The Roth Conversion Playbook

Anthony Sandomierski CPA/PFS, CFP®, MST |

3 Educational Examples Showing How Roth Conversions May Help Families Save on Taxes 

By Anthony Sandomierski CPA/PFS, CFP®, MST
Wealth Advisor

Most investors understand that Roth IRAs grow tax-free.
But very few understand how strategic Roth conversions may help households manage lifetime and generational taxes.
For high-net-worth households, the opportunity may be meaningful.

With the right planning, families can potentially:

  • Potentially reduce future required minimum distributions (RMDs)
  • Potentially increase tax-advantage growth
  • Potentially improve after-tax legacy planning

Below are three real-world case studies of actual clients I have where Roth conversions can be especially powerful.

Case Study #1: Converting IRAs to Roth IRAs in Your 90s While Receiving Long-Term Care

The Situation
A couple in their 90s was in an assisted living. Unable to really spend much of what they have because they weren’t able to travel, had no debt, and are really just paying for their long-term care facility. So their taxable income was quite low AND they were receiving a large medical tax deduction.

Their assets included:

  • Traditional IRAs
  • Roth IRAs
  • Taxable brokerage accounts

The Problem
Their traditional IRAs were a considerable future tax liability for their heirs. This is a GOOD problem for the beneficiaries BUT we were trying to think through what could be done to benefit both sides of the table.
Under current law, inherited IRAs must generally be fully distributed within 10 years, meaning their children would likely face considerable income taxes on those withdrawals.

The Strategy
One approach was converting some or all eligible traditional IRA assets to a Roth IRA, subject to tax planning considerations.
Instead of paying the taxes from the IRA itself, they used non-IRA assets from their taxable accounts to pay the conversion tax.
The decision was made to go this route because their life expectancy was unknown and there was a window of opportunity.

Why This Matters

  • More money stays invested in the Roth
  • The Roth continues to grow tax-free for MANY years
  • No required minimum distributions apply

The Result
If the couple passes away:

  • Their children inherit Roth IRAs instead of traditional IRAs
  • The children can allow the accounts to grow tax-free for up to 10 years
  • Withdrawals during that period would generally be tax-free

In effect, a taxable inheritance becomes a tax-free inheritance. The beneficiaries stand to inherit the entire estate virtually tax-free!!

Case Study #2: Retirees Living on Social Security with a 20-Year Tax Window

The Situation
Another couple I worked with was in their early 70s.

Their situation was unique:

  • Social Security covered their living expenses
  • They were not withdrawing from their investment accounts
  • They had a mix of traditional IRAs and taxable brokerage accounts

However, they were approaching the age when required minimum distributions (RMDs) would begin.
Without planning, those RMDs could:

  • Push them into higher tax brackets
  • Increase taxes on Social Security
  • Reduce their net worth long-term

The Strategy
Because their taxable income was relatively low, we saw a multi-year Roth conversion opportunity.

The plan:

  • Gradually convert their traditional IRA to a Roth IRA
  • Spread conversions across multiple years
  • Pay the tax using taxable investment assets

The Long-Term Impact
During their life expectancy:

  • Their Roth IRA could grow tax-free for two decades
  • They eliminate or reduce future RMD pressure
  • Their children could inherit the Roth IRA

And because of the 10-year inherited IRA rule, their heirs could allow the Roth to grow another decade tax-free before withdrawing. That means the same assets may benefit from tax free compounding.
Some other considerations we had to take into account were higher Medicare premiums for a few years but these did not outweigh the benefits of the Roth conversions.

Case Study #3: The High-Income Executive Using the “Backdoor Roth” Strategy

The Situation
In this case, one spouse was a corporate executive earning seven figures annually. The other spouse was a homemaker.

The couple faced a common problem:
Their income was too high to contribute directly to a Roth IRA.

However, they were already maximizing retirement savings by:

  • Maxing out their 401(k) plan
  • Saving additional money each year

The Strategy: Backdoor Roth Contributions
Each year they:

  1. Contribute about $7,000 each to non-deductible IRAs
  2. Wait a short period of time
  3. Convert those IRAs into Roth IRAs

This process is commonly known as a Backdoor Roth strategy.

The Long-Term Result
If they repeat this strategy over time, they could accumulate:

  • Roth assets may build depending on contributions limits and market conditions
  • Investments that grow tax-free
  • A pool of retirement money that may not face required minimum distributions

For high earners, this is one of the few ways to systematically build Roth wealth over time.

Why Roth Conversions Are A Potentially Useful Powerful Tax Strategies Available

Roth conversions aren’t right for everyone.
But when used strategically, they can help investors:

  • Reduce lifetime taxes
  • Avoid large RMDs later in life
  • Increase after-tax retirement income
  • Create tax-efficient inheritances

The key is timing the conversions correctly and integrating them into a broader tax strategy. Most Roth conversions really benefit beneficiaries, so important to have a solid idea and vision as to what you are trying to accomplish.

Want to See if a Roth Conversion Makes Sense for You?

Every household’s tax situation is different.
The optimal strategy depends on factors like:

  • Current and future tax brackets
  • Retirement income sources
  • Estate planning goals
  • Time horizon

A carefully designed conversion strategy can potentially save tens or even hundreds of thousands in taxes over time.
If you'd like to explore whether a Roth conversion strategy fits your situation, we’d be happy to help. Click below to get started and setup a 15 minute complimentary call with one of our advisors to see if this makes sense for you!

Disclaimers:

The views stated in this letter are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Converting from a traditional IRA to a Roth IRA is a taxable event.
A Roth IRA offers tax free withdrawals on taxable contributions.
To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Important: These examples are provided for educational purposes only and reflect generalized scenarios. Results will vary based on individual circumstances, tax laws, and other factors. Roth conversion strategies involve costs and risks (including taxes due upon conversion and potential impacts to Medicare premiums). We do not provide tax or legal advice; consult a qualified tax professional regarding your situation.