Advisors' newly and nearly retired clients face a complex picture heading into the end of 2022.
On the one hand, portfolio values have fallen substantially, and those in the retirement red zone are fretting over the impact of sequence of returns risk on their financial plans. At the same time, there are pressing opportunities for clients to consider as the year draws to a close.
One of the brightest prospects advisors see for late 2022 is the opportunity to make conversions between traditional individual retirement accounts and Roth IRAs. For many, Roth conversions are a great opportunity today, given the current dynamics in the markets and the meaningful prospect that taxes could increase in the future.
Making Sense of the Math
As a general matter, down markets present an opportunity for clients to convert a larger percentage of their traditional IRA to a Roth while keeping the tax burden manageable.
The advantage presented by down markets is a matter of straightforward arithmetic, says Mike Piershale, president of the retirement-focused advisory firm Piershale Financial Group. For example, if a given client would have normally done a $100,000 conversion from a traditional IRA worth $1 million, that same $100,000 conversion would now represent a meaningfully higher percentage of the traditional IRA if the account value has declined by 10% or 20%.
Market Drops Elevate In-Kind Transfer Opportunities
Advisors know that many clients enacting conversions will not want to sell assets at depressed prices and then convert the cash proceeds. As such, Noah Rubin, managing director and financial advisor at the Rubin Wealth Management Group of Wells Fargo Advisors, says it may make sense to consider opportunities to make transfers of assets between taxable and Roth accounts "in kind."
In-kind transfers are attractive because the investor doesn't have to lock in losses in a security they expect will rebound in the future, Rubin explains. There are also tax efficiencies to be had, because once it is held in the Roth, the cashing-out of the stock for distribution purposes will be free of income tax.
A solid rule of thumb is to favor the in-kind conversion of whatever securities the advisor and client think will grow the most after the conversion. In late 2022 and early 2023, market experts say, this might include stocks in the banking and financial sectors.
