Tag Archive for 'Roth IRA Conversion'

Why You Should Convert to a Roth IRA (July 2010)

WHY YOU SHOULD CONVERT TO A ROTH IRA

Forget all the articles you have read about whether you should convert to a Roth IRA.  Forget about “Roth IRA Conversion Calculators.”  If you have a substantial amount in a retirement plan that can be converted to a Roth IRA, you should convert this year.  I am confident about this because my son, Ethan Okura, and I have developed a technique for converting to a Roth IRA in a special way which greatly reduces income taxes in the conversion.

Before I explain the technique, let me do a quick review of the advantages of a Roth IRA.  “Qualified distributions” from a Roth IRA are completely tax free.  A qualified distribution is one made more than 5 years after January 1st of the first year in which you made a contribution to any Roth IRA, and which is made after you are 59 ½ years old, or after death.  With a Roth IRA, you don’t have to start taking out distributions when you are 70 ½ years old.  The entire Roth IRA can keep growing tax free for your entire life.  Then, after your death, the Roth IRA can be distributed to your child, grandchild, or other loved one, over her life expectancy, completely tax free, while the balance still in the Roth IRA can keep growing tax free during your beneficiary’s lifetime!  There is nothing more free of income taxes than a Roth IRA.

The following can be converted into a Roth IRA:  a traditional IRA, and, subject to the terms of the retirement plan, a 401(k), profit sharing plan, 403(b), deferred compensation plan, and inherited 401(k).  Until this year, a person with a modified adjusted gross income of more than $100,000 was not allowed to convert to a Roth IRA.  From January 1, 2010, anyone can convert to a Roth IRA, no matter how large your income.  I suggest doing it before the window of opportunity closes.

The main reason people hesitate to convert to a Roth IRA is that the assets converted to a Roth IRA will be taxed.  The technique which we have developed greatly reduces the taxes.  The basic idea is one that we estate planning attorneys have been using for many years: limited partnerships or LLCs.  The new creative twist is in applying a proven estate planning technique to the area of Roth IRA conversion.

First, we change the traditional IRA into an IRA that is permitted to invest in LLC shares, real estate and other investments besides stocks and bonds.  If you would like to have your IRA invest in real estate, it can be done!  If you prefer to have your IRA keep investing in stocks, bonds and mutual funds, we have the stocks, bonds and mutual funds owned by a business entity such as an LLC.  We have your IRA own LLC shares.  We structure the LLC documents and the ownership arrangement in such a way that a “valuation discount” is justified.  A valuation discount is an artificial but legal reduction in value of assets for appraisal purposes.  The discount can be anywhere from 40% to 70%.  For example if the valuation discount turns out to be 70%, that means that you can convert $1,000,000 worth of assets in a traditional IRA to a Roth RIA, and legally report to the IRS that $300,000 of assets were converted, so that you only have to pay tax on the $300,000.  The other $700,000 would be converted to the Roth IRA tax free.

Do not try to do this yourself.  There are very technical rules about “prohibited transactions,” which, if violated, can cause serious tax problems.  There are only a handful of attorneys in the State of Hawaii knowledgeable about prohibited transactions.  My son Ethan Okura will be putting on an educational seminar on this technique in Honolulu on July 23rd and 24th, 2010.  You can reserve a seat by phoning the Honolulu Office of Okura & Associates.