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The Financial Advisor’sRoth ConversionHandbook
Contents
Introduction 1
Why Should I Consider Roth Conversions for My Clients? 2
Roth Conversions During a Down Market 3
The CARES Act 4
The SECURE Act 5 How Much Should My Client Convert to a Roth? 6
Income InSight® and Roth Conversion Strategies 8
Tax Clarity® and Roth Conversion Strategies 10
Comparing Roth Conversions in Tax Clarity and Income InSight 11 Communicating the Benefits of Roth Conversions With Clients 13 How to Use Roth Conversions in Your Marketing Strategy 14 We Can Help 16
1
Introduction
On March 11, 2020, the United States dipped into a bear market. Right
now, most clients are probably experiencing losses in their portfolios,
and some may be wondering if they will have to postpone their
retirement, or even “un-retire.” To help financial advisors understand
the opportunities in the current economy and to improve their ability
to meet their clients’ changing needs, we’ve created this guide.
Roth conversions are going to be particularly valuable as markets
recover, because the funds will recover tax-free, and you can spread
out the tax liability more evenly throughout retirement. This guide
will outline everything you need to know about Roth conversions and
how they can make a significant difference when it comes to your
clients’ retirement strategies.
“Right now, mostclients are probablyexperiencing losses in their portfolios...”
2
Why Should I ConsiderRoth Conversions for My Clients?
Many financial advisors know taxes have a significant impact on
their clients’ retirement strategies but fail to address the topic out of
uncertainty surrounding compliance issues. However, no retirement
strategy is complete without first considering the tax implications of
that strategy. One tax technique that can be especially beneficial to
many mass affluent retirees is the Roth conversion. Converting part
of a traditional IRA into a Roth IRA can have significant long-term tax
benefits.
3
Many advisors wait until the end of the year to do Roth conversions
in order to make sure that the client isn’t accidentally bumped into a
higher tax bracket or paying a Medicare premium based on income
that arrives late in the year.
However, now that we’re in a down market, if we harvest tax losses
early in the year, then we know we are unlikely to have any net capital
gains on the return at the end of the year. Advisors can do those
Roth conversions earlier in the year. That’s advantageous for a few
reasons. Any bounce back comes tax free, and it can reduce a future
tax burden because of high required minimum distributions (RMDs)
from IRAs.
Roth ConversionsDuring a Down Market
4
The CARES Act
IRA owners who would otherwise be subject to RMDs can
forego making those distributions in 2020 in accordance with
the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The option to skip the RMD applies to “regular” RMDs, initial
RMDs for people who turned 70½ in 2019 but decided to forego
their initial RMD until tax year 2020, and inherited IRAs.
The initial RMD would need to have been taken by April 1, while
the regular RMD for 2020 would have needed to be taken by
December 31. If the initial RMD was taken within the past 60
days, it could be rolled over into an IRA as an indirect rollover,
accomplishing the same result as skipping it. Moreover, if the
recipient of an RMD that occurred in 2020 is diagnosed with
COVID-19 or was impacted by COVID-19 (guidance will likely be
forthcoming), the RMD can be paid back to the IRA any time
within the subsequent three years.
For clients who don’t need either their regular RMD or the RMD
from an inherited IRA, consider doing a Roth conversion. For
the traditional IRA, you could convert the entire RMD amount,
or likely better, only the amount that keeps the client in a key tax
bracket. Although you can’t directly convert the inherited IRA
RMD to a Roth, by not taking it, the client will have additional
room in their current tax bracket, which may make a conversion
from their own IRA more desirable.
5
One of the biggest changes created by the Setting Every Community
Up for Retirement Enhancement Act (SECURE Act) is the increased
RMD age to 72, but only for people born on or after July 1, 1949. If a
client turned 70½ last year, they
are still on the old RMD schedule.
Those who turn 70½ prior to July
will get an extra year of deferral,
and those born in the second
half of the year will get an extra
two years, creating an additional
window for Roth conversions.
Roth IRAs don’t have required
minimum distributions. So, when
you do that Roth conversion, that
money is allowed to compound
over the rest of the client’s lifetime, and the majority of the assets
that are left behind to the beneficiaries are tax-free Roth IRA assets.
[To help financial advisors understand the changes brought about by the SECURE
Act and to improve their ability to meet their clients’ changing needs, we’ve
created a free guide, which also features feedback from professionals across
the financial services industry. Download “Inside the SECURE Act: For Financial
Advisors and Your Clients.”]
The SECURE Act
SECURE
Act
6
The 2017 Tax Cuts and Jobs Act significantly lowered marginal income
tax rates for most people, and many advisors are now evaluating how
much should be converted to a Roth. It’s important to consider not
only the tax bracket the client is in today and the starting points of
adjacent tax brackets, but also the client’s, or in some cases, their
beneficiaries’ tax bracket in the future.
It is most common to consider Roth conversions when a client has
significant room before the edge of a tax bracket. For example, a
client in the middle of the 12% tax bracket may want to consider
converting enough IRA to Roth IRA to fill the 12% bracket, thereby
avoiding any withdrawals being taxed at 22%. Because the jump from
12% to 22% is so significant, it’s unlikely a client would want to convert
his or her entire IRA.
How Much Should My ClientConvert to a Roth?
7
Quantifying the single-year impact of various conversion strategies
enables the client to make an educated decision about the costs of
a conversion and avoid potential pitfalls like entering a new bracket,
creating Social Security tax, or creating unnecessary Medicare expenses.
If the client is within two years of enrolling in Medicare or already over
age 65, then it is worth considering conversions to the point the client
would pay additional Medicare Part B and Part D surcharges, which
are not calculated as tax directly but are based on modified adjusted
gross income. Because Medicare Part B and Part D premiums are
based on modified adjusted gross income, you may want to avoid
conversions that will bump up their income and force them to pay
more in premiums.
It’s also important to take into consideration the lifetime impact of the
conversion. For example, the standard deduction for a
couple filing jointly in 2019 was $24,400,
and there is an extra deduction of
$2,600 if both are over age 65.
This couple could have about
$800,000 of ordinary income over
a 30-year retirement without paying
any tax at all. If the couple has pensions,
the amount that could be withdrawn tax free
over a lifetime from the IRA would be reduced,
but it could still be significant.
8
Income InSight makes creating Roth conversions easy by offering a
multi-year Tax Map that shows key opportunities to convert and the
impact a Roth conversion has on an overall retirement strategy.
Most people follow the traditional retirement income pattern: taking
Social Security as soon as possible, using non-IRA money for as long
as possible, and tapping into IRA money when the non-qualified
money runs out or they are forced to because of RMDs. If they have
Roth money, they use it last, if at all. However, pushing money from
a traditional IRA or 401(k) directly into a Roth IRA can have some
significant tax benefits. The client will pay income tax as of the date
of the conversion, but once it’s in the Roth, it will grow tax free, and
future withdrawals will be tax-free (under current tax law). Roth
conversions are different than Roth contributions in that your clients
can do them in any year, regardless of income and whether they’re
working, and there is no contribution limit. Use Income InSight to
navigate your Roth conversion strategy conversations with clients.
Income InSight®and Roth Conversion Strategies
Income By SourcePlan - EverthingIsFine
150k
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0k
2019
2020
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Katie’s RothKyle’s Roth Katie’s RiBKatie’s WiB/MothersFathers Kyle’s RiB Spendable 8
There are a variety of different conversion patterns to consider. You
could harvest to the top of the 12% bracket, to a Medicare premium
surcharge threshold, to the top of the 24% bracket, or to the lifetime
effective rate. In the last case, you would only convert until your client
hit an effective marginal rate that is higher than what they would
have paid on average each year had they followed the traditional
harvesting pattern. How do you do that?
• Identify the optimal Social Security claiming strategy
• Generate annual Tax Maps
• Identify the average lifetime effective tax rate from the base case
• Annually convert until an effective marginal rate is reached
that is higher than the effective tax rate from the base case
Income InSight will automatically generate all of this for you. From
the report page:
1. Click on the plan tab on the right-hand side of the page.
2. Select the “Change Harvesting Pattern” button.
3. Select the harvesting pattern you’d like to demonstrate, and
click save.
4. Compare the harvesting strategy against portfolio longevity,
income floor and estate values in the “Base Case” under
normal and stressed economic scenarios.
9
10
As with any financial decision, there are a number of things to
consider prior to making a Roth conversion, and a “best time” to do
so is difficult to determine. That said, from a Tax Clarity standpoint,
a Roth conversion made when the effective marginal rate is minimal
would be best.
Recall that a Roth conversion provides the ability to move money out
of a traditional IRA and pay taxes on that distribution at the existing
federal and state rates at the time of the conversion. Once made,
the funds will appreciate tax-free and distributions are not ultimately
taxed. Tax Clarity graphically indicates where the next dollar harvested
from ordinary income would have a minimal effective marginal rate,
and thus an opportunity for a Roth conversion.
Tax Clarity®and Roth Conversion Strategies
60%
40%
20%
0%
$150,000$140,000$130,000$120,000$110,000$100,000$90,000$80,000$70,000$60,000$50,000$40,000$30,000$20,000$10,000$0
Rate on next dollar
of Ordinary Income
$55,000 @ 59.8%
Base EMR Regular Tax BracketsChange EMR
Sour ce : Ta x C lari t y
11
Income InSight is designed for future-focused income planning.
As a result, it involves more client financial data. It also involves
some modeling assumptions and requires expectations to be made
regarding the future. The modeling includes sources of income,
portfolio (qualified and non-qualified) information, risk assessment
questions, tax data and more to develop a base case for income
planning. That information can then be stress-tested under various
assumptions for the future. Asset harvesting, such as the timing
of the Roth conversions, can also be modeled for discussion with
the client. In total, Income InSight is a comprehensive planning
mechanism for those looking to create an income model for their
clients in or approaching retirement. In short, Income InSight helps
you show clients the lifetime impact value that’s delivered by doing
a Roth conversion.
Tax Clarity helps you identify how much you can convert to a Roth.
The software is designed to consider current-year, factual tax data
from the client tax returns to find the effective marginal tax rate, or
tax on the next dollar of income, paid by the client. It provides a more
granular data analysis into the return while allowing for comparative
scenarios to be calculated against the base case. Those scenarios can
calculate the impact of current year Roth conversions.
Comparing Roth Conversionsin Tax Clarity and Income InSight
• Holistic
• Focused income
planning for the future
• Assessments of income sources
(Social Security Timing,
OI, SSBI/QBT, pensions, etc.)
• Incorporation of client portfolios
(Q, NQ, Roth, JT Ten, etc.)
• Stress test functionality
(i.e., long-term care, early death,
down market)
• Current year Tax Map
• Account harvesting retirement analysis
• Modular – likely used to
supplement your existing
financial planning software
• Annual tax assessments
• Simplicity – based on factual
tax data inputs
• Detail of data inputs and outputs
• Comparative scenario analysis
• Identification of marginal tax
rates and Medicare thresholds
• Ordinary income and
capital gains Tax Maps
12
13
Determining which income streams
to use at certain points in retirement
can be incredibly complicated
for the average American. Your
clients might not realize that
each decision made about
their retirement plan can impact
other areas leading to potentially significant tax inefficiency in their
retirement strategy. They also are probably unaware of how beneficial
a Roth conversion could be to their overall retirement strategy. It’s
important to remind your clients:
• Roth conversions can be especially advantageous because
the growth comes back tax-free.
• Doing Roth conversions can spread out the tax liability earlier
in retirement.
• Right now, there are no required minimum distributions
under current rules for Roth IRAs, so it’s a good time to
consider accelerating off Roth IRA and Roth conversions.
It can be helpful for clients to see the difference a Roth conversion
can make. Tax Clarity displays an easy-to-understand Tax Map graphic
illustration to help your clients visualize their tax landscape. Income
InSight shows the impact a Roth conversion can have on a client’s
overall retirement strategy.
Communicating the Benefitsof Roth Conversions With Clients
14
Creating and executing a marketing strategy is a key component for
the success of your business. In this era of constant communication
and instant notification, marketing is more important than ever before.
Key messages are a critical component of your marketing strategy.
Use them to communicate the points you consistently want to make
to your audience. Your key messages should be targeted to your
audience. You can find several examples in our marketing eBook for
financial advisors.
How to Use Roth Conversionsin Your Marketing Strategy
14
Include information about Roth conversions in your key messages.
A well-crafted message will highlight your unique benefits, target
your audience, support your goal, and often include a call to action.
Communicate about the benefits of Roth conversions, and how you
can help clients and prospects create more tax-efficient retirement
strategies on your website, blog, newsletter, emails, and social media.
Publish original content positioning how Roth conversions are
beneficial and why you specifically can help them take advantage of
this opportunity. Remember to include a call to action – what you
want your clients and prospects to do. Do you want them to watch
your video about Roth conversions? Schedule a meeting with you?
The possibilities are endless.
Plus, we’ve created a new client-facing video series about taxes in
retirement that includes helpful information about Roth conversions.
This video series is exclusively available to our Tax Clarity subscribers
and makes it easy for you to offer educational webinars to clients
and prospects and to show how you can help them avoid tricky tax
situations. The video series is a part of our new marketing kit that
includes downloads, templates and videos to help you communicate
with clients and prospects. Not a Tax Clarity subscriber? Subscribe
now!
15
16
Covisum® creates software solutions, practice management and
marketing resources to help advisors and financial institutions grow
and improve lives through better retirement decisions. With our
proven process, advisors are able to streamline their practices, offer
actionable insights and utilize successful marketing tactics.
When you subscribe to our software solutions, we’ll connect you
with a customer success coach to help you get the most out of
your subscription, including access to our expert support team. Our
support team will train you on how to use the tools and resources,
and they are here for you, as long as you’re a subscriber, to help with
case questions and to coach you on how to communicate your value
based on the reports.
Whether you’re tackling Roth conversions or other retirement
income strategies, the right solutions can make all the difference for
your clients. Take a 10-day free trial and see how Covisum software
solutions can help you grow.
We Can Help
About Covisum
Covisum is a financial tech company that powers some of the nation’s
largest financial planning institutions and serves more than 20,000
financial advisors. We provide software solutions that help advisors grow.
With Covisum, you can count on expert support, actionable client reports,
and growth-oriented practice management and marketing resources that
align with your subscription to help you attract the right prospects,
retain clients, and grow your business.
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