Funding Roth Conversions through the In Marriage QDRO®

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  • Post last modified:September 1, 2023

If you have clients worried about the rise in taxes over the next several years, you have probably started looking at which clients are eligible for a Roth IRA Conversion. Have you noticed a client that would be a good candidate for a Roth IRA conversion; however, the funds trapped inside a 401k they cannot access. Or the client makes too much money to fund a Roth IRA.

The In Marriage QDRO® is a proven tool that can gain access to the funds inside the 401k and allow you as the advisor to oversee the tax strategy of a Roth IRA conversion.

There is an income limitation as to who can make contributions to a Roth IRA. But there is not an income limitation to Roth IRA conversions. In this strategy, the employee spouse takes an agreed upon amount from the 401k and transfers it to the spouse. It initially goes into the spouse’s traditional IRA into a Roth IRA that same year or several years. If the couple has sufficient funds to pay the Roth conversion costs, then no distribution from the 401k QDRO is necessary. However, if the couple needs cash to pay for the conversion costs, then part of the 401k In Marriage QDRO® can be distributed to the spouse without the 10% penalty. They can then use the distributed funds to pay for the Roth conversion. Depending on the tax rate for the couple that particular year, it may be access to cheaper money when the 10% penalty is not applied, even if they don’t need cash.

Since there is no RMDs for Roth IRAs, this strategy, in essence, accomplishes the benefit of an RMD strategy. No RMDs when this spouse hits 70.5 years-of-age.