The Financial Advisor’sRoth ConversionHandbook

Contents

Introduction 1

Why Should I Consider Roth Conversions for My Clients? 2

Roth Conversions During a Down Market 3

The CARES Act 4

The SECURE Act 5 How Much Should My Client Convert to a Roth? 6

Income InSight® and Roth Conversion Strategies 8

Tax Clarity® and Roth Conversion Strategies 10

Comparing Roth Conversions in Tax Clarity and Income InSight 11 Communicating the Benefits of Roth Conversions With Clients 13 How to Use Roth Conversions in Your Marketing Strategy 14 We Can Help 16

1

Introduction

On March 11, 2020, the United States dipped into a bear market. Right

now, most clients are probably experiencing losses in their portfolios,

and some may be wondering if they will have to postpone their

retirement, or even “un-retire.” To help financial advisors understand

the opportunities in the current economy and to improve their ability

to meet their clients’ changing needs, we’ve created this guide.

Roth conversions are going to be particularly valuable as markets

recover, because the funds will recover tax-free, and you can spread

out the tax liability more evenly throughout retirement. This guide

will outline everything you need to know about Roth conversions and

how they can make a significant difference when it comes to your

clients’ retirement strategies.

“Right now, mostclients are probablyexperiencing losses in their portfolios...”

2

Why Should I ConsiderRoth Conversions for My Clients?

Many financial advisors know taxes have a significant impact on

their clients’ retirement strategies but fail to address the topic out of

uncertainty surrounding compliance issues. However, no retirement

strategy is complete without first considering the tax implications of

that strategy. One tax technique that can be especially beneficial to

many mass affluent retirees is the Roth conversion. Converting part

of a traditional IRA into a Roth IRA can have significant long-term tax

benefits.

3

Many advisors wait until the end of the year to do Roth conversions

in order to make sure that the client isn’t accidentally bumped into a

higher tax bracket or paying a Medicare premium based on income

that arrives late in the year.

However, now that we’re in a down market, if we harvest tax losses

early in the year, then we know we are unlikely to have any net capital

gains on the return at the end of the year. Advisors can do those

Roth conversions earlier in the year. That’s advantageous for a few

reasons. Any bounce back comes tax free, and it can reduce a future

tax burden because of high required minimum distributions (RMDs)

from IRAs.

Roth ConversionsDuring a Down Market

4

The CARES Act

IRA owners who would otherwise be subject to RMDs can

forego making those distributions in 2020 in accordance with

the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The option to skip the RMD applies to “regular” RMDs, initial

RMDs for people who turned 70½ in 2019 but decided to forego

their initial RMD until tax year 2020, and inherited IRAs.

The initial RMD would need to have been taken by April 1, while

the regular RMD for 2020 would have needed to be taken by

December 31. If the initial RMD was taken within the past 60

days, it could be rolled over into an IRA as an indirect rollover,

accomplishing the same result as skipping it. Moreover, if the

recipient of an RMD that occurred in 2020 is diagnosed with

COVID-19 or was impacted by COVID-19 (guidance will likely be

forthcoming), the RMD can be paid back to the IRA any time

within the subsequent three years.

For clients who don’t need either their regular RMD or the RMD

from an inherited IRA, consider doing a Roth conversion. For

the traditional IRA, you could convert the entire RMD amount,

or likely better, only the amount that keeps the client in a key tax

bracket. Although you can’t directly convert the inherited IRA

RMD to a Roth, by not taking it, the client will have additional

room in their current tax bracket, which may make a conversion

from their own IRA more desirable.

5

One of the biggest changes created by the Setting Every Community

Up for Retirement Enhancement Act (SECURE Act) is the increased

RMD age to 72, but only for people born on or after July 1, 1949. If a

client turned 70½ last year, they

are still on the old RMD schedule.

Those who turn 70½ prior to July

will get an extra year of deferral,

and those born in the second

half of the year will get an extra

two years, creating an additional

window for Roth conversions.

Roth IRAs don’t have required

minimum distributions. So, when

you do that Roth conversion, that

money is allowed to compound

over the rest of the client’s lifetime, and the majority of the assets

that are left behind to the beneficiaries are tax-free Roth IRA assets.

[To help financial advisors understand the changes brought about by the SECURE

Act and to improve their ability to meet their clients’ changing needs, we’ve

created a free guide, which also features feedback from professionals across

the financial services industry. Download “Inside the SECURE Act: For Financial

Advisors and Your Clients.”]

The SECURE Act

SECURE

Act

6

The 2017 Tax Cuts and Jobs Act significantly lowered marginal income

tax rates for most people, and many advisors are now evaluating how

much should be converted to a Roth. It’s important to consider not

only the tax bracket the client is in today and the starting points of

adjacent tax brackets, but also the client’s, or in some cases, their

beneficiaries’ tax bracket in the future.

It is most common to consider Roth conversions when a client has

significant room before the edge of a tax bracket. For example, a

client in the middle of the 12% tax bracket may want to consider

converting enough IRA to Roth IRA to fill the 12% bracket, thereby

avoiding any withdrawals being taxed at 22%. Because the jump from

12% to 22% is so significant, it’s unlikely a client would want to convert

his or her entire IRA.

How Much Should My ClientConvert to a Roth?

7

Quantifying the single-year impact of various conversion strategies

enables the client to make an educated decision about the costs of

a conversion and avoid potential pitfalls like entering a new bracket,

creating Social Security tax, or creating unnecessary Medicare expenses.

If the client is within two years of enrolling in Medicare or already over

age 65, then it is worth considering conversions to the point the client

would pay additional Medicare Part B and Part D surcharges, which

are not calculated as tax directly but are based on modified adjusted

gross income. Because Medicare Part B and Part D premiums are

based on modified adjusted gross income, you may want to avoid

conversions that will bump up their income and force them to pay

more in premiums.

It’s also important to take into consideration the lifetime impact of the

conversion. For example, the standard deduction for a

couple filing jointly in 2019 was $24,400,

and there is an extra deduction of

$2,600 if both are over age 65.

This couple could have about

$800,000 of ordinary income over

a 30-year retirement without paying

any tax at all. If the couple has pensions,

the amount that could be withdrawn tax free

over a lifetime from the IRA would be reduced,

but it could still be significant.

8

Income InSight makes creating Roth conversions easy by offering a

multi-year Tax Map that shows key opportunities to convert and the

impact a Roth conversion has on an overall retirement strategy.

Most people follow the traditional retirement income pattern: taking

Social Security as soon as possible, using non-IRA money for as long

as possible, and tapping into IRA money when the non-qualified

money runs out or they are forced to because of RMDs. If they have

Roth money, they use it last, if at all. However, pushing money from

a traditional IRA or 401(k) directly into a Roth IRA can have some

significant tax benefits. The client will pay income tax as of the date

of the conversion, but once it’s in the Roth, it will grow tax free, and

future withdrawals will be tax-free (under current tax law). Roth

conversions are different than Roth contributions in that your clients

can do them in any year, regardless of income and whether they’re

working, and there is no contribution limit. Use Income InSight to

navigate your Roth conversion strategy conversations with clients.

Income InSight®and Roth Conversion Strategies

Income By SourcePlan - EverthingIsFine

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Katie’s RothKyle’s Roth Katie’s RiBKatie’s WiB/MothersFathers Kyle’s RiB Spendable 8

There are a variety of different conversion patterns to consider. You

could harvest to the top of the 12% bracket, to a Medicare premium

surcharge threshold, to the top of the 24% bracket, or to the lifetime

effective rate. In the last case, you would only convert until your client

hit an effective marginal rate that is higher than what they would

have paid on average each year had they followed the traditional

harvesting pattern. How do you do that?

• Identify the optimal Social Security claiming strategy

• Generate annual Tax Maps

• Identify the average lifetime effective tax rate from the base case

• Annually convert until an effective marginal rate is reached

that is higher than the effective tax rate from the base case

Income InSight will automatically generate all of this for you. From

the report page:

1. Click on the plan tab on the right-hand side of the page.

2. Select the “Change Harvesting Pattern” button.

3. Select the harvesting pattern you’d like to demonstrate, and

click save.

4. Compare the harvesting strategy against portfolio longevity,

income floor and estate values in the “Base Case” under

normal and stressed economic scenarios.

9

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As with any financial decision, there are a number of things to

consider prior to making a Roth conversion, and a “best time” to do

so is difficult to determine. That said, from a Tax Clarity standpoint,

a Roth conversion made when the effective marginal rate is minimal

would be best.

Recall that a Roth conversion provides the ability to move money out

of a traditional IRA and pay taxes on that distribution at the existing

federal and state rates at the time of the conversion. Once made,

the funds will appreciate tax-free and distributions are not ultimately

taxed. Tax Clarity graphically indicates where the next dollar harvested

from ordinary income would have a minimal effective marginal rate,

and thus an opportunity for a Roth conversion.

Tax Clarity®and Roth Conversion Strategies

60%

40%

20%

0%

$150,000$140,000$130,000$120,000$110,000$100,000$90,000$80,000$70,000$60,000$50,000$40,000$30,000$20,000$10,000$0

Rate on next dollar

of Ordinary Income

$55,000 @ 59.8%

Base EMR Regular Tax BracketsChange EMR

Sour ce : Ta x C lari t y

11

Income InSight is designed for future-focused income planning.

As a result, it involves more client financial data. It also involves

some modeling assumptions and requires expectations to be made

regarding the future. The modeling includes sources of income,

portfolio (qualified and non-qualified) information, risk assessment

questions, tax data and more to develop a base case for income

planning. That information can then be stress-tested under various

assumptions for the future. Asset harvesting, such as the timing

of the Roth conversions, can also be modeled for discussion with

the client. In total, Income InSight is a comprehensive planning

mechanism for those looking to create an income model for their

clients in or approaching retirement. In short, Income InSight helps

you show clients the lifetime impact value that’s delivered by doing

a Roth conversion.

Tax Clarity helps you identify how much you can convert to a Roth.

The software is designed to consider current-year, factual tax data

from the client tax returns to find the effective marginal tax rate, or

tax on the next dollar of income, paid by the client. It provides a more

granular data analysis into the return while allowing for comparative

scenarios to be calculated against the base case. Those scenarios can

calculate the impact of current year Roth conversions.

Comparing Roth Conversionsin Tax Clarity and Income InSight

• Holistic

• Focused income

planning for the future

• Assessments of income sources

(Social Security Timing,

OI, SSBI/QBT, pensions, etc.)

• Incorporation of client portfolios

(Q, NQ, Roth, JT Ten, etc.)

• Stress test functionality

(i.e., long-term care, early death,

down market)

• Current year Tax Map

• Account harvesting retirement analysis

• Modular – likely used to

supplement your existing

financial planning software

• Annual tax assessments

• Simplicity – based on factual

tax data inputs

• Detail of data inputs and outputs

• Comparative scenario analysis

• Identification of marginal tax

rates and Medicare thresholds

• Ordinary income and

capital gains Tax Maps

12

13

Determining which income streams

to use at certain points in retirement

can be incredibly complicated

for the average American. Your

clients might not realize that

each decision made about

their retirement plan can impact

other areas leading to potentially significant tax inefficiency in their

retirement strategy. They also are probably unaware of how beneficial

a Roth conversion could be to their overall retirement strategy. It’s

important to remind your clients:

• Roth conversions can be especially advantageous because

the growth comes back tax-free.

• Doing Roth conversions can spread out the tax liability earlier

in retirement.

• Right now, there are no required minimum distributions

under current rules for Roth IRAs, so it’s a good time to

consider accelerating off Roth IRA and Roth conversions.

It can be helpful for clients to see the difference a Roth conversion

can make. Tax Clarity displays an easy-to-understand Tax Map graphic

illustration to help your clients visualize their tax landscape. Income

InSight shows the impact a Roth conversion can have on a client’s

overall retirement strategy.

Communicating the Benefitsof Roth Conversions With Clients

14

Creating and executing a marketing strategy is a key component for

the success of your business. In this era of constant communication

and instant notification, marketing is more important than ever before.

Key messages are a critical component of your marketing strategy.

Use them to communicate the points you consistently want to make

to your audience. Your key messages should be targeted to your

audience. You can find several examples in our marketing eBook for

financial advisors.

How to Use Roth Conversionsin Your Marketing Strategy

14

Include information about Roth conversions in your key messages.

A well-crafted message will highlight your unique benefits, target

your audience, support your goal, and often include a call to action.

Communicate about the benefits of Roth conversions, and how you

can help clients and prospects create more tax-efficient retirement

strategies on your website, blog, newsletter, emails, and social media.

Publish original content positioning how Roth conversions are

beneficial and why you specifically can help them take advantage of

this opportunity. Remember to include a call to action – what you

want your clients and prospects to do. Do you want them to watch

your video about Roth conversions? Schedule a meeting with you?

The possibilities are endless.

Plus, we’ve created a new client-facing video series about taxes in

retirement that includes helpful information about Roth conversions.

This video series is exclusively available to our Tax Clarity subscribers

and makes it easy for you to offer educational webinars to clients

and prospects and to show how you can help them avoid tricky tax

situations. The video series is a part of our new marketing kit that

includes downloads, templates and videos to help you communicate

with clients and prospects. Not a Tax Clarity subscriber? Subscribe

now!

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Covisum® creates software solutions, practice management and

marketing resources to help advisors and financial institutions grow

and improve lives through better retirement decisions. With our

proven process, advisors are able to streamline their practices, offer

actionable insights and utilize successful marketing tactics.

When you subscribe to our software solutions, we’ll connect you

with a customer success coach to help you get the most out of

your subscription, including access to our expert support team. Our

support team will train you on how to use the tools and resources,

and they are here for you, as long as you’re a subscriber, to help with

case questions and to coach you on how to communicate your value

based on the reports.

Whether you’re tackling Roth conversions or other retirement

income strategies, the right solutions can make all the difference for

your clients. Take a 10-day free trial and see how Covisum software

solutions can help you grow.

We Can Help

About Covisum

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financial advisors. We provide software solutions that help advisors grow.

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