Successful Roth IRA Conversions: A Work of Art
By Ann Siford , Professional Network Manager, Equity Trust Company
Roth IRA conversions involve more than accounting and tax expertise; successful conversions will require well-orchestrated, collaborative efforts by masters of their financial and legal trades.
Navigate any financial website, trade publication or financial practitioner event and you’ll find the words “Roth conversion” indexed among the resources or debated in conversations. The key though, is to not only wade through the abundance of information and walk away with the “how-to’s”, but to also meticulously apply expert techniques to a client’s conversion strategy. To explore further, we turned to Robert Keebler, CPA, MST, AEP and partner with Baker Tilly, for his perspective on what CPAs, advisors and attorneys should be doing as they begin to examine the feasibility of a conversion for their clients.
In short, successful Roth conversions should at the very least integrate professional collaboration, a “back-up plan” and viable conversion tools. “Professionals must enter into Roth conversions artfully,” elaborates Keebler. “What many professionals are missing is that the Roth conversion is not just about computing the tax implications, estate tax, income tax and how to finance the Roth. It’s a collaborative effort within a client’s entire professional team.”
Certainly, with all the coverage by financial publications and institutions, the majority of clients will approach their CPAs and tax advisors first to review a Roth conversion calculation.
“The role clearly within the providence and expertise of the CPA is to avoid estimated tax payments and avoiding AMT,” says Keebler. “Estimated state tax payments, when not timed properly will almost certainly result in AMT.”
One must not make a conversion determination though without incorporating the legal counsel and financial planning disciplines into the conversion discussion. “Roth conversions also raise asset protection issues, beneficiary designation issues, estate tax apportionment issues and in some instances may require drafting of charitable lead and/or charitable remainder trusts, when appropriate, to generate an income tax deduction for a particular year,” explains Keebler.
“At this point in time, the precise standard of care and responsibilities between CPAs, lawyers and financial advisors are at best unclear,” Keebler adds, “but it would suffice it to say that each advisor has the responsibility to begin the Roth conversion conversation with their clients. Right now all three professions have not done an adequate job in getting clients educated about Roth conversions.”
Conceptualize a “Back-up Plan” for Client Strategies
A key to mastering discussions with clients about the Roth conversion is knowing how to use the recharacterization strategy from day one. Keebler stresses that professionals must work diligently to conceptualize and incorporate the ability to recharacterize the Roth back to a traditional IRA into the Roth conversion strategy.
He notes there are three points in time following your client’s conversion in January 2010 that you will want to look at. The first is at Thanksgiving, 2010. If the market has fluctuated negatively for the client, transfer the money out of the Roth for thirty days and then transfer it back into the Roth. The second time to review your client’s account is during tax preparation in 2011, technically April 15th, but March 2011 is more realistic. As part of the review, you may wish to file an extension so that you have a third opportunity to review whether the recharacterization was beneficial for your client, this being October 15, 2011.
“Be patient,” advises Keebler. “Wait until October of 2011 before making the final move.”
Master Artisans Draw Upon the Right Tools
New tools and resources are hitting the market and websites every day to aid consumers and professionals in answering questions from “should I?” and “how much should I convert?” to “when should I convert?” Many tools help to estimate the current and future tax environment as well as a variety of retirement scenarios. For the professional shaping and honing their conversion strategies, what makes one version better than another? What should CPAs and advisors be looking for in a software package?
“Most online calculators by mutual fund websites are woefully inadequate for professionals and do not meet the standard of care. It is ideal for consumers trying to learn the basics, but many clients will need much more,” explains Keebler. “A good software package allows one to look at the incremental conversions by bracket along with the two year spread and the overall estate tax implications.”
Keebler has reviewed numerous software and conversion tools over the years and most recently co-developed the CCH conversion software package Roth IRA Conversion Expert™. This tool allows users to quickly analyze a variety of conversion options based on different rates of return and various tax rates upon withdrawal, compare results of different scenarios and compile clients’ reports with one, easy-to-use tool. Summarizing the software, he shares, “It provides a unique vantage point by calling into question the efficacy of only looking at one substantial conversion versus converting through each tax bracket.”
Regardless of what tool and approach one uses when examining the Roth IRA conversion opportunity, the key is to be thoughtful throughout the process. There are many “life event” factors that no one tool can adequately formulate or experienced professional anticipate. But by skillfully assembling your professional team, crafting a well-thought out conversion strategy with an opportunity for a “do-over”, and exercising in Keebler’s words, “great client care”, you may just deliver your client a Roth conversion strategy approaching a financial masterpiece.
Robert Keebler references to additional resources:
- The new AICPA book The Rebirth of Roth: A CPA’s Ultimate Guide for Client Care is due the end of December. To learn more about the book or place an order, please call the AICPA customer service hotline at 1-888-777-7077.
- 100+ Roth Examples and Flowcharts contains an extensive set of examples pertaining to Roth IRAs and the intricacies of this investment vehicle. Edited by Barry Picker, these 100+ examples are a great tool to aid in the comprehensive and expansive rules related to Roth IRA contributions and conversions. To learn more about the book or place an order, please call Picker & Auerbach customer service hotline at 1-800-809-0015.
- Now available is CCH’s Roth IRA Conversion Expert™ . This software provides tax practitioners with comprehensive Roth IRA analysis and implementation guidance to convert a traditional IRA to a Roth IRA successfully and efficiently. For more information on the Roth IRA Conversion Expert, please contact CCH customer service hotline at
1-888-224-7377 or go to http://tax.cchgroup.com/findrep/findrepresearch
Want to hear more on Roth IRA conversions from Robert Keebler?
Learn the 8 Strategies for Successful Conversions in a recorded webinar available to CPAs, Attorneys and Financial Advisors through the Equity Trust Financial Professional Network.
Ann Siford is Manager of the Professional Network at Equity Trust Company, a custodian specializing in the investment of retirement funds in alternative assets. The Professional Network provides professionals in the self-directed retirement account industry with educational resources, access to expertise from peers and industry experts and targeted promotional tools to aid in expanding their business.
For more information on the Professional Network, contact Ann at 1-888-382-4727 x255 or visit http://www.trustetc.com/pronetwork to sign up.
Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.