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Financial Planning > Tax Planning

A PIF in Action

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Consider the following Roth conversion situation: A client converts her $1 million traditional IRA to a Roth IRA resulting in federal tax at today’s top bracket (35%) of $350,000. Now assume the client’s traditional IRA held $1 million NAV PIF interests prior to the conversion and that the FMV of those interests is $700,000 as determined by the appraiser. She then completes the Roth conversion resulting in only $245,000 of tax due to the reduced income reported on the 1099R from the conversion ($700,000 taxable FMV x 35% tax = $245,000). This client has effectively locked in a maximum 24.5% tax rate on their conversion instead of the actual top bracket of 35% ($245,000 of tax / $1 million IRA NAV = 24.5% effective rate).

This client still has the same $1 million NAV in the Roth that she had in the traditional IRA prior to the conversion. The full value of her eventual distributions from the Roth IRA will be completely tax free (assuming the distributions are qualified under the rules). The net result is $105,000 of federal income tax savings not counting any state income tax benefits that may result, as well.

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