Valuing Roth Conversion and Recharacterization Option

Journal of Financial Planning: November 2017


Executive Summary

  • This paper explains the options provided by the tax code for Roth conversions and recharacterizations.
  • Models are presented of the after-tax value of Roth conversion strategies to the strategy of retaining funds in a TDA and withdrawing these funds in a later year.
  • Four reasonable cases illustrate how the Roth conversion and recharacterization options in the tax code could allow a taxpayer to increase the after-tax value of the funds converted to a Roth account by 5.56 percent, compared to the strategy of retaining these same funds in a tax-deferred account until later in retirement.
  • One particular case, in which the Roth conversion increased the after-tax value by 62.79 percent, reflects the situation many taxpayers face.
  • An example explains what a financial adviser should do to take advantage of the Roth conversion/recharacterization options available in the tax code.

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Retirement Savings and Income Planning