• Taxation of Social Security Benefits. If you add your conversion amount to your adjusted gross income, it could make up to 85% of your Social Security benefits taxable in the year of the conversion. But future Roth withdrawals won’t impact your benefit taxation.

• Market Timing. The last thing you want to do is convert at the “top” of the market, when your account is most highly valued. Think of how you would feel if you paid taxes on the peak value at conversion, only for the market to decline in the next year. Of course, no one has a crystal ball about when the market has peaked
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• Your Longevity. It’s difficult to gauge how long your assets might have to grow on this tax-free basis after conversion. And after your death, your beneficiary will face slightly different withdrawal rules, depending on whether the beneficiary is a spouse, and how the inherited IRA is handled.

Clearly this is a multi-dimensional computation, and not a matter of guesswork. Further, you want to get advice from someone who is not benefiting from fees on assets under management.

The Solution
These complex tradeoffs are a feature of the new Roth Conversion Optimizer that is one part of Maxifi Planner (Maxifi.com) – a comprehensive economics-based lifetime financial planning tool created by Boston University economist Larry Kotlikoff, who also created MaximizeMySocialSecurity.com. (Note: Kotlikoff is my co-author and economic genius behind our book’s disclosure of Social Security Horror Stories).

Maxifi’s patented interactive algorithms are designed to answer any and all of your planning and retirement questions, including analyzing whether you should do a Roth Conversion. It will calculate precisely how much to convert annually to minimize your lifetime taxes and, thus, maximize your household’s sustainable living standard.

You won’t know the impact on increasing your lifetime spending until you run Maxifi premium program. Check out the demo and podcasts at Maxifi.com. At $149, including free online support, it’s well worth the cost.
And that’s The Savage Truth.