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Re-Characterizing a Traditional IRA to a Roth

Barry GoldwaterWritten By: Barry Goldwater in Newton, MA

As a planner, I talk to people every day about financial priorities. It’s the usual stuff; retirees who need income, people changing jobs want to understand rollovers, young families wanting life insurance. Financial priorities are where you are right now in your life and they usually change as you live longer. Whatever your financial priority, you still need the right strategy creatively getting you to where you need to go. I say creatively, because there is always more than one way to accomplish the same goal and creativity in planning will get you to your financial priority with greater tax benefits.

I read a book called “The Zen of Motorcycle Maintenance” and as great books do, it had a few stories going on simultaneously. One was about exploring the relationship between a father and his son on a cross country motorcycle ride together. The other was the father’s relationship with his work as a mechanical writer, a job that was literally making him lose his mind. A mechanical writer explains how to assemble things.  They are the ones who write the instructions that come with the gadgets we buy so we can assemble them at home. I realized that this man was responsible for writing the assembly instructions for this one product from this one company, but a competitor who makes the same product will most likely have a different assembly instruction. Why is this? Because competitors have their own mechanical writers and they will interpret differently how to assemble the same gadget..

What does this have to do with financial priorities? Nothing, except this; we as consumers read one set of instructions and assume this is the only way to assemble this gadget, but in reality, there are many ways to assemble the same gadget. Same rule applies to planning financial priorities; there are different ways to plan for your priorities, but will these different planning methods assemble your financial gadget properly? If done creatively, they surely will. Let me give you an example.

We are all saving in IRAs but should it be a ROTH or a traditional IRA? To suggest a conversion from a traditional IRA to a ROTH you have to start a broader conversation about how to deal with the tax associated with this conversion. Most planners do not have creative solutions to address this. Here is one creative solution to re-characterizing a traditional IRA to a ROTH.

Bob and Marie Perk, ages 78 and 76, were in good health and owned a parcel of farm land valued at $900,000, with a $300,000 cost basis. If they sold it they would have owed capital gains taxes of $120,000 (20% of the $600,000 gain). Their children might disagree about whether the farm should be sold when they die and the complication and expenses of the selling process concerned them.

  • Current Market Value of Real Estate $900,000
  • Cost Basis of Property $300,000
  • Amount Subject to Capital Gains Taxes $600,000
  • Capital Gain Eliminated $120,000
  • Initial Value of Legacy Plan $900,000
  • Tax Deduction with LegacyPlan $345,822
  • Tax Savings at 25% Tax Bracket $86,456
  • Immediate Annual Payments for 20 year Term Certain annual income $45,000
  • Death Benefit from 2nd to Die Life Policy* $1,000,000

By using philanthropy, we created a tax deduction large enough to re-characterize $345,000 of traditional IRA. This method of property liquidation created a tax deduction of $345,000. This tax deduction can be applied dollar for dollar in converting a traditional IRA to a ROTH. $345,000 of ROTH IRA gets this couple $23,600 annual income that is tax free. In a 25% bracket, Bob has to pay $5,780 of taxes on this income. If Bob lives another 10 years, he has saved $50,000 in taxes not paid on the same income he would have had in his traditional IRA plus all the other benefits that accompany being philanthropic with this particular plan.

Creative planning gets you to your financial priority with greater tax benefits.

Barry Goldwater is an insurance consultant specializing in tax deductible, income, and estate planning strategies. He can be reached at 617-527-9736 or

To see more educational articles from Barry, click on the following link (Barry Goldwater).

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LegacyTree Foundation is a 501C3 non profit organization est. 1999. The charitable transactions outlined are tested and performed according to IRS code and they are not considered investments. LTF and Barry Goldwater do not give legal, financial nor tax advise.  All the deferred annuities mentioned and incomes derived through the Legacy Plans are deferred annuities underwritten by an investment grade insurance company and not LTF. All life insurance contract illustrations provided by investment grade life insurance companies.
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