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Paul Fennell
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I have worked in finance and capital markets since starting with Salomon Brothers in the 1980’s, and my clients have ranged from Fortune 100 companies to Internet entrepreneurs. Currently I'm seeking institutional acceptance for a patent-pending financing structure designed as a replacement for... More
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Fennell Advisory
  • A $10 Million Roth Contribution? 0 comments
    Nov 8, 2013 2:33 PM

    That would be news.

    But here's an interesting fact: doing a Roth conversion is equivalent to making a Roth contribution in the amount of the tax payment, provided your tax rate remains the same.

    In other words -- if we assume that his tax rate remains the same -- someone like Mitt Romney could effectively contribute millions to a Roth account, if he hasn't already done so.

    How can I say that? Take the example of an investor in the 40% bracket with a $1 million traditional IRA. If she took a non-penalty distribution of the entire account today she'd receive $600,000 after taxes.

    If she took the distribution later, her after-tax proceeds would equal today's after-tax value grown at the portfolio rate of return (because a fixed portion of the portfolio grows at the same rate as the portfolio). It's as though she has a Roth account in the amount of today's after-tax value, $600,000. That provides very useful context.

    Doing a Roth conversion means she goes from having $600,000 in her virtual Roth account to having $1,000,000 in the real deal. In other words, her tax payment effectively moves $400,000 from a taxable account to a non-taxable account, just like making a regular Roth contribution.

    Under this scenario of an unchanging tax rate, I can precisely identify the value of a conversion: it's the tax savings from holding the conversion payment in the Roth account.

    Most discussions of a Roth conversion say, "Well, it depends on the tax rate and other factors," which is technically accurate, but provides little insight. I would say, "If we knew that your tax rate were not going down, then this would be a lay-up trade, the equivalent of making a super-sized Roth contribution." It's something that every high net worth client -- the person likely to pay the highest marginal rates even in retirement -- should definitely explore.

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