Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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money in a traditional IRA) even if the account itself must be depleted to pay the conversion income tax— i.e., factor #1 trumps factor #3 if the rate increase is substantial enough. B. What goes into the spreadsheet. Should your client convert to a Roth IRA? A spreadsheet cannot give “the answer.” A spreadsheet just regurgitates the inputs you give it. Computer projections of the benefits of a Roth conversion are based on assumptions as to future tax rates, investment returns (inside and outside the IRA), and withdrawal amounts. Different professionals running different computer programs may reach different conclusions regarding the profitability of converting to a Roth IRA. Creating inputs truly applicable to the client’s personal situation is a daunting task.  What income tax rates do you assume will apply to the client’s traditional IRA withdrawals, Roth conversion, and outside investment income? Make sure the projections you are using are based on the actual taxes that would be payable on a specific amount of taxable income (not simply on a “marginal” tax bracket). With federal income tax law being extremely complex, and subject to rapid and substantial change, and with the client’s personal circumstances being subject to changes that can affect his personal income tax picture regardless of what is happening to the Code in general, how much weight or certainty can you accord to a projected income tax rate? How does any applicable state income tax affect this?  When do you assume the money will be distributed? Some projections assume that all plans and Roth IRAs are liquidated at the participant’s death. This approach fails to evaluate the potential advantage of paying the benefits out gradually to a younger generation beneficiary after the participant’s death. Also consider the possibility that the money may unexpectedly need to be withdrawn sooner due to illness or other setbacks.  Do you assume the same investment returns for assets inside a Roth IRA, inside a traditional plan, and outside a plan? You cannot know for sure what the client’s future tax rates, spending needs, or investment results will be. If the client’s tax rate and investments go up, and his spending needs stay level or decline, the Roth conversion could be very profitable. If the client’s tax rate and investments decline and/or spending needs accelerate, a Roth conversion could be a costly mistake. The future is unknowable. Unless the conversion is free (see ¶ 5.8.02 (A)), the client might be best advised to convert some but not all of his plans to a Roth, and to consider converting more in a later year. C. Beyond the spreadsheet. There can be factors that incline a client towards or away from a Roth plan without regard to what the spreadsheet says; see ¶ 5.8.02 , ¶ 5.8.03 . Also, for some (many?) clients, personality outweighs computer projections: Some individuals are constitutionally attracted to Roth conversions, others are instinctively repelled by them. There can be a tendency (among advisors as well as clients) to use the computer projections and other factors not to help decide what to do, but to justify what has already been decided. One regrettable tendency is to regard the Roth conversion decision as an all-or-nothing proposition. There are advisors who push all their clients towards Roth conversions and advisors who practically forbid their clients to convert. Clients want to convert everything or they want to