Roth IRAs are attractive retirement vehicles for three reasons. First, contributions and growth are tax-free, when structured properly. Second, there is no minimum required distribution at age 70 1/2 . And, finally, the death benefit is tax-free.
It’s obvious why most people would want to take advantage of Roth IRAs, but many high-income boomers – both singles and couples – are limited to minimal or no contributions. They cannot take full advantage of benefits offered by this particular retirement vehicle. Moreover, singles or couples making more than $100,000 yearly cannot convert from an IRA to a Roth IRA.
But there is a way to help your higher-income clients convert to a Roth IRA, via specific planning strategies and products. Look for a fixed index annuity with at least a three-year reset crediting strategy that accepts 100 percent of the client’s premium. No interest is credited until after 2010, when the income limitation on conversions ends. Avoid bonus index annuities – they will trigger a tax when the account is converted.
For your client’s benefit, also look for a vehicle that allows flexible contributions and offers double-digit caps. Once you’ve found a fixed index annuity that meets these criteria, follow three simple steps, as illustrated in the following example.
Let’s assume your clients are a married couple filing jointly, both over 50, and making more than $160,000 yearly. Here is a high-level view of the steps that will enable them to take advantage of Roth IRA benefits:
1. Establish “His” and “Her” standard IRAs, funding them with the maximum yearly contribution of $5,000 each. Because the clients are over 50, an additional $1,000 contribution is taken. Continue funding the IRAs at maximum levels through 2010. At current rates, these clients will have contributed $12,000 a year for three years, for a total of $36,000. Remember, no 401(k) contribution can now be made.