The following is an excerpt from The Gospel of Roth: The Good News About Roth IRA Conversions and How They Can Make You Money
What if you convert a large IRA on January 4, 2010 (at 9:57 am) that contains one mutual fund? Over the following one year and 10 1/2 months the mutual fund goes up substantially—say 30 percent. Let’s say the account was valued at $1 million on January 4, 2010.By October 15, 2011, it would be worth $1.3 million based on this assumption. You then could leave the account converted realizing a tremendous financial benefit. If you were subject to taxes at a rate of 35 percent, you would owe $350,000 in income tax on this conversion. You would have to pay $175,000 in 2011 and $175,000 in 2012. However, this might appear all the more compelling because at your decision point of October 15, 2011, your account was actu¬ally worth $1.3 million. So you have the option to decide whether to complete this Roth conversion committing to pay the taxes on $1 million with the knowledge that it’s actually worth $1.3 million. This would save 35 percent of the $300,000 gain or $105,000 in taxes. You just profited $105,000 by using the RCO. That might be worth considering. I mean $105,000 here and $105,000 there and pretty soon we’re talking about real money.
If you think that a 30 percent increase over a 22 1/2 month period sounds extreme, please consider recent history. Over the past 30 years, the S&P 500 index has gone up by at least 30 percent nine times. That’s almost one-third of the time. No one can predict the future, and I cer¬tainly don’t know if your accounts will go up or down. However, there is a great likelihood that you will be very happy to have this RCO and to monitor your own account performance.
Maybe your IRAs are worth less now than they were a few years back by locking in a lower value for taxation, and watching the future come to you; this timing of the RCO seems really attractive.
This Roth Conversion Option does not cost you anything other than a little preparation. It is strictly a paperwork transaction handled by the IRA custodian or trustee. It is like a mulligan or a do over in golf. Some corporate executives have been under scrutiny lately for backdating their incentive stock options—an illegal practice where executives picked an advantageous lower price on their company stock that would profit them immensely in the future. The RCO is a legal way for you to backdate your own stock options. The Roth Conversion Option is like betting on a recorded football game that you have already seen.
You will have ample time to analyze and consider the many potential benefits that a Roth IRA conversion may have for you in your specific situation during the ensuing one year and 10 ½ months after you convert. That is 651 days. You will have time to finish reading this book and other books on the subject. You may even recommend The Gospel of Roth to others. You can run Roth calculators until your brain turns into mush. You will be able to employ professional advisors to help you with this decision. You will have time.
RCO THINKING: TO KEEP AS ROTH ORUNCONVERT—THAT IS THE QUESTION
Actually you should not decide on the Roth conversion specifics until you have used the RCO and seen the results. This way you are able to more accurately analyze how much and what accounts to keep converted to a Roth, if any, and you may know more about future pro¬posed tax rate changes and your own situation. You will also be able to select—after the fact—which Roth accounts to keep converted and which ones to unconvert from each of your separate Roth IRAs. You can even choose to keep converted just a portion of a Roth conversion and unconvert the rest.
You have the chance with each converted Roth IRA to use the great line that Gilda Radner coined as the character Emily Litella on Saturday Night Live: “Never Mind!”
Anyone who would like to take advantage of this free one-time op¬portunity that will give you more financial options in the future should make this Roth conversion on January 4, 2010.The special 2010 deferral of tax to 2011 and 2012 makes it possible to take this Roth Conversion Option without even having to increase the amount of estimated tax that you pay to the IRS until after you have gone firm with any Roth conversions on October 17, 2011.When the IRS gives you a mulligan, I suggest you take it.
This RCO opportunity reminds me of the great Will Rogers quote, “Don’t gamble! Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it…” The RCO allows you to do just that with your taxes.
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