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Answering Roth Conversion Questions In A Down Market
Here is a quick guide to client conversations about Roth IRA conversions . By Paul R . Samuelson
SHReWD InveSToRS look foR oppoRTunITIeS no matter how bad the economic outlook . With their investments down from the glorious highs of only a few months ago , some clients ( particularly those hovering around retirement ) may be seeking advice on Roth individual retirement account ( IRA ) conversions . of course , no situation is the same , and advice must account for all the variables for each client and their family . Still , Roth conversions are among the transactions advisors need to consider in their quest to minimize taxes and maximize retirement income .
Here is my quick guide to client conversations about Roth IRA conversions . These are rules of thumb . You need sophisticated financial planning and tax calculation software to provide the best advice .
What are the short- and long-term benefits of Roth conversions ?
A Roth conversion involves liquidating assets in a taxadvantaged account like a traditional IRA or 401 ( k ), paying taxes on the withdrawal , and then funding a Roth IRA . So , in the short run , investors will pay taxes ( more on that later ).
The Roth IRA offers these benefits :
• Investors don ’ t pay taxes on future withdrawals ( making Roths a nice rainy day fund ).
• There are no minimum required distributions for Roth IRAs as there are for traditional IRAs and 401 ( k ) s . RMDs can drive up taxes for people age 72 and older .
• Roth IRA assets can pass tax-free to heirs ( rules apply , of course ).
Under what circumstances should investors ( and their financial advisors ) consider a Roth IRA conversion ?
Many investors benefit from conversions under these conditions :
• When they are just entering retirement .
• When they haven ’ t filed yet for Social Security benefits .
• When they are still years away from having to take RMDs ( now starting when they are 72 ).
Describe further those investors for whom Roth conversions make the most sense .
Such investors have at least moderate-size IRAs and brokerage accounts and don ’ t foresee needing all their assets to pay day-to-day expenses in retirement . They have annuities or pensions and delayed Social Security files to optimize their benefits .
Married couples with a significant age gap may also be good candidates . When one spouse — assumed to be the older one — passes , the widowed spouse will have
september 2022 | financial advisor magazine | 55