How Advisors Can Use Roth Conversions to Guide Clients
Key Takeaways:
Roth conversions are an effective method of helping clients reduce the taxation of retirement savings.
Low-income years, the retirement transition, and market drops are three time periods when Roth conversions might make sense for clients.
Financial advisors should integrate conversions into their comprehensive financial planning for certain clients.
In 2010, the IRS eliminated the income status and filing conditions for Roth IRAs, enabling investors to convert traditional IRAs into Roth IRAs regardless of their income. Since this change, financial advisors have seen growing interest among clients due to market volatility, tax concerns, and long-term planning needs.
Roth conversions allow investors to pay taxes on their retirement savings when they’re in a lower tax bracket, rather than waiting until later when tax rates may be higher. Today, clients are taking advantage of Roth conversions to fight against market turbulence and economic uncertainty.
Financial advisors can help clients utilize Roth IRA conversions to strategically manage and grow their wealth. Modern planning tools, such as Asset-Map, help financial advisors educate clients about their financial situations. Keep reading for tips on when to recommend Roth IRA conversion to clients.
What is a Roth IRA Conversion?
Making sure clients understand Roth IRA conversions is the first step to success. Sit down with your clients to discuss Roth IRA conversions and when they make sense.
A Simple Breakdown for Clients
Explain what a Roth IRA conversion is in clear, non-technical language to make sure clients understand its purpose.
A traditional IRA allows money to grow tax-deferred. Clients usually get a tax deduction when contributing, but pay income taxes when withdrawing the money in retirement. A Roth IRA works in the reverse way. Clients pay taxes upfront when they make a contribution or convert, then their money can grow tax-free, and they won’t owe taxes when withdrawing in retirement.
Financial advisors will also want to break down the reasons why clients might convert traditional IRAs into Roth IRAs, such as tax-free growth, no required minimum distributions (RMDs), and to support legacy planning.
When Might a Conversion Make Sense?
Roth conversions can be beneficial at different times for specific clients. While they don’t make sense for everyone, they can be smart in specific situations, including during:
Low-income years. If your client’s income lowers, due to a career change, sabbatical, business loss, or early retirement, they may fall into a lower tax bracket. This can be a good time to convert a traditional IRA to a Roth IRA to pay less in taxes.
The retirement transition. The time between when clients retire and when required minimum distributions (RMDs) begin, currently at age 73, is another good time for Roth conversions. This is because their taxable income is often lower before RMDs may push them into a higher tax bracket.
Market drops. Clients may also consider converting traditional IRAs during market downturns, moving depressed assets into Roth IRAs at a lower tax cost. The funds can then grow tax-free in the Roth account as the market recovers.
Roth conversions present a long-term planning opportunity for advisors to work with their clients on strategic timing. Asset-Map helps clients facilitate conversations around Roth IRA conversions by visualizing timing windows.
Why Market Volatility Can Be an Opportunity for Roth Conversions
Market volatility presents an opportunity for financial advisors and their clients to make strategic moves supporting tax-efficient planning. While market volatility may be unsettling, periods of market downturn can help clients optimize long-term tax planning.
The Tax Advantages of Lower Portfolio Values
A market dip, in turn, impacts the value of a traditional IRA. If a client converts their traditional IRA during this time, they pay taxes on today’s reduced value instead of what the investments might be worth after the market rebounds. This enables clients to:
Convert more shares for the same tax cost
Support future tax-free growth in a Roth IRA
Reduce the tax impact of the conversion
Imagine your client has an investment that has dropped in value due to a temporary market decline. By choosing to convert now, the client pays less in taxes to move the asset into a Roth IRA. Later, as the market recovers, the asset will regain value, growing tax-free inside the Roth IRA.
Planning Conversions as Part of a Long-Term Strategy
Roth conversions should be considered and weighed in a broader financial plan. They are most effective when integrated into a comprehensive financial plan. Financial advisors can help clients create a long-term strategy by:
Identifying low-income years or RMD-free years as ideal windows
Considering partial or phased conversions to avoid tax bracket impacts
Using tax projections for conversion planning
Financial advisors can frame conversations around:
Tax diversification. Clients have more control over taxable income in retirement by having both traditional and Roth accounts.
Estate planning. Roth IRAs are a tax-efficient way to transfer wealth with no RMDs during the account holder’s life.
Withdrawal flexibility. Advisors can guide clients in managing retirement withdrawals strategically to minimize taxes.
Help clients see the whole picture with tools like Asset-Map. While Asset-Map does not include a built-in Roth conversion calculator, it can still illustrate the impact of a conversion when advisors know the relevant values and tax implications.
By visually mapping these details, advisors can help clients understand how a Roth conversion could affect their retirement income, legacy planning, or tax liability within the context of their overall financial plan.
Key Considerations and Common Client Concerns
Roth conversions can offer long-term benefits, but there are many things to consider. Help clients feel confident and informed during the decision-making process by addressing any concerns upfront.
Tax Implications and Timing
The most common concern from clients is how a Roth conversion will impact their taxes.
There are a couple of factors to consider here:
The pro-rata rule. This rule states that if a client has both pre-tax and post-tax money in a traditional IRA, the IRS requires them to pay taxes on the converted amount proportionally, not just the post-tax funds. If not planned for, this can result in unwanted tax bills.
Step transaction risk. If your client is considering backdoor Roth contributions, be careful not to execute the steps too close together. If too close, the IRS might interpret it as one transaction, which can trigger penalties or taxes.
Tax brackets. The converted amount is treated as ordinary income for the tax year. So, if too much is converted at once, a client may be pushed into a higher tax bracket. Strategic timing and partial conversions are good strategies to avoid this.
Financial advisors should also advise clients to consult with a tax professional to evaluate the implications for their specific circumstances.
What if the Market Keeps Dropping?
This is a common and normal concern among many clients. The market fluctuates, and timing is never guaranteed. Converting during a downturn can feel risky to clients. Empathize with your clients and help them assess their situation by:
Focusing on long-term strategy. It’s important to remind clients that Roth conversions aren’t about short-term gains, but long-term tax efficiency. If the market drops further, they still have locked in tax-free growth once it rebounds.
Considering staggered conversions. Spread conversions across several quarters to help balance market uncertainty for risk-averse clients.
How Advisors Can Guide These Conversations
Financial advisors are responsible for guiding clients in the right direction and providing sound financial advice. Using modern planning tools like Asset-Map helps advisors frame conversations visually. Our innovative tool simplifies tax diversification and retirement planning by offering a clear financial picture for clients.
Enhance planning conversations by mapping income sources, taxes, and account types on one screen. This visual mapping enhances client understanding and confidence, ultimately building stronger client relationships.
Empowering Clients Through Clarity and Timing
Roth conversions are a proactive strategy that can help clients save on tax costs and grow assets tax-free. Financial advisors should revisit Roth strategies during annual planning, especially for those approaching retirement. Empower clients by guiding them on the best time for conversions to reap the most benefits.
Learn more about how Asset-Map supports retirement planning conversations by scheduling a demo today.