Video: Roth Segregations

with 8 Comments
Roth Recharaterizations are no longer part of the tax code.

For a description of how this changes this Roth conversion strategy, read “No Roth Recharacterizations After 2017?

A complex technique called “Roth segregation accounts” could earn your investments an extra 30% over the next two years.

Part 1: IRA Tax Law

Part 2: Implementation

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.

8 Responses

  1. Chip

    I am 65 and planning to retire at age 66 in 2013.
    My income is around 125k annually and I have approx 1.2 million in IRA’s and 401 accounts. I plan on with drawing about 60k annually during retirement.
    Should I convert to a Roth, if so when, or am I okay if I’m only with drawing 60k annually. Will the IRS require me to withdraw more at age 70?

    • David John Marotta

      Greetings Chip,

      You should look at a Roth conversion for 2012. Take a look at the numbers for Mr. Average at

      The divisor at age 70 is 27.4 and your $1.2M could have grown to $2M by then which would require $73,000 in annual distributions. This amount plus Social Security would put you in the current 25% tax bracket which is rising to a 28% tax bracket. Getting some of your IRA converted to a Roth this year at the 15% and 25% rate would be a great tax savings.

  2. Susan Mills

    Dear David – My husband and I are 55 and 56 respectively. Combined we are making 135,000. We are in the 28% bracket. We have 500,000 in 401k s at our work. We hope to retire a little earlier than 66 but will depend on available health insurance costs.
    We do not have children and we figure we will probably spend our money down as we get older.

    My plan at work is offering Roth conversion. How or would this be a benefit to us?

    • David John Marotta

      Greetings Susan,

      I would recommend you work with a financial planner who also does tax planning in order to project your future tax brackets and see which approach would benefit you the best. Here are at least two competing possibilities:

      (1) You are currently in the 28% tax bracket which currently scheduled to rise in 2013 to the 31% tax bracket. At those rates any conversion staying in the 28% tax bracket which does not drop by more than 9.7% should be kept. That means that the short answer is, yes, a conversion in 2012 which stays in the 28% tax bracket would benefit you. And any conversion which pushes you into the 33% tax bracket must appreciate at least 6.5% in order to exceed the appreciation hurdle to being kept. The explanation of that can be found in our article: Roth IRA Conversion 2012: A Roth Conversion Calculator

      (2) But another option which ought to be considered is that you will retire at age 66 and have 4-5 years of low or no income between retirement and age 70 1/2 when you have to start taking required minimum distributions (RMDs) and Social Security. We call these the gap years. You may be able to fill these years with Roth conversions in the lower tax brackets and get most if not all of your $500,000 401k converted to a Roth IRA. With this plan it would be more important to make sure that you have accumulated taxable savings sufficient to live from 66-70 AND pay the tax on some large conversions. Having sufficient taxable savings is one of the requirements of taking full advantage of a Roth conversion.

      These are complex matters and best done with an advisor fluent in Roth conversion calculations. They would look at your total situation and projections in order to help you decide between options.

      • Susan Mills

        Thank you for your advice. It is very confusing and will look for someone to help.

  3. Liliana

    Dear David,

    Last year I was laid off, and left my 401K intact. However, I’ve been thinking it might be best to move it to a Roth IRA, but now I wonder if I should first transfer it to an IRA, then a Roth. The amount in the 401K is small, but I want to do what ever is best for my future.

    Also, I’m starting a new job soon. I can’t contribute to the 401K until I have been employed for one year. When the times comes, do you think it is in my best interest to put money into the 401K, or should I invest differently, like another Roth maybe?

    Many thanks!
    ~ Liliana

    • David John Marotta

      Greetings Liliana,

      It is easier to recharacterize a Roth back into the traditional IRA it came from. Consequently we prefer to move the 401k to a traditional IRA and then convert the traditional IRA to a Roth IRA. Converting the Roth in a year where you have little or no income will mean you will pay less tax, but you need to be able to pay the tax without touching any of the money being converted.

      First make the distinction if you are trying to postpone realizing income because you will be in a lower bracket later, or your income is still rising and you will be in a higher bracket later.

      My priorities for funding for people who will be in a higher bracket later are:
      (1) 401k ONLY to the extent you get a match if your contribution is to a traditional 401k. (If you can contribute to a Roth 401k, then contribute more.)
      (2) A Roth IRA to the maximum
      (3) A taxable investment account.

  4. Emily

    Hello Mr Marotta,

    I am unsure if I should convert more money into my Roth in 2012. I am 58, single, retired. I have $2M liquid net worth, $475K in traditional IRA, $575K in Roth IRA. I converted $300K to the Roth so far this year, and I wonder if I should convert more. Further conversions would put me in the 35% Fed tax bracket. Should I bite the bullet and pay the tax this year?