Trouble is, most advisors have little experience in advising on the Roth conversion equation because it never before applied to the mass affluent and high-net-worth markets. Moreover, the tools used by advisors have been relatively simplistic, and they fail to illustrate the conversion scenarios properly by showing the dynamics in each of the three financial variables.

That is where new tools, like the one from Convergent Retirement Plan Solutions LLC, will come into play. Convergent, along with Archimedes Systems, has developed the Roth IRA Conversion Optimizer, which takes conversion analysis and client illustration to a new level for advisors.

"Because so many affluent clients have been kept from converting, the Roth IRA conversion market never matured and neither did the tools advisors use," says Ben Norquist, the president of Convergent, which is based in Brainerd, Minn. "What the industry has done wrong is examine the variables involved in the Roth conversion calculation in isolation without looking at the complexity of their interrelationships. In too many instances, advisors have looked at each of the variables as all-or-nothing propositions instead of considering the in-between situations-because the tools were not sophisticated to illustrate the in-betweens."

Norquist says that often when advisors measure a traditional IRA against a Roth, they consider paying all of the tax out of the IRA instead of considering a payment of just part of the tax up-front and a partial conversion. "In fact, what often makes the most sense is a partial conversion," he says.

One way you can help your client is by illustrating the dynamic nature of the variables. Take a look at Figure 1. This example uses a married couple, ages 64 and 62, trying to figure out conversion options for the $700,000 they have in IRAs. They plan to use the option under the federal law to defer the income on their 2010 conversion until 2011 and 2012, which also defers the tax liability on the assets they withdraw from the traditional IRA to convert to the Roth.

Convergent's optimizer uses just eight inputs to create a client illustration.

Next, there is a Figure 2 with the tab with the results, which the Web-based optimizer calculates almost instantly. On the left side of the results screen, you can adjust the sliders to fine-tune key variables and look at the full range of different conversion possibilities open to each client. For instance, this illustration assumes that there will be a real return of 4% annually on all the assets and a future tax rate of 40%. It also assumes that the couple will begin making monthly withdrawals of $5,100 in 2010.

The bar chart on the right of the results screen displays the benefits of partial conversion. Each bar represents a different conversion scenario, with each bar showing the net benefits of converting an additional 10% of the traditional IRA's assets. In this example, converting 100% of the $700,000 seems advisable because it will provide this couple with a projected net benefit of $71,000 of assets based on the IRA joint life expectancy tables. However, things are not always so simple.

  One problem is that if the couple converted 100% of their IRA assets, they would need $276,491 in cash outside of their IRAs to pay the tax bill. What if they don't have that cash available outside of their IRAs? What if they only have $200,000 of cash in the bank? And what if they don't feel comfortable spending down all of that cash to pay their Roth conversion tax bill? Take a look at the results shown in Figure 3, where we limit the non-IRA cash outlay to pay conversion taxes to about $100,000.

In this scenario, the total net benefit of converting is $49,000, and all of that benefit is consumed by the retiring couple and no assets are left to their heirs. This additional data is provided in the optimizer by clicking one of the bars that adjusts the conversion amount, and in this instance we assumed there would be a 100% conversion.