If you’ve ever asked how to reduce retirement taxes, you’ve probably heard someone say, “Have you thought about doing a Roth conversion?” The challenge is that every calculator relies on assumptions. You must guess your future tax rate and decide whether you want to use outside cash to pay taxes now or simply pay taxes gradually through future distributions. With so many variables, many high-income earners are left thinking, “I still don’t know if this makes sense.”
Here’s what I tell my clients: there’s more to Roth conversions than the basic math.
Why Roth Conversions Matter for High-Income Earners
When you pull income from a qualified retirement account later in life, your withdrawals can cause more of your Social Security to be taxed, and they can also increase your Medicare premiums through IRMAA. While it’s nearly impossible for high-net-worth individuals to eliminate Social Security taxation entirely, avoiding higher Medicare premiums can be possible with the right planning.
This is where a Roth conversion can help, but keep in mind we aren’t talking about the kind you might see in the news headlines. If you run a standard online calculator, you may see scenarios where you either pay a large tax bill today or about the same total amount spread over the next 10 to 20 years.
You’ll often find traditional advisors suggesting that you wait for a market downturn to do the conversion. If your account has dropped 20%, 30%, or 40%, the economy looks shaky and the headlines are depressing, most people don’t want to carry out a conversion. They are probably more concerned at that point about preserving what they have.
How Enhanced Roth Conversions Reduce Taxes Today
Instead of relying on market corrections, a more strategic approach is what we call an enhanced or discounted Roth conversion. This involves using a self-directed IRA to invest in private assets such as real estate projects or partnerships. These tend to move through what’s known as a J-curve of valuation.
In the early stages of development, the money invested in a project has been spent, but the finished asset doesn’t yet exist. For a period, those partnership units are worth less on paper than the amount invested. During this window, you can apply legally recognized valuation discounts such as lack of marketability, lack of control, and minority interests. These discounts are used in estate planning and are compliant when backed by a qualified appraisal.
Say you invested $100,000 in a project, but the discounted appraised value is $50,000. You can convert based on the $50,000 value rather than the full $100,000. You pay taxes on half the amount today while still moving the full investment into the Roth structure.
More Tax-Free Income in Retirement
This strategy gives you something traditional Roth conversions and calculations overlook. You don’t have to wait for the market to force valuations down. You also don’t have to estimate future tax rates. Instead, you can work with a professional to use a method that reduces the initial tax cost of the conversion and positions you for tax-free income later.
Matt Chancey is a Registered Representative of Realta Equities, Inc Member FINRA/SIPC and an Investment Advisory Representative of Realta Investment Advisors, Inc. Neither Realta Equities, Inc,. or Realta Investment Advisory are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Realta Wealth is a trade name for the Realta Companies co-located at 1201 N Orange Street., Suite 729 Wilmington, DE 19801.
Realta Wealth is the trade name for the Realta Wealth Companies. The Realta Wealth Companies are Realta Equities, Inc., Realta Investment Advisors, Inc., and Realta Insurance Services, which consist of several affiliated insurance agencies. Securities are offered through Realta Equities, Inc., member FINRA/SIPC and Investment Advisory Services are offered through Realta Investment Advisors, Inc., a US SEC Registered Investment Advisor co-located at 1201 N. Orange St., Suite 729, Wilmington, DE 19801.
This material is for informational purposes only and does not constitute investment, tax, or legal advice. All investments involve risk, including loss of principal, and past performance is not indicative of future results. Examples provided are hypothetical and do not guarantee future outcomes. Tax strategies discussed may not be suitable for all investors; consult a qualified tax professional regarding your situation. This is not a recommendation or solicitation to buy or sell any security or strategy.
Investments discussed may be speculative, illiquid, and involve a high degree of risk, including the possible loss of principal. Such investments are generally available only to qualified or accredited investors.