For certified public accountants (CPAs) working with clients who hold substantial qualified retirement accounts, the math of required minimum distributions (RMDs) can be quietly alarming. A client who’s diligently saved $1 million or more in a traditional or rollover individual retirement account (IRA) or 401(k) hasn’t actually saved that amount—at least not in after-tax terms. Instead, 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.
The result is a tax liability that compounds alongside the account balance, often arriving when Social Security income, pension payments, and investment distributions may already be pushing clients into higher brackets than anticipated. For clients who inherited IRAs, the situation is more acute because of the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s 10-year mandatory depletion rule, which compresses what was once a multidecade tax deferral into a single decade, often stacking distributions directly on top of peak earning years.
The conventional response to these pressures is a Roth conversion: pay taxes now at today’s income tax rates and move assets into a permanently tax-free environment. The strategy is well understood in principle. What’s less well understood, however, is an approach that makes the conversion largely self-funding by using income the qualified account can easily generate via an options strategy, known as “writing covered call options,” that I feel is a conservative but active strategy that could greatly benefit a portion of a CPA’s client base. Here’s what CPAs need to consider.
Traditional Roth conversions allow clients to pay the tax bill from outside savings (typically a taxable brokerage account or cash reserves). For many clients, this creates a psychological and financial barrier. Parting with liquid savings each year to fund a tax bill is a difficult ask, even when the long-term math clearly favors doing so.
The result is that many clients who would benefit most from systematic Roth conversions never start, or they start too late. They reach age 73 with multimillion-dollar pre-tax balances, facing RMDs that push them into the highest federal brackets, trigger Medicare surcharges, and create concentrated taxable income events for their heirs.
The covered call strategy begins with a structural shift in how the qualified account is managed. Rather than holding a passive portfolio of low-cost index funds, the account is invested in a diversified basket of equity exchange traded funds (ETFs) on which the investment manager systematically writes covered calls, selling the right to purchase shares at a specified price and date in exchange for immediate premium income.
This isn’t an unusual strategy. In fact, covered call writing is one of the most conservative and time-tested options strategies available, and it’s permitted inside traditional and rollover IRAs and self-directed 401(k) plans that have received appropriate options approval from their custodian.
What makes my covered call strategy distinctive from others is the location of the underlying assets. When covered calls are written in a taxable account, the premium income is taxed immediately—as short-term capital gains or ordinary income—at the investor’s marginal rate. Written inside a traditional or rollover IRA or self-directed 401(k), that same dollar of premium accrues and compounds tax-deferred within the account. Over time, the difference in the tax-deferred account’s growth trajectory is substantial.
A well-structured covered call program on a $1 million equity portfolio can realistically generate an additional 4% to 12% in annual option premium income—meaning $40,000 to $120,000 in premium accruing tax-deferred inside the account each year, alongside whatever the underlying equities appreciate.
With the covered call structure in place, the annual Roth conversion follows a straightforward sequence. Consider this example using a 30% effective tax rate:
As you can see from this example, the client’s underlying equity portfolio is never touched. Because the gross returns of the plan (8% equity, plus fixed-income appreciation, plus 4% to 12% annual option premium) can exceed the $150,000 annual withdrawal on a $1 million starting balance, the portfolio balance continues to grow over time even as conversions are executed annually.
This is a counterintuitive but important feature of the strategy: The account doesn’t deplete in the way a normal standard Roth conversion scenario might suggest. However, there are a few caveats:
It’s important to know that not every client is a candidate for this approach. The strategy works best where several conditions converge:
The Roth conversion is a durable tax planning strategy, offering a rare opportunity to pay a known tax liability today in exchange for eliminating an uncertain and potentially larger tax liability in the future. What my covered call approach adds to it is a self-funding mechanism that removes the primary obstacle to execution: The need to draw on outside savings to pay the Roth conversion tax each year.
As CPAs, you’re the first to see a client’s growing pre-tax balance, anticipate the RMD trajectory, or recognize when the 10-year inherited IRA clock has started running. That awareness—and the willingness to surface it as a planning conversation—is often the catalyst that sets the strategy in motion.
For CPAs working with clients who hold meaningful qualified retirement assets, this is a planning conversation worth having. The window is open, the math is compelling, and the potential covered call premium income to fund the strategy is often already there, sitting inside the account, waiting to be put to work.
