Commercials Are Abundant for Roth Conversions — Watch Out!

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' weekly contribution through IB blogs will help you sift through the noise and give you some perspective. Read Full Bio

Taxes are now done! What’s next? Roth IRA Conversions.

That’s the big thing this year so it seems…. Before 2010, only individuals with modified adjusted gross incomes of $100,000 or less could convert amounts in their traditional IRA to a Roth IRA. However, beginning in 2010, the $100,000 AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated.

At first, I could not believe the amount of commercials on the radio and in magazines touting why “you need to consider a Roth IRA conversion.” Roth IRA conversions are tricky, often require a complicated analysis and may require a detailed execution strategy. Subsequently, there’s a small portion of the professional advisory universe capable of giving advice on these matters. Secondly, if your future income tax rate is going to be lower than your current tax rate, then a conversion rarely makes sense. While there are a handful of other specific issues to consider such as estate planning, gifting, retirement withdrawal needs, and your specific goals, but either way, there’s really also only a small universe of people that a Roth Conversion might make sense for. All in, not nearly worth all the advertising I’m seeing for it.

And then it hit me: A number of these commercials are designed less to advise you on a Roth conversion and more about convincing you that you might have a problem and that they can solve it for you, ideally after you hired them. After you hired or bought something from them, whether you needed the service or not, they win.

The decision to convert will be specific to your situation. Here are some considerations as you process this strategy.

  • What is your estimate of future tax rates in the next few years? When tax rates are going down, the conversion makes little sense; when rates are going up, the conversion makes sense
  • Will you actually need the IRA funds to live off of in retirement?
  • Do you wish to leave assets to your children or other heirs?

  • How will you pay the taxes due on any conversion?
  • Are you comfortable with more paper work, more tax filings, and more tracking?
  • Will you be in a taxable estate in the future? This is very difficult to calculate because the estate tax is a constant moving target.
  • How old are you? Do you have time on your side to recover the taxes paid due to the much longer time value of money calculation in favor of younger tax payers?
  • … among other minutia.

The decision to convert is not a simple one because many factors need to be considered. In order for me to do this analysis for my clients, I usually need a current net worth, income projection, tax projection, cash flow analysis, and an estate review, beyond just knowing what their investment portfolio looks like. I would then double check this with their estate attorney and/or CPA or tax advisor.

Without this framework, I cannot advise on this strategy. I guarantee you a commercial, advertisement, or an introductory meeting will not be sufficient to determine whether this is a good idea or not.

This is a complicated matter. If you want qualified advice, you should seek out one or more of the following: A tax or estate planning attorney, a certified public accountant (CPA) or an enrolled agent (EA) who’s qualified in this matter and/or a fee-only certified financial planner (CFP ) who is qualified in this matter, one who actually has experience and can demonstrate they have an actual process for reviewing the Roth IRA conversions. You need to know the process, why it matters to you, and you need to know what the motivations are behind why some people are telling you to do this.

Commercials are abundant. It’s only going to get worse by the end of the year. Seek only qualified advice. Qualified advice means credentials and experience, not large commercial marketing budgets.

Michael Dubis is a fee-only Certified Financial Planner and President of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at financialperspectives@gmail.com.

Disclaimers:
This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this Web site or that of the author.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.
THIS COMMUNICIATION MAY NOT BE USED BY YOU AS A RELIANCE OPINION WITH RESPECT TO ANY FEDERAL TAX ISSUE DISCUSSED HEREIN AND IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU BY THE INTERNAL REVENUE SERVICE.

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