Roth conversions are a great way for savers to protect themselves against the risk of rising taxes. In fact, the tax-free savings trend has been growing hand over fist.
Protection from future tax changes. Tax-free income in retirement. And the ability to pass the funds on to your heirs tax-free as well.
What’s not to love?
However, there are still speed bumps many savers encounter when considering a Roth conversion. And the biggest may be the conversion’s break-even point.
The break-even point of a Roth conversion is the point at which the Roth account has “earned back” the funds spent on taxes during the conversion itself.
Many savers understand the amount spent on taxes to be an investment of sorts. An investment that requires a return. And thus, “How quickly will I receive a return on that investment?” becomes a question to consider.
What savers really want to know is: “When will I break even on the additional dollars spent on taxes and IRMAA drift required to complete the Roth conversion?”
And advisors who can answer these questions quickly and with confidence are the advisors who are best positioned to grow their Roth business and client acquisition.
Earlier this spring, Stonewood Financial rolled out our Roth Done Right software, which analyzes the tax and IRMAA savings of a conversion (and helps advisors uncover the optimal conversion pattern for a client).
Last month, we rolled out a BIG enhancement.
Now, we’ve integrated a powerful break-even analysis into the report. And it makes for one of the most complete tools advisors can use to optimize Roth conversions for their clients.
I recently hosted a webinar exploring the importance of the break-even discussion in the client meeting process.
If you missed the call, don’t fret. I’m linking the recording here so you can watch:
Study Group: The Importance of Break-Even
On the webinar, I walked through the key variables that influence the break-even analysis and how to make reasonable, realistic assumptions for your clients when you’re analyzing it. You’ll learn about important considerations like tax assumptions, your client’s income picture before and after a potential Roth conversion, Tax Drift, and IRMAA Drift.
And then there is one final detail, a detail that could completely change the outcome for your clients. As mentioned earlier, an IRA dollar must eventually be taxed, either to the IRA owner through distributions or the IRA owner’s heirs as they inherit the money. So then, what tax rate do you use for the heirs? Is it the same as the IRA owner's tax rate? Can you quantify the Widow’s Penalty? Or the 10-year Tax Trap? Do we use effective or marginal tax rates?
All of these questions and more are answered in the video. It's an excellent resource for advisors looking to establish themselves as the Roth conversion experts in their market.
