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You might want to consider doing more than one Roth conversion in a year in order to optimize your conversion strategy, providing you with a better probability of success. By doing multiple Roth conversions, you are able to wait until the following year to see which investments perform better.

Typically you have until December 31st to do a Roth conversion for the current year. Then you have until October 15th the following year to recharacterize your Roth IRA*. When applying the double Roth conversion strategy, your financial planner will strategically structure both Roth conversions with different characteristics.

*Roth recharacterizations must be decided upon at your tax filing time, which is typically April 15th, or October 15th if you file for an extension.

Transcription:

“So today we’re going to talk about our double Roth conversion strategy.

A Roth IRA is an account you put after-tax dollars into, grows tax-free and your withdrawals will come out completely tax-free when you go to pull money out later on.

One of the ways you can get money into the Roth is by doing a conversion – that’s taking money out of your traditional IRA and moving it into the Roth.

There’s trade-offs, on the positive side, once you get money into the Roth all future growth on those dollars are completely tax-free.

The trade-off, however, is that when you move the money you have to pay the taxes on the amount that you convert into the Roth IRA.

The nice thing is that you can actually undo that or process a recharacterization up until the time that you file your taxes.

So if you do the conversion in 2017, you have up until April 15th of 2018 to undo it.

So one way to really take advantage of being able to recharacterize your conversions is to implement a double conversion strategy.

So what you would do is that instead of just doing one Roth conversion you would do two.

Let’s say you’re going to be converting thirty thousand dollars, just as an example.

You would open two separate Roth IRAs, convert thirty thousand into each of those and then you’re just going to invest them differently.

One’s going to be much more conservatively invested, potentially all bonds, short-term, high-quality.

The other one you’re going to invest more aggressively, one hundred-percent stocks.

Now you’re just taking stocks and bonds that you had in your IRA anyways, separating them out into these two different accounts, then you just get to wait, see which one does better, and put back or recharacterize the one that doesn’t do as well.

So it’s basically like betting on a horse race after you already know who wins, right.

You get the benefit of waiting to see what happens in the market and then you keep the account that does better.

By doing this year-over-year you really maximize the amount that you can get into that Roth IRA.

So that’s the basics of the Roth conversion strategy.”

About the Host

Allison Alley

Financial Planner

CFP®, MSBA, AIF®

With over 12 years of financial experience, Allison Alley is committed to working with clients to help them achieve their retirement, estate, investment and tax planning needs. Prior to joining Pure Financial Advisors, Inc. Allison...