Converting Your IRAs into Multi Roth IRAs

Converting IRA's to Roth IRA's could be a great long-term wealth management investment strategy for investors. Most likely, investors are unaware or have no idea whether a Roth conversion is even suitable for themselves. I was looking over my investments and an idea popped into my mind. I thought, what if I split a Traditional IRA into (2) Roth IRA‘s and why would you want to do that? Well, suppose you had $100,000 in your Traditional IRA, theoretically you could put $50,000 in a bond Roth IRA account and establish another Roth IRA account and put the remaining $50,000 into a equity portfolio in February. So you would have (2) Roth IRA's one would Fixed and the other would be an Equity portfolio. Now lets say the during the year your Roth IRA equity portfolio loses 50% ($25,000) and the Roth IRA Bond portfolio made 10% ($55,000) my total Roth IRA account would be $80,000 at the end of the year, a loss of $20,000! Plus, I also have to consider $35,000 tax liability I would owe to Uncle Sam if I had converted everything into a Roth IRA. That's a $20,000 loss plus an additional $35,000 for taxes all in the same year, that's hard to swallow even though you know that in the long-term its going be beneficial for your future retirement. Now on the conversion process and you created (2) Roth IRA buckets.

The investor would establish a equity portfolio with $50,000 and another Roth IRA bucket of $50,000 all in a bond portfolio. Let's assume that the equity portfolio had a negative performance of 50% to value of $25,000 and again the Roth IRA bond portfolio has a 10% gain. By separating your Traditional IRA dollars into different buckets you can now choose which portfolio you want to re-characterize. You could now choose to convert the Roth IRA equity portfolio that loss value. The reasoning for this strategy is that instead of taking the $50,000 equity portfolio re-characterization, the investor could possibly convert only the loss value of the equity portfolio. This would allow the investor only be hit with a $25,000 portfolio re- instead of a $50,000. Now if you had converted all $100,000 into (1) Roth IRA, the investor would not have had the choice, the investments would have been all commingled. The further reward is that you can re-characterize back into the Roth IRA within 30 days and as long as the complete turn-around conversion does not occur in the same calendar year.

Now lets look at a different scenario, the investor has $100,000 in a Traditional IRA, he/she split's the money into (2) Roth IRA portfolios, an equity and a fixed account with $50,000 each. The investment performance on the equity portfolio is 50% with an ending value of $75,000. The investor now benefits because he re-characterized the Traditional IRA at $50,000, but the investment has increased to $75,000. This is a $25,000 value increase that the investor benefits with not just the increase in value of the equity portfolio, but the benefit that they do not have to be subject to the extra $25,000 re-characterization process. When an investor follows this approach, it's a strategy that we would call an asset allocation approach. My recommendation before you go ahead and follow this investment strategy, talk to your financial advisor before you make any final decisions!

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