Close Close

Retirement Planning > Retirement Investing

How to help high-end boomers prepare for a tax-free retirement

Your article was successfully shared with the contacts you provided.

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.

2. Convert the IRAs into Roth IRAs in late 2010, when the income limitation ends and everyone can legally make conversions, regardless of income level. Make the conversion before any interest is credited, to ensure your clients don’t have to pay a tax upon conversion. Both clients continue making the maximum contribution for the next five years. This ensures that the retirement funds meet the requirements for qualified (tax-free) distribution as long as the clients are over 59 1/2 .

3. By 2015, these clients’ Roth IRAs will be worth well over $100,000 (the $36,000 conversion amount, $60,000 added over the next five years, plus the accrued interest). The principal and interest can both be taken tax-free, because they meet the qualified distribution requirement.

This is a great strategy to help establish your credentials with boomer clients – and it positions you to help them with those 401(k) rollovers when they retire.

Click here to download a pdf (936k) of the entire special section: IRA Rollovers.

The section includes:

Industry experts Bruce Beaty and James R. Wagner share tips about how advisors can help high-end boomers prepare for a tax-free retirement; reducing taxes (and potential tax penalties) on IRA earnings; and IRA conversion ideas.

  • How to help high-end boomers prepare for a tax-free retirement
    by Bruce Beaty
  • 5 tips to reduce taxes on IRA earnings and, conversely, avoid penalties
    by James R. Wagner

*For further information or to contact this author, please use the forum below.