Roth IRA conversion
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There seems to be no clear cut answer if and when this is beneficial ? Any opinions
It seems the break-even point is between 10-12 years. Wouldn’t recommend it for clients aged 65 or above, depending on the situation of course. If the market is flat for the next 10-15 years then there really wouldn’t be much, if any benefit. But who’s to say?
That is kind of my point… It seems to be a crap shoot, based on what the market will return… Can’t seem to justify it.
Most things in our business are a crap shoot depending on what the market does, aren’t they?
I think there are a few benefits beyond the breakeven. No RMDs. Some clients have enough in pensions and SS that they really don't want to take an RMD. And since there are no RMD's they'll more than likely be able to pass more cash on to their benes. The benes have the same options as with a Traditional IRA, but it's not as big a deal to take the lump sum out all at one time because most of the time there will be no tax bill on the distribution. Or they can stretch it, like they should, and get tax free income for themselves. If you're just looking at cash flow break even then it might not be worth it. If you're looking beyond that, it could be huge.I have tried to talk to clients about the Roth conversion but it feels like a waste of time. Poeple are more concerned about taxes this year than in 20 years. By the time people really start thinking about tax issues the IRA is 6 figures and the tax hit would be to big.
Social Security was supposed to be tax free at one time, now up to 85% is taxable to a couple just making $44,000. I could easily see the same thing happening to Roth IRA's in the future as well. (Tax free if your income is under $44,00 or some other ridiculously low amount). Just like the estate tax taxes already taxed income, the government would have no moral objection to taxing Roths.
StokThree main factors:
1)Current vs. Future Tax Brackets 2) RMD's 3) Money to pay the taxes 1) To some extent, it can be a math equation. Will taxes be higher now or in the future? 2)Is this money that will be needed? If it is not, a Roth can give decades of extra tax free growth. 3) A Roth will ALWAYS be better if the money used to pay the taxes is not money that otherwise would be invested.I didn’t realize the new rules, until a client of mine pointed it out,
"The law includes a special rule for conversions that occur in 2010. For that year only, unless you elect otherwise, income from a conversion will not be reported in 2010, but instead will be reported in two equal installments in 2011 and 2012. The income will be accelerated, however, to the extent you take withdrawals before 2012."I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
[quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.[/quote]
If it’s in a Roth, the growth will come out tax-free. So if you believe that taxes are going to be higher, then the benefit is paying less tax now on the income and NOT paying any tax when you take the money out.
Also, assuming you have approximately $1.2 million in multiple (I think I read that right) IRAs, you can spread that $400k gain over a few years. In addition, you are technically withdrawing the money when you convert, so you can actually take out the 400k to pay the taxes you owe.
Since we know you are fairly new at Jones, it is unlikely that you are increasing too terribly much the income tax you currently pay.
Now, at your age it might be a bad idea. But your reasoning is flawed.
You're a financial advisor and you can't figure out reasons why a Roth conversion can make sense?I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
You're a financial advisor and you can't figure out reasons why a Roth conversion can make sense?[/quote][quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
He's a new Jones broker.
You're a financial advisor and you can't figure out reasons why a Roth conversion can make sense?[/quote][quote=anonymous][quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
He's a new Jones broker.
[/quote] Exactly. When I was in my first year or so at Jones I thought Bond Fund of America was a diversified bond holding. I also thought laddering Principal, Prudential and CIT bonds was safe. Talk about scary. Where was FSD when I was making those moves ?
[quote=mlgone]ok I get the Roth argument…but isn’t anyone worried that the gov’t will repeal the tax free growth in 10 years when we are a big mess debt wise? I would be worried? I know there would be a revolt but do we trust the tax status to the future?[/quote]
I don’t think the politicians are that imaginative. More likely they would establish rules that only people who are on welfare can contribute to a Roth, but i fyou already have one, you are ok.
[quote=iceco1d]
[quote=Moraen]
[quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.[/quote]
If it’s in a Roth, the growth will come out tax-free. So if you believe that taxes are going to be higher, then the benefit is paying less tax now on the income and NOT paying any tax when you take the money out.
Also, assuming you have approximately $1.2 million in multiple (I think I read that right) IRAs, you can spread that $400k gain over a few years. In addition, you are technically withdrawing the money when you convert, so you can actually take out the 400k to pay the taxes you owe.
Since we know you are fairly new at Jones, it is unlikely that you are increasing too terribly much the income tax you currently pay.
Now, at your age it might be a bad idea. But your reasoning is flawed.
[/quote]
If someone is under 59 1/2, and they pull money out to pay the taxes they owe for the conversion, they will the 10% tax penalty on the amount withdrawn.
[/quote]
Right. So, $40k in his case. But it doesn’t really make much sense for him anyway, since he’s so old.
Hold on! If you use IRA money to pay income tax on the Roth conversion, you pay income tax plus a 10% penalty. So you don’t have that money to invest. So you are paying tax and a penalty; or taking cash from somewhere else, and paying tax. I still believe that you are better off growing the money in an IRA and living with the tax consequences. Otherwise, you are paying a bunch of tax with expensive dollars now, losing the growth potential of that money, all for the possibility of having lower taxes when you retire. For a 50+ year old with a seven figure plus IRA, I think it’s a bad choice. I’m not being argumentative. I really don’t see the value.
[quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
You’re a financial advisor and you can’t figure out reasons why a Roth conversion can make sense?[/quote]
Then show me. Assume an IRA valued at 1.5 million, with a cost basis of 250,000. Age 55. 28% tax rate. How much to convert? The time value of that convert money if invested with an 8% annual return? The present value of the tax savings of a 5% withdrawl taken starting at 65 if the conversion is made? Go ahead and do the figures and prove to me that a conversion is in my best interest.
[quote=anonymous] [quote=52new]I have a couple problems with Roth conversions. The first one is, what is the benefit to the FA? I know that is self centered, but we all need to pay the bills. The other question is what is the real benefit to the client? If I were to convert my own IRA’s to Roth’s, it would cost me about $400k. Even if I had that cash lying around, I believe that the value of that cash(if invested) would grow considerably greater than the cost of taxes in the long run. Particularly in the face of the high probability of higher taxes in the future. So I’d pay $400k in taxes now for the possible future benefit of lower taxes? I just don’t see that as a wise decision.
You’re a financial advisor and you can’t figure out reasons why a Roth conversion can make sense?[/quote]
Then show me. Assume an IRA valued at 1.5 million, with a cost basis of 250,000. Age 55. 28% tax rate. How much to convert? The time value of that convert money if invested with an 8% annual return? The present value of the tax savings of a 5% withdrawl taken starting at 65 if the conversion is made? Go ahead and do the figures and prove to me that a conversion is in my best interest.[/quote]
Why the hell would the cost basis matter in an IRA?
You said you weren’t sold on them. For you, it might not make sense. For people half your age, it might.
A successful financial advisor looks at his clients’ needs from their perspective, not his.