For the first time in many months, there's something other than the financial crisis to talk about with high-net-worth clients and prospects: the opportunity to convert to a Roth IRA.
If you have not lined up your talking points and tools for advising on Roth IRA conversions with your clients, some other advisor could seize that opportunity.
With the global financial crisis leaving Americans wary of all things financial-including their advisors- it's wise for those advisors to plan a comprehensive campaign to advise on the 2010 Roth IRA conversion rule changes.
While it was of less importance in the past, the Roth IRA is now set to play a larger role in 2010 personal financial plans. With income restrictions on conversions lifted, your wealthiest clients for the first time ever can choose to pay an up-front tax bill on a traditional IRA in order to gain the promise of tax-free capital gains for life from a Roth.
The Roth IRA was established by the Taxpayer Relief Act of 1997, but at first the conversion wasn't allowed for those with more than $100,000 of modified adjusted gross income, so these individuals couldn't enjoy the Roth's advantages: its tax-free income, its lack of required minimum distribution and its estate planning benefits.
However, the Tax Increase Prevention and Reconciliation Act of 2005, signed into law in May of 2006, eliminated the income restriction on converting in 2010. With the new law, it's estimated that more than 13 million affluent households will gain access to the Roth IRA conversion option, and about half of all IRA assets will become eligible for the conversion-in other words, some $1.4 trillion.
The media storm has already begun. Google lists dozens of articles extolling the virtues of converting to the Roth. And that public interest should lead to lots of questions from your clients and prospects about whether they should be jumping at the chance as well.
The choice to convert, however, is not nearly as simple as the media generally reports. Three variables must be factored into the equation, and the only way to give clients a correct answer is to actually run the calculations for them and show them the interplay between the variables-RMD avoidance, future tax rates and the available cash they'll need to pay the up-front tax.
Without a doubt, we will see some advisors in the months ahead cynically exploit the conversion opportunity as a sales windfall. We will see product pushers find angles and explain why one type of product is perfect for a Roth conversion strategy, even though the Roth IRA decision is actually product-neutral, since the same products in a traditional IRA will work and perform the same way in the Roth.
As these sales gimmicks and puffery abound in the months ahead, independent advisors will have an opportunity to differentiate themselves by illustrating the complexity and thoughtful planning that must go into any decision to convert. By warning clients to avoid the quick-fix-solution providers and by emphasizing education and careful deliberation, an advisor can stand out from the brand and promote prudent wealth management.
That doesn't mean sitting on the sidelines. You do have to find a Roth IRA advice strategy. But you want to avoid sounding like a cheerleader for Roth conversion and instead you want to sound like the coach.