Retirement Tax Planning
The Premium Roth Conversion:
A Self-Funding Strategy
How writing covered calls inside a Rollover IRA can systematically fund Roth conversions — without touching principal or outside savings.
The Problem
The Hidden Tax Liability Inside Every Pre-Tax Retirement Account
A client who has diligently saved $1 million or more in a traditional 401(k) or Rollover IRA hasn't actually saved that amount — not in after-tax terms. The IRS holds a silent ownership stake in every pre-tax dollar, and beginning at age 73, it starts calling in that interest through mandatory annual distributions, whether the client needs the income or not.
Traditional Roth conversion advice tells clients to pay the tax bill from outside savings. For many, this creates a significant barrier — parting with $40,000–$60,000 in liquid savings each year is a difficult ask, even when the long-term math clearly favors it.
The RMD Problem
Many clients who would benefit most from systematic Roth conversions never start, or start too late — reaching age 73 with multi-million dollar pre-tax balances, facing RMDs that push them into the highest federal brackets and trigger Medicare IRMAA surcharges.
Inherited IRAs
Under the SECURE Act's 10-year mandatory depletion rule, most non-spouse beneficiaries must fully deplete an inherited IRA within a decade — often stacking massive distributions directly on top of their own peak earning years.
The Strategy
The Account Generates the Income
That Pays the Tax Bill
Rather than holding a passive portfolio, the account is invested in a diversified basket of equity ETFs on which covered calls are systematically written — selling the right to purchase shares at a specified price in exchange for immediate premium income that accrues tax-deferred inside the plan.
Key Benefits
Why This Approach Works
Self-Funding
A well-structured covered call program on a $1M equity portfolio can generate 4%–12% in annual option premium — $40,000 to $120,000 accruing tax-deferred inside the plan each year.
Principal Protected
Equity positions are never liquidated to fund the conversion. The underlying portfolio remains intact and continues to appreciate alongside the premium income being generated.
Tax-Free Growth
Assets moved into a Roth IRA compound permanently tax-free with no RMDs and no future tax obligation — passing to heirs without the income tax burden of a pre-tax IRA.
The account generates the income that pays the tax bill. The conversion potentially costs the client nothing out of pocket.
William Ulivieri — Cenacle Capital Management
The Mechanics
How the Conversion Is Funded
A step-by-step illustration using a 30% effective tax rate on a $1M Rollover IRA.
Step 01
Generate Premium Income
The Rollover IRA writes covered calls weekly on diversified ETFs (QQQ, IWM, EEM, SPY), generating option premium that accrues tax-deferred inside the plan throughout the year.
Step 02
Initiate the Conversion
The client and CPA request a $150,000 gross withdrawal from the qualified account at year-end, triggering ordinary income tax on the full amount.
Step 03
Premium Covers the Tax
The $45,000 tax liability (30% effective rate) is funded entirely by the option premium generated during the year. No principal is liquidated. No outside savings required.
Step 04
Roth Receives $105,000
The remaining $105,000 is contributed to a Roth IRA, where it compounds tax-free at 10% per year — with no RMDs and no future tax obligation for the client or their heirs.
The Numbers
20-Year Projection
$1M starting Rollover IRA • 30% effective tax bracket • 18% gross return inside IRA • 10% Roth return • $105,000 net annual Roth contribution
| Year | Rollover IRA Balance | Roth Balance (Tax-Free) | Combined Total |
|---|---|---|---|
| End of Year 5 | $1,214,626 | $641,036 | $1,855,662 |
| End of Year 10 | $1,705,639 | $1,673,430 | $3,379,069 |
| End of Year 15 | $2,828,958 | $3,336,111 | $6,165,069 |
| End of Year 20 | $5,398,839 | $6,013,875 | $11,412,714 |
Projections are hypothetical and for illustrative purposes only. Past performance is no guarantee of future results.
Ideal Candidates
Who This Strategy Is For
Not every client is a candidate. The approach works best where several conditions converge.
Profile 01
Pre-RMD Window (Ages 60–72)
The optimal time to execute systematic conversions is after earned income has declined but before RMDs begin at 73. Each year of inaction in this window is a year of conversion opportunity that cannot be recovered.
Profile 02
Rollover IRA or 401(k) of $500K+
The strategy requires sufficient assets to generate meaningful option premium. 100-share round lots are required to sell options. Portfolios below this threshold may need some supplemental outside funding.
Profile 03
Inherited IRA Beneficiaries
Under the SECURE Act, most non-spouse beneficiaries must fully deplete an inherited IRA within 10 years. A covered call strategy combined with a coordinated annual drawdown can substantially reduce this tax exposure.
Ready to Explore This Strategy?
The Window Is Open.
The Math Is Compelling.
For clients with meaningful qualified retirement assets, this is a planning conversation worth having. The option premium income to fund the strategy is often already there — sitting inside the account, waiting to be put to work.
William Ulivieri, Series 65, is the owner and portfolio manager at Cenacle Capital Management, LLC, a State Registered Investment Advisor located in Glenview, Illinois. Bill does not provide tax or legal advice. Past performance is no guarantee of future results. Projections shown are hypothetical and for illustrative purposes only. © 2026 Cenacle Capital Management