This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Roth Change Strategy Can Lower Your Tax Bill

Perhaps that rate isn't low enough for you, though. Maybe you need to ensure that the tax rate is even lower, say, 15% or less. Following the example, you'd need to see an increase of 66% or more in your holdings, which would equate to a 33% move in the market (for your leveraged holdings, one way or the other). If the market doesn't move in the amount you hoped, you can just recharacterize the entire conversion, nothing lost.

You probably want to pull your "winnings" off the table and put the remaining Roth IRA into a safe (or safer) investment than the leveraged investments chosen before, such as a balanced fund or even straight bonds.

Now you can pull the same maneuver in the following year with whatever is left in the traditional IRA, splitting it just as before. Over time you should wind up with a significant Roth IRA with a lower tax cost.

This is not a huge payoff strategy -- you'll be losing money in your traditional IRA holdings each year, guaranteed. Your net position would be the same (minus the tax).

After the first year of the example, assuming a 20% gain you'd have $60,000 in the Roth and $40,000 in the traditional IRA, having paid $12,500 in tax. Second year, same result and you'd have $84,000 in the Roth and $16,000 in the traditional IRA, paying $5,000 more in tax. Third year, again the same 20% gain resulting in a total of $93,600 in the Roth, $6,400 in the trad, paying $2,000 in tax. And so on, until the amount gets too small to work with any more.

The end result is that all of this tallies up to the same $100,000 you started with, having paid tax of just less than $21,000 versus the original $25,000 you would have paid. Holding out for a higher return from the strategy would yield a lower tax rate overall.

>To submit a news tip, email: tips@thestreet.com.

RELATED STORIES:







Follow TheStreet.com on Twitter and become a fan on Facebook.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs