Roth Conversions

[Charpress]

There are a lot of interesting things to consider when deciding to Roth or not.

Convert in 2010 and put the taxes off to the following 2 years? Yes, you can spread your payments out, but will they be at a higher rate? That is a question the client has to answer because if you make assumptions and recommendations and if tax rates are considerably higher, you could have some responsibility.

Automatically decide against a Roth because of age or because some tax software say not to? No, not necessarily. Something like 87% of people die with money still in an IRA. If leaving money to kids is anywhere close to a consideration, then you need to illustrate how much a tax-free stretch can end up being worth.

For basically a simple concept, there are so many ins and outs it becomes extremely complicated and a mine field for liability.

By the way, in my experience CPAs get this wrong most of the time. The bean-counter type of CPA cannot see past "tax deferred" and will advise against a Roth in many cases where a Roth should be advised.

 

[padthaiforlunch]

FYI - Any distributions taken with 2 years of conversion make the 2 year "tax payment deferral" option null and void and the IRS accelerates the tax due.

Perhaps. It depends upon how much they take out. If the distribution is less than the amount of regular contributions, then they won't be touching the conversion monies.

According to the IRS:

Order of distribution

1. Regular contributions.

2. Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:

a. Taxable portion (the amount required to be included in gross income because of the conversion rollover) first, and then the

b. Nontaxable portion.

3. Earnings on contributions.

 

[free2008]

Re: Roth Conversions - Missing the point

While the technical info in these posts seems pretty on the mark, most have missed the bigger question which is how to know if a ROTH is correct for the client or not.

There are something like 16+ variables to consider when attempting to analyze and compare a conversion to no conversion.

One of the most important factors is the lost opportunity cost on the taxes. Most calculators ignore this. LOC on the taxes means that once you send the taxes to the IRS, you no longer have that money on your side of the ledger. The cost of the conversion is not just the tax cost, it is the fact that in addition to the tax cost you lose all future earnings on that amount.

When you factor that in in my experience it often does not make sense to do the conversion.

I am NOT "anti" ROTH conversions by a long shot. Sometimes there are excellent compelling reasons to do them...

-the client does not need or want to take RMD'S
-the client wants to leave an account that can grow tax-free for heirs
-the client is in an estate tax situation and wants to pay the taxes now to get that amount out of his/her estate.

Another consideration is the "have your cake and eat it too" approach. Say a 65 year old client has $400,000 in their IRA. Figure out the present value of $400,000 in 20 years. Convert ONLY that amount now. Then calculate a 20 year pay-down of the balance giving them maximum income so that at the end of 20 years, the non-converted IRA balance is spent down to zero.

At age 85, their ROTH account balance is $400,000 and not only did they not run out of money, they can start over and even if they took the same withdrawals from the ROTH it will be like them getting a 25% (or more, or less depending on their future tax bracket) since the ROTH income is tax-free.

I have used this lately and the clients are very pleased with it. I couple it with an income rider with a guaranteed 8% roll-up rate for 18 years so that I can use 8% as my guaranteed future income account value. That particular product also will pay the income value out at death over 5 years so it is a pretty compelling story.

 

[padthaiforlunch]

Good points. Welcome to the forum.

 

[GNSBRG]

I have been on a couple of webinars for the Roth conversion, and it seems best if the client has NQ funds with which to pay the tax as well as no need to access the money and wants to benefit heirs with a stretch IRA.
Curious who the carrier is who offers the 8% rollup for 18 years. Is that simple or compounded?

 

[padthaiforlunch]

American Equity will go 20 years growth on their income rider. 8.5% compound, iirc. There is a fee.

 

[Charpress]

Any Roth conversion software that does not take fully into account the present and future lost opportunity values of the taxes paid together with the impact of paying taxes from within versus from outside the IRA is worthless.

I have seen a few programs geared to selling that ignore (or allow you to ignore) the impact of lost revenue on taxes paid. That is probably an E&O situation just waiting to happen.

But the larger point still in our business is not to talk people into doing a Roth or not. It is getting into a position of helping, knowing what we are talking about, and hopefully earning some business as a result.

 

[insuranceexec]

Any Roth conversion software that does not take fully into account the present and future lost opportunity values of the taxes paid together with the impact of paying taxes from within versus from outside the IRA is worthless.

I have seen a few programs geared to selling that ignore (or allow you to ignore) the impact of lost revenue on taxes paid. That is probably an E&O situation just waiting to happen.

But the larger point still in our business is not to talk people into doing a Roth or not. It is getting into a position of helping, knowing what we are talking about, and hopefully earning some business as a result.

Spoken like a true professional.

 

[lalh20]

Any Roth conversion software that does not take fully into account the present and future lost opportunity values of the taxes paid together with the impact of paying taxes from within versus from outside the IRA is worthless.

I have seen a few programs geared to selling that ignore (or allow you to ignore) the impact of lost revenue on taxes paid. That is probably an E&O situation just waiting to happen.
quote]

absolutely correct except the part about E&O. Your E&O insurance won't cover you for giving tax advice - which is what you are doing when selling on Roth information. 99% of organizations are ignoring this and the agents will be the one to pay when it all hits the fan.

This doubles the fiasco that most of you may remember with trust mills - don't give roth advice, get clients to come to your office and refer all the information to a CPA and let them give the advice, then make your sale.

Trust me, Roth conversions shouldn't be your marketing strategy for 2010. Email me if you want and I'll explain more, there's some very good articles on the topic.

 

[scagnt83]

absolutely correct except the part about E&O. Your E&O insurance won't cover you for giving tax advice - which is what you are doing when selling on Roth information. 99% of organizations are ignoring this and the agents will be the one to pay when it all hits the fan.

This doubles the fiasco that most of you may remember with trust mills - don't give roth advice, get clients to come to your office and refer all the information to a CPA and let them give the advice, then make your sale.

Trust me, Roth conversions shouldn't be your marketing strategy for 2010. Email me if you want and I'll explain more, there's some very good articles on the topic.

E&O will cover you for whatever business activities you disclose to them.
My E&O covers me for insurance/investment products as well as financial planning (which includes tax advice).
Anyone with a securities license is covered for tax advice related to the investments they sale.
Anyone with a 65 or 66 is covered for financial planning which includes tax advice if pertinent.