The Roth IRA
An Excellent Choice for Same Sex Couples
by James Lange, JD, CPA

Roth IRAs offer outstanding retirement and estate planning opportunities to virtually everyone who qualifies.  Because of the limited number of other planning alternatives, the Roth IRA and Roth IRA conversion is an especially effective planning technique for individuals and couples. 

In most cases, we recommend that each individual make a $2,000 Roth IRA contribution per year.  For taxpayers filing individually, you must have an Adjusted Gross Income (AGI) of less than $95,000, and $2,000 or more of earned income.  If you are wealthy and have qualifying beneficiaries (i.e., the beneficiaries are earning a minimum of $2,000), please consider gifting them $2,000 each.  Then, have them purchase a Roth IRA for themselves.

Why is a Roth IRA better than a regular IRA?

Roth IRAs, with limited exceptions, grow income tax free, and they are not subject to the minimum distribution rules requiring withdrawals at age 70½.  Regular IRAs only defer tax payment on income and capital gains, and they have minimum distribution requirements.  The disadvantage of the Roth IRA is that you do not receive a tax deduction when you make a contribution.  In effect, Congress is taxing the seed, not the harvest.

The only time we found the Roth less favorable than the traditional IRA was in the event that your income tax bracket would be lower at the time of withdrawal than at the time of contribution.  Even then, the Roth IRA is consistently a better choice unless a short investment period is anticipated.

Roth IRA Conversion

If your AGI is less than $100,000, please give serious consideration to converting at least a portion of your current regular IRA or, in many cases, your retirement plan to a Roth IRA.  Some IRA owners should convert their entire IRA to a Roth IRA.  For most clients who qualify, we usually recommend a partial conversion.  Making the conversion does require paying taxes on the converted amount.  But, even taking that tax payment into account, the conversion provides a dramatic increase in long-term benefits.

You may ask, "What about the loss of earning power on the money I will be spending in taxes?"  Our analysis takes that loss into account.  The benefits measured in total purchasing power of the tax-free compounding of the Roth IRA exceed the lost income and principal from the taxes triggered by the conversion.

Available on our web site is our peer-reviewed article, IRAs After the TRA ’97-What Hath Congress Roth?  Example 4 analyzes the case of a 55-year-old who converts $100,000 from a regular IRA to a Roth IRA.  It demonstrates that the conversion will generate approximately $94,000 of additional purchasing power available by age 75.  We invite you to work through our numbers until you are convinced.

One drawback is that income triggered by making the Roth IRA conversion may be taxed at a higher income tax rate.  The additional income from the conversion will be added to your existing income, and it will likely increase your tax bracket.  You might end up paying 36 or 39% tax on the conversion to save taxes at 28%.  There are, however, many times when paying income tax at the higher rate will still be the wisest choice, particularly if it is a long-term investment.  Additionally, there are problems when the only money available to pay the taxes is in the IRA itself.  While we are enthusiastic in many cases, we are still quite cautious about our recommendations for significant conversions.

Estate Planning for IRA Owners

Making a significant Roth IRA conversion is usually great for both you and your heirs.  Assuming your heirs make the proper election, they will continue to enjoy many years of tax-free growth after you die.  In addition, your estate is likely to enjoy an estate tax savings as a result of your Roth IRA conversion.

Please keep in mind that the disposition of your IRAs, Roth IRAs and your retirement plans are controlled by your beneficiary designations, not your will or living trust. Therefore, IRA owners and retirement plan participants with total assets of more than $675,000 should consider whether they need sophisticated IRA and retirement plan beneficiary designations as well as sophisticated wills or living trusts.  An integrated tax-savvy approach including wills, trusts and retirement plan beneficiary designations will often dramatically increase the amount of funds retained by your partner and other heirs at the expense of the IRS.  For more information, please see my article, The Value of a Roth IRA in an Estate, published in Financial Planning magazine, May 2000 (available on our web site). 

Where to Go From Here

I recommend that all IRA owners review the table of contents in the article, Retirement Planning for IRA Owners and 401(k) Plan Participants, and read the appropriate sections. For those who qualify or could plan to qualify for a significant Roth IRA conversion, I highly recommend that you review the table of contents and read the appropriate sections in IRAs After the TRA’97- What Hath Congress Roth? (adapted from an article appearing in the May 1998 issue of The Tax Adviser © 1998 by The American Institute of Certified Public Accountants, Inc.).

We also encourage you to explore our web site for our free e-mail newsletter, seminars, videos, articles and other resources.

James Lange is a tax attorney and CPA who provides specialized retirement and estate planning services to individuals with significant retirement plan accumulations.  He has prepared over 450 simple and complex retirement and estate plans.  These plans include tax-savvy advice, will and trust preparation, and sophisticated beneficiary designations for IRAs and other retirement plans. You can contact Jim by phone at (800) 387-1129, or (412) 521-2732, or by e-mail at admin@outestateplanning.com.