Article from Ed Slott and Company, LLC

When visiting the doctor, does he or she ask foundational questions to help determine your medical condition? Of course. “How are you feeling?” “Are you a smoker?” “What hurts?” Does the doctor take some basic measurements – height, weight, blood pressure? Does he listen to your heart and lungs? Most assuredly.

The doctor is establishing an overall picture of health so as to make informed medical decisions. Without such elemental knowledge, how could a proper diagnosis be made? How could “next steps” be recommended with any confidence? It is not possible to provide appropriate care or guidance simply by looking at a person. Assumptions could be a death sentence.

Who else needs to ask elemental questions? Who else needs to poke and prod to identify foundational information? Financial advisors. It is impossible to chart a path forward without a general understanding of a person’s overall financial goals and wellbeing. Probing questions are how advisors identify the suitability of certain transactions. They are how advisors can confidently make investment recommendations. Investigative inquiries uncover needs and other issues that are literally impossible to know without asking.

Yet for some reason, I keep hearing stories about financial advisors failing to address a certain topic: Roth conversions. In fact, my own parents fell victim to this financial oversight. Out of respect for their privacy I stayed out of their financial affairs. Sadly, I learned later, their previous advisor never broached the subject of Roth conversions. Partial Roth conversions, systematically implemented over a few years, coordinated with their tax advisor so as maximize tax brackets, would have been a prescription for financial health. My folks could have transitioned their IRAs from “forever taxed to never taxed.”

Alas, they missed all those years of maximum conversion tax efficiency. Yes, they can still do Roth conversions now, even though they are of RMD age, but it is a little less potent. RMDs must be taken first, and it is expected that taxes could rise in the near future.

Like a doctor administering a basic blood pressure test, a financial advisor inquiring about Roth conversions is critical. If your advisor fails to ask, then broach the topic yourself. Know that a Roth conversion is no panacea, and it is not always a good fit for every situation. But at least you can rest easy knowing you had the conversation.

I am frequently asked, “When is the cutoff when Roth conversions stop making sense?” The answer is never. There is no such end date. I don’t care how old a person is or how much money they have or what tax bracket they exist in. Simply assuming a person won’t do a Roth conversion based on any data point is borderline malpractice. Maybe a person’s supreme goal is to leave a tax-free inheritance to their heirs. If that is the ultimate objective, then tax brackets and additional tax on Roth conversions after taking an RMD be damned.

Roth conversions: have the conversation…or risk a sickly doctor/patient relationship. That is my professional “medical” opinion.

Greg Storen is a proud member of Ed Slott’s Master Elite Advisor Group for over 15 years. Ed Slott is the Nation’s leading IRA expert and guides financial advisors across the country in IRA laws.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Andy Ives and Ed Slott are not affiliated with LPL Financial. Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Copyright ©2021, Ed Slott and Company, LLC Reprinted from The Slott Report, May 03, 2021, with permission. [Article] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

 

Blog by Greg Storen, MBA – Financial Advisor, Senior Tax Professional

Learn more about Greg and the rest of the Storen Financial team here.