How a Piecemeal Internal Roth Conversion (PIRC) Could Save Your Retirement

The Piecemeal Internal Roth Conversion (PIRC) may be indispensable to your retirement plan.

There are two massive risks that could waylay your retirement journey and prevent you from living a happy and stress free retirement. The first is tax rate risk, the risk that tax rates in the future will be dramatically higher, and the second is longevity risk, where you run out of money before you die.

Historically, financial planners have been decent at mitigating either one or the other of those risks but rarely good at mitigating both.

If you’re mitigating tax rate risk, you are executing a series of Roth conversions in a way that stretches out your tax liability over time but quickly enough that you get it done before tax rates go up for good. You should really try to get your financial house in order before 2030 if possible.

Dealing with longevity risk is fairly simple and involves accumulating more money in your retirement portfolio but this can be a challenge for most people. The 4% Rule has fallen out of favor in recent times and that means using your stock market portfolio to fund your lifestyle needs has become much more expensive.

The other option is to offload that risk to companies that deal in mitigating that risk but they typically come with a few downsides. A fixed index annuity is another option that people have traditionally used to mitigate longevity risk.

The problem with the traditional approach that financial advisors use to mitigate longevity risk is they typically do it to the exclusion of mitigating tax rate risk. 99% of advisors implement a fixed index annuity within the tax-deferred bucket and once you begin receiving that income it is impossible to receive that income in any other way.

If you draw a guaranteed stream of income via an annuity in your tax-deferred bucket, the whole purpose can be thwarted if tax rates go up. If tax rates double in the future and you are relying on that income, you will have half as much money as you expected and will have to spend down your other stock market assets to compensate.

The second issue is that the money will count as provisional income and cause social security taxation, compounding the problem and requiring more money to come from your stock market portfolio. Combined, these problems can lead to running out of money 7 to 10 years faster.

Many companies allow you to do a Roth conversion prior to drawing against the annuity but they usually require you to convert the entire dollar amount in the same year. This can result in most of that money being taxed at your highest marginal tax bracket.

There are only a few companies that allow you to do a Piecemeal Internal Roth Conversion where you can do those conversions over whatever timeframe your financial plan calls for.

By getting the conversion done before tax rates go up for good, you have insulated your guaranteed stream of lifetime income from tax rate risk and when coupled with other streams of tax-free income, this can cover your lifestyle needs in a guaranteed way for the rest of your life.

The traditional approach to mitigating longevity risk permanently exposes you to tax rate risk. Insurance companies and advisors have not been historically interested in mitigating both types of risk and you need to find an annuity company that offers a Piecemeal Internal Roth Conversion feature if you want to find the right solution.