Converting an IRA to a Roth IRA is simple, thanks to TOTAL's highly flexible planning data. Illustrating a conversion of an IRA to a Roth IRA requires scheduling withdrawals from the IRA and additions to the Roth IRA. The steps to show a conversion are the same for the main scenario planning data and TOTAL Online's What-If.
1) Withdrawals from IRA
Select the IRA in the asset section. Go to the Future Changes section. Add a new entry with the client's age for the conversion, and the conversion amount as a negative monthly amount. Add a second entry with the client's age the next year, and zero as the monthly amount to stop the withdrawal. Conversions occurring over multiple years can be handled by adjusting the future changes entries.
2) Additions to the Roth IRA
Select the Roth IRA in the asset section. If the client does not have an existing Roth IRA, create one by adding a new asset with the Type or Retirement Plan, Retirement Plan Type of Roth IRA. Go to the Future Changes section to make the matching addition to the ROTH as withdrawn from the IRA. Add a new entry with the client's age for the conversion, and the conversion amount as a positive monthly amount. Add a second entry with the client's age the next year, and zero as the monthly amount to stop the addition. Conversions occurring over multiple years can be handled by adjusting the future changes entries.
3) Other Expense Offset, Required for Easy Money Only
Scheduled withdrawals occurring prior to retirement in Easy Money display as an income source available for reinvestment. To avoid the automatic reinvestment, use an Other Expense to offset the scheduled withdrawal. Add an Other Expense and add a clear description, like "Conversion Offset". Go directly to the future changes section and enter the age and the annual amount of the conversion.
Desktop Edition Note: Other Income/Expense are a single input area in the desktop edition. Enter the amount as a negative annual amount to indicate it is an expense rather than an income to offset the IRA withdrawal amount. Add an entry for the age the conversion ends with an amount of zero to stop the offsetting expense.
Example: One-time conversion of $50,000 from IRA to Roth
IRA Withdrawal: The client, age 50, is converting 50k from an IRA to a Roth IRA. Select the IRA and enter a monthly withdrawal for age 50 of (4,166.67). Enter the client's age the following year, 51, with an amount of 0 to stop with withdrawal.
Roth IRA Addition: Enter a matching addition to the Roth IRA, using a positive monthly amount of 4,166.67 , and the age the following year with the amount of 0 to stop the addition.
Easy Money Offset: For Easy Money only, enter an offsetting Other Expense for the year of the conversion as an annual amount if the conversion occurs before Ind. 1's retirement age. Use the top data input, which will populate the future changes section, or jump directly into future changes to enter the amounts. In this example, enter age 50 and the annual amount of 50,000. Next, add an entry for age 51 and the amount of 0 to stop the expense.
In the Assets section, review the client's Retirement Plans report (C10 for Ind. 1, C10a for Ind. 2 unless projected separately). Verify the scheduled withdrawal is occurring for the correct age and amount.
Next, go to the client's Roth IRA report (C11 for Ind. 1, C12 for Ind. 2). Verify the scheduled addition is occurring for the correct age and amount.
In the Appendix section, review the client's Retirement Plans report (H5 for Ind. 1, H6 for Ind. 2 unless projected separately). Verify the scheduled withdrawal is occurring for the correct age and amount.
Next, go to the client's Roth IRA report (H7 for Ind. 1, H8 for Ind. 2). Verify the scheduled addition is occurring for the correct age and amount.
Last, move out of the appendix and go to the Retirement Capital Estimate (C6). Confirm the other expense entry offset the scheduled IRA withdrawal.
Roth conversion strategies can also be modeled in TOTAL Online's powerful What-If. This is an excellent way to show the long-term impact of a conversion strategy.
Showing a conversion of $100,000 from an IRA to a Roth over five years at $20,000 per year is modeled below for an example client who is age 50 with high earned income. The data entry is the same as described above, entering a withdrawal from the IRA and an addition to the Roth IRA.
The results show the tax impact of the conversion, reducing the overall capital initially, which has a lasting effect. The conversion does not have a positive impact for the client until age 90. The client would be better served by a Roth conversion if the conversion occurred in periods of lower income, reducing the tax impact.