Welcome to another episode of the World Breakdown Podcast, where we provide practical financial strategies you can apply with your CPA, financial advisor, or with us if you’re a client. Today, we’re diving into a fascinating case study on how a Roth conversion can pave the way for multi-generational wealth.
Understanding the Case: A Business Owner’s Tax Strategy
In this case, we worked with John, a 55-year-old business owner who started his company three years ago. After navigating startup costs, he’s finally generating solid revenue but still has $400,000 in carry-forward losses. These losses present a unique tax planning opportunity that can significantly impact his future wealth.
Traditional IRA vs. Roth IRA: What’s the Difference?
Before we dive into the strategy, let’s break down the difference between a Traditional IRA and a Roth IRA:
Traditional IRA: Contributions are tax-deductible, and the money grows tax-free. However, withdrawals in retirement are taxed as income.
Roth IRA: Contributions are made with after-tax dollars, but withdrawals (including investment growth) are tax-free.
To use a farming analogy:
A Traditional IRA is like getting a tax break on seeds you plant but paying taxes on the full harvest.
A Roth IRA is like paying taxes on the seeds upfront, but the harvest is completely tax-free.
The Roth Conversion Strategy
We noticed John had $400,000 in carry-forward losses and asked if he had a Traditional IRA. Since his business is structured as an LLC, his net operating losses can be used to offset taxable income from a Roth conversion.
When you convert a Traditional IRA into a Roth IRA, the IRS treats the conversion as taxable income for that year. However, by using John’s carry-forward losses, we could convert $350,000 without him paying any income tax.
The Long-Term Financial Impact
Let’s walk through the numbers:
By executing the Roth conversion correctly, we saved John $126,000 in immediate tax liability.
Over time, that money, invested in a Roth IRA, will compound tax-free.
If John retires at 70, the Roth IRA could grow anywhere from $244,000 to $1 million based on historical market returns.
If the account remains untouched until an heir inherits it, it could grow to $8 million to $18 million, depending on how long John lives.
The $126,000 in tax savings, if compounded, could turn into $1.2 million to $2.7 million over time.
Why Financial Planning Matters
This case highlights the importance of working with a financial advisor beyond just investment management. No stock or mutual fund can outperform the return on investment from strategic financial planning.
If you’re interested in a free financial analysis, we only work with clients where we can deliver massive value. It’s a no-pressure process, so feel free to reach out!
Final Thoughts
A Roth conversion isn’t for everyone, but when executed correctly—especially in cases like John’s—it can set up tax-free multi-generational wealth.
If you want to read, watch, or listen to a more technical deep dive on Roth Conversions, here are some links to more of our content.
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