When it comes to Roth IRAs, a well-intended move can wind up as a costly mistake without good guidance from an advisor.
ThinkAdvisor recently asked financial advisors to describe clients’ worst investment choices this year and what they did to help fix the problem. Mistakes around Roth IRA contributions and conversions emerged as a common theme.
“I have a high-income client who was doing Roth conversions, although he is in the top tax bracket," Shawn Clagg, owner of Choc Wealth Management, said via email. "For this client, and for many taxpayers for that matter, he will be in lower tax brackets after he retires. Therefore, he will have substantial tax savings — north of $500k in today’s dollars — by waiting to convert in low tax bracket years.
“Shifting income to lower tax brackets is what we generally refer to as ‘bracket management,’” Clagg, a CPA, continued. “We couldn’t fix the past but were able to stop his plan to convert in 2024 and the future by explaining the math. Nothing magical here — he simply was doing what he had thought was smart.”
When the Client Earns Too Much
Another common Roth IRA mistake is contributing in a year when income exceeds the allowed limit. But there's an easy fix, according to Jeff McDermott, founder and CEO of Create Wealth Financial Planning, a virtual RIA.
“Earlier this year, I had a client make a Roth IRA contribution without us discussing it — a great initiative on their part. The problem is that their income trajectory showed them likely to exceed the Roth IRA adjusted gross income ... threshold, making it an ineligible contribution,” McDermott said.
