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How advisors can help clients conquer Roth conversion misconceptions . By Eric L . Reiner

Crucially , “ people don ’ t always understand the tax implications of a Roth conversion and just pick an arbitrary number ” to convert , says Christopher Fundora , director of retirement planning at Traphagen CPAs & Wealth Advisors in Oradell , N . J .

Folks hear that Roths can deliver tax-free income and they trip over themselves to convert money from traditional retirement accounts , which churn out taxable required minimum distributions starting at age 73 ( age 75 for individuals turning 74 in 2033 or later ). But they often fail to grasp that the choice between a traditional and Roth retirement account hinges largely on arbitraging their current and projected future tax rates . The knowledge gap gives advisors a golden opportunity to showcase their value with a sophisticated projection contrasting “ with conversion ” and “ without conversion ” scenarios . “ You have to do multi-year planning with the client , into RMD age , to see if you can really justify a conversion ,” says Jim Holtzman , CEO of Legend Financial Advisors in Pittsburgh .

Gaining Trust

Advisors can use the projection to highlight important dynamics few people would think to consider , such as the impact of their required distributions on the taxable percentage of Social Security benefits . With high-income retirees , advisors can show their clients how RMDs could lead to larger premiums for Medicare Parts B and D because of the income-related monthly adjustment amount , or subject portfolio income to the 3.8 % net investment income tax .

It ’ s also important to discuss with affluent clients a potential conversion ’ s estate planning implications . “ If the client is financially set , it might be worth doing a conversion because they can afford to and their heirs can inherit the Roth and let it grow tax-free for 10 years . Now you ’ re looking at a multi-generational projection that extends the horizon 10 years past the client ’ s expected date of death ,” Holtzman says .

“ When you start making these points to a prospect , they realize , ‘ Oh , wow , there ’ s a lot to this ,’” he says . “ And I give them good stories about when it made sense [ for a client to convert ], when it made sense not to , and the in-between side of it , where it ’ s not obvious one way or the other and you take a leap of faith on some of the assumptions and maybe convert some , just to hedge bets on tax rates or changes in their situation .”

Maladroit Execution

Procedural goofs are frequent , practitioners say . For instance , without your intervention , someone might miss the December 31 , 2024 , deadline for a 2024 Roth conversion , erroneously thinking they have until April 15 , 2025 , the due date for 2024 IRA contributions . The nefarious pro rata rule ensnares many unsus-

DECEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 51