Page 30 - Investment Advisor February/March 2023

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According to the researchers, a key insight is that portfolio benefit to tax-efficient retirement plans.”
longevity tends to increase if one defies conventional wisdom According to the analysis, some fintech firms, including
to always defer taxes until future years. Among the most Personal Capital, Betterment and others, are beginning to
effective approaches to possibly extending portfolio longevity, move in this direction. “Ultimately, our findings challenge the
they explain, is careful Roth conversions during either pre- conventional wisdom advocated by many CPAs to defer taxes
retirement or early retirement years. for as long as possible,” DiLellio says.
Large financial institutions such as Fidelity and Vanguard “We show the value of strategically paying some taxes ear-
currently provide retirement income planning tools that rely lier to avoid large taxes later due to RMDs or switching tax
solely on the common rule withdrawal strategy, researchers filing from married to single. Lastly, we show that tax alpha or
say: “Our findings suggest that their enterprise applications the additional pre-tax return realized by an optimal strategy is
should not be entirely discarded due to their heuristic benefits. usually most sensitive to future tax rates, and least sensitive to
Instead, results from the common rule strategy can be used the rate of return for the stock market,” he explains.
to guide the next level of optimization that has a substantial

It’s worth giving Roth
conversions serious

consideration.

If advisors believe their clients’ tax rates will be
higher in the future than they are now, then the
Roth conversion is a good bet and should be taken
advantage of before rates increase. If the tax laws
don’t change, rates are scheduled to increase
automatically after 2025, so counting this year,
there may only be four years left to push a Roth
conversion into lower tax brackets.
As a general matter, says Mike Piershale,
president of the retirement-focused advisory
firm Piershale Financial Group, down markets
present an opportunity for clients to convert a
larger percentage of their traditional individual
retirement account to a Roth while keeping the tax
burden manageable.
The advantage presented by down markets is a
matter of straightforward arithmetic, Piershale says.
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 mean-
ingfully higher percentage of the traditional IRA if the account
value has declined by 10% or 20%.
Despite the attractive math, 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 in the future, Rubin explains. There are also tax efficiencies
Rubin, managing director and financial advisor at the Rubin to be had, because once it is held in the Roth, the cashing-out
Wealth Management Group of Wells Fargo Advisors, says it of the stock in the future for income purposes will be free of
may make sense to consider opportunities to make transfers of income tax.
assets between taxable and Roth accounts “in kind.” According to Piershale and Rubin, a solid rule of thumb is to
In-kind transfers are attractive because the investor doesn’t favor the in-kind conversion of whatever securities the advisor
have to lock in losses in a security they expect will rebound and client think will grow the most after the conversion. In

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