Strategy
Building Businesses, Relationships With Roth Conversions
Michael Slemmer is a CFA and a principal of Advisors Trusted Advisor, a Medfield, Mass.-based consulting and training firm for investment advisors and wealth managers.
Significant changes to the conversion
rules for "Roth" individual retirement accounts, or IRAs, that
come into force next year present financial advisors with a rare
opportunity to get closer to existing clients and attract new
ones.
In 2010, US taxpayers with adjusted
gross annual incomes over $100,000 will be allowed to convert
traditional IRAs to Roth IRAs -- which are traditionally funded
with non-deductible contributions, but which allow for tax-free
withdrawals. In other words, people will be able to exchange
IRAs, built with deductible contributions, and turn them into
non-taxable sources of retirement income -- once they pay tax on
any earnings and pretax contributions.
Until now, few advisors have focused
on Roth IRAs. Why would they have? With most high-net-worth
individuals previously barred from funding them, the issue was
moot for many their clients.
A provision in the Tax Increase
Prevention and Reconciliation Act of 2005 lifts the income
restriction on Roth IRA conversion eligibility on 1 January 2010.
This little-publicized change opens the door to a
tremendous tax planning opportunity for millions of people who
now hold well over $1.4 trillion in tax-deferred IRA and defined
contribution plan assets.
There are several reasons
high-net-worth investors may want to make the conversion. With
asset values battered by the financial crisis, taxes levied on
converted assets are likely to be lower. Converted assets come
out tax-free, and in many cases, penalty-free. Roth investors can
be more tax efficient in retirement by devising a tax-efficient
withdrawal strategy for discretionary assets. Also, Roth IRA
assets are not subject to required minimum distributions at age
70 and a half as traditional IRA assets are, allowing more
flexibility to pass these on to the next generation.
The Roth 2010 conversion opportunity
isn't an “all or nothing at all” proposition, as many people
think -- and many website “Roth analyzer” tools seem to imply.
It’s instead a balance of several factors: future tax rate and
life-expectancy assumptions, sources for conversion tax payment
to name a few. These should be weighed in determining an
optimal conversion amount.
Proper analysis of the Roth conversion
option also shreds a favorite axiom: "never pay taxes
before you have to." With the 2010 changes, there are many
scenarios in which paying the conversion taxes makes complete
sense.
With these benefits to high-net-worth
investors, advisors have a ready-made business building approach
if they choose to take advantage of it, as people with a high net
worth will be inundated with opportunities to convert. And
advisors who get to their own clients and prospects before the
media turns in earnest to covering conversions will have
positioned themselves as experts and taken an important marketing
advantage.
How can advisors take advantage of the
tax-change law? First, they have to educate themselves about the
change - what it is, how it works, who can benefit most and why.
Once educated, advisors can put a plan in place to use this as a
way to generate buzz and create a "Roth presence" in the
marketplace.
Savvy advisors will use the Roth
changes:
- As a PR opportunity - Roth changes happen in 2010, but the press is writing about it now. Be the advisor to take a proactive stance on what’s happening and use this knowledge to stand out in a crowded market. This means writing articles for the local media of your target market, being interviewed on the radio and generally creating awareness around Roth changes. Review your client base and find opportunities to speak at clubs, meetings, etc. to share their knowledge of the change and its impact.
- As a client-retention strategy - Many advisors hope they have all of the assets for any given client, but suspect there may be more elsewhere the client hasn’t disclosed. The Roth discussion offers a built-in reason to inquire about all of the retirement holdings for your client. Meet with existing clients and review their plans, talk about their retirement approach and discuss the impact of different scenarios. This will lead to a deepening relationship and, even if no conversion takes place, the dialogue helps build your credibility with the client.
- To generate client referrals - Conventional wisdom wisdom says an advisor can’t just ask for referrals, they have to have something to offer to the referral that’s valuable. Offering a free review of retirement assets and then providing insights about conversion possibilities might be seen to fit the bill. Iinvite clients and their referrals to a seminar on the Roth-rule change, friends and then schedule meetings with each attendee to review their retirement portfolios.
Finally, Roth conversions give
advisors an opportunity to strengthen relationships with "centers
of influence" - that is, others of their clients professional
network. What better way to partner with an accountant or
attorney than over an issue, like a Roth conversion, that touches
all three trusted advisors: tax planning, legacy planning and
investment planning? Reach out to other providers and offer to do
joint educational session, or individual reviews of
clients.
