Conventional Roth conversions may be overpricing your tax liability.
For clients with $1 million or more in traditional IRA or 401(k) balances, the standard conversion calculation often overstates what you actually owe — because it ignores how the IRS defines fair market value.
The conversion tax is calculated on fair market value — not face value.
Most advisors treat the two as identical. Under the right structure, they are not. When you convert a traditional IRA to a Roth, the IRS taxes the converted amount as ordinary income — based on the fair market value of the assets being converted.
For a standard IRA holding publicly traded securities, fair market value and account balance are the same thing. But for an IRA that holds an interest in a properly structured LLC, the analysis is different. The fair market value of an LLC interest — the thing actually being converted — is determined by appraisal.
A professionally appraised LLC interest, structured with appropriate operating agreement provisions, may appraise at a meaningful discount to the LLC’s underlying asset value. That discount reduces the amount subject to ordinary income tax at conversion.
Three elements make the discount legally defensible.
The Structure
An IRA-owned LLC is established with the client as manager and the IRA as minority member — a structure the IRS expressly acknowledged in its 1996 Swanson guidance.
The Operating Agreement
Specific provisions in a professionally drafted operating agreement — transfer restrictions, redemption limitations, and control constraints — create the conditions that support a valuation discount under standard appraisal methodology.
The Appraisal
An independent, qualified business appraiser determines the fair market value of the LLC interest at the time of conversion. The discount is not assumed — it is documented, defensible, and specific to the structure.
A client converting $2,000,000 in traditional IRA assets through a properly structured IRA-LLC may convert at an appraised fair market value of $1.3M – $1.5M — reducing taxable income by $500,000–$700,000.
Actual discount ranges are determined by independent appraisal and vary by structure and operating agreement provisions.
Built on published IRS guidance and established case law.
This strategy is not novel or experimental. Its legal basis has been developed over three decades of IRS guidance and Tax Court precedent.
Appropriate for a narrow, specific client profile.
RTC coordinates the full implementation.
This strategy requires a CPA or accountant, a tax attorney, an estate planning specialist, a business appraiser, and a retirement tax strategist working from a unified plan. Our family office model provides that coordination as a single engagement.
- 01Retirement Tax Risk Analysis identifying total conversion opportunity and projected tax savings
- 02Strategy recommendation and implementation roadmap
- 03Coordination with tax counsel for LLC formation and operating agreement drafting
- 04Referral to qualified independent appraiser for LLC interest valuation at conversion
- 05Integration with your existing CPA and financial advisor throughout the process
- 06Ongoing oversight through retirement and future legislative shifts
Discount ranges are illustrative and subject to independent appraisal on a case-by-case basis. This page is for informational purposes only and does not constitute tax, legal, or investment advice. Strategy suitability depends on individual circumstances. Retirement Tax Consultants, LLC coordinates with qualified tax counsel and independent appraisers; RTC does not provide legal services or appraisal services directly.