Page 46 - Investment Advisor - Jan/Feb 2021

RETIREMENT PLANNING

retirement accounts can provide flexibil- percentage of their benefit to be subject $19,500 or $26,000 (for those who are
ity for your clients in helping them for- to taxes in the year of the conversion. 50 or over) contribution limits. The
mulate a retirement withdrawal strategy. maximum total contributions allowed
ROTH IRA CONVERSION STRATEGIES to a 401(k) for 2021 are $58,000 and
ROTH CONVERSION DISADVANTAGES Doing a Roth IRA conversion when asset $64,500 for those who are 50 or over.
Sometimes a Roth conversion may not values in a client’s traditional IRA are If the client’s employer allows in-ser-
make sense, or at least careful analysis is low can provide them with “more bang vice withdrawals, your client can roll the
required. Most of these decisions involve for their conversion buck.” For exam- after-tax money to a Roth IRA doing the
the merits of paying taxes now in exchange ple, a conversion during stock market Roth conversion with little or no taxable
for the benefits of a Roth IRA in the future. declines, like last March, would allow income. An alternative, if their employ-
When considering a Roth conversion, a client to potentially convert a high- er allows this, is to transfer the extra
it’s important to look at the after-tax money to a designat-
potential payback — specifi- When considering a Roth ed Roth account within the
cally, the amount of taxes that conversion, look at the potential 401(k) plan. The money is still
will be due on the conversion in a Roth account where it
upfront compared to the cli- payback — specifically, the can grow tax-free. When your
ent’s life expectancy. This is client leaves their employer,
especially crucial for a client amount of taxes that will be due on they can then roll the funds
who is 60 or older. An analy- the conversion upfront compared in the Roth 401(k) over to a
sis needs to be run to analyze Roth IRA.
a potential break-even point to the client’s life expectancy. If their employer doesn’t
where the benefits of doing allow in-service withdrawals
the conversion outweigh the current er percentage of their traditional IRA, then your client will have to wait until
taxes due on the conversion. offering the potential for this depressed they leave the employer.
Clients may want to do a Roth IRA amount to appreciate tax-free in the 3. Inherited IRAs. The Secure Act
conversion as part of their estate plan- Roth account over time. changed the rules for inherited IRAs for
ning strategy. This is a prime example of 1. Backdoor Roth IRA. The back- most non-spousal beneficiaries. With a
where all of the pros and cons of the Roth door Roth is a popular strategy for those few exceptions, non-spousal beneficia-
conversion need to be weighed and dis- who earn too much to contribute to a ries must withdraw the entire amount
cussed with your client. The estate plan- Roth IRA. To work, your client makes of the inherited IRA account within 10
ning benefits need to be weighed against an after-tax contribution to a traditional years of receiving it. In the case of a
the current-year taxes on the conversion. IRA and then immediately converts this traditional IRA, this means paying taxes
Even for clients who are 59 ½ or to a Roth IRA. on the value of the account. In the case
older, the five-year requirement for This gets trickier if clients have other of beneficiaries who are adults in their
qualified distributions remains in effect. money in a traditional IRA that includes peak earning years, this can be a large
In the case of Roth IRA conversions, pretax contributions and earnings. In tax hit that was not anticipated by the
there is a separate 5-year rule for each this case, the amount converted will be account owner.
conversion that starts on Jan. 1 the year taxed as a percentage of the after-tax With an inherited Roth IRA, the same
the conversion occurs. If your client contributions to the pre-tax contribu- 10-year rule still applies. However, the
needs to take a distribution from the tions and earnings. distributions will be tax-free to the
converted funds prior to the completion 2. Mega Backdoor Roth IRA account beneficiaries as long as the
of the 5-year window, any earnings will Conversion. This strategy allows your account holder held the assets in a
be subject to taxes, and if your client is client to contribute up to $38,500 on Roth IRA for at least five years prior to
younger than 59 ½, penalties as well. an after-tax basis to their employer’s their death.
The extra income generated from 401(k) and then convert this money to
the Roth conversion could bump clients a Roth IRA at some point in the future. Roger Wohlner is a financial writer who
who are on Medicare into a higher cost This amount is reduced by any matching brings his experience as a financial advisor
bracket for their Medicare Part B ben- contributions made by their employer. to his writing. He ghostwrites extensively
efits. For those receiving Social Security, Your client’s 401(k) plan must allow for financial services providers, investment
the extra income may cause a higher after-tax contributions above the managers and financial advisors.

44 INVESTMENT ADVISOR JANUARY/FEBRUARY 2021 | ThinkAdvisor.com