Situation:
A physician is 65 and single. He is retired and the value of his individual retirement account (“IRA”) is $6,000,000. If the balance in his IRA remained at $6,000,000 when he turned 70 ½ (the age at which he is required to begin taking distributions from his IRA) his required distribution amount would be approximately $220,000. This would put him in a 33% marginal income tax bracket assuming income tax rates stay the same as they are now. The physician is currently in a 15% marginal income tax bracket and lives comfortably on the money he receives from his non-IRA assets.
Solution:
THOR can work with this physician to convert some of his assets from his traditional IRA to a Roth IRA. A Roth IRA is an alternative to a traditional IRA. Unlike traditional IRA’s, contributions to a Roth IRA are not tax deductible, but they do grow tax-free and withdrawals are tax-free. Distributions from Roth IRAs do not have to begin once a person reaches 70 ½, like they do with traditional IRAs. In fact, you are not required to take a distribution from a Roth IRA during your lifetime. Any person is eligible to convert assets from a traditional IRA to a Roth IRA. THOR can assist the physician in converting an amount from his traditional IRA to a Roth IRA each year leading up to the year that he reaches 70 ½ that would put him up to, but not exceeding, the 33% marginal income tax bracket. That translates into a conversion from his traditional IRA of approximately $140,000. If we convert $140,000 a year for the next five years to a Roth IRA, this will give the physician approximately $700,000 in a Roth IRA. He will not be required to take a distribution from the Roth IRA during his lifetime, so he can let the funds grow tax-free for the benefit of his children. Discussions can also take place with the physician regarding his required minimum distributions from his traditional IRA once he obtains the age of 70 and ½.