There’s been plenty of applause over the SECURE Act 2.0 provisions included in the omnibus bill that Congress passed under the wire in December. As I look at it, the bill’s clear winners are your clients who are high-net-worth (HNW) wage earners.

With your help, they’ll now have even more latitude to do Roth conversions and: 

• Save money in income and capital gains taxes

• Make their retirement savings last longer

• Enhance their legacies

Lower-wage earners or those constrained by student loan debt gained some ground—but nearly as much as those with retirement plans who can afford to save (economist Theresa Ghilarducci points out).

Putting SECURE 2.0 To Work For HNW Clients
I’ve written before about the potency of Roth conversions in helping clients minimize taxes and maximize retirement income. To sum up, withdrawals from Roth IRAs are not taxable as income, and heirs of the accounts realize the same benefit for the 10 years they have to withdraw money and zero out the accounts.

The new law just enhanced this opportunity. Under SECURE 2.0, the age for RMDs is increased to 73 effective Jan. 1, 2023, and 75 effective Jan. 1, 2033. The previous age was 72, an extension created in 2019 by the first SECURE Act.

In the future, clients in their 60s and early 70s will have a longer runway for making voluntary withdrawals from tax-deferred plans, like IRAs, 401(k)s, 403(b)s, SEP and SIMPLE plans, to fund Roth conversions. (For simplicity’s sake, I’ll refer to all accounts with RMD provisions as “IRAs” in this article.)

The time to do this is generally the period after a client’s retirement (or semi-retirement), when their taxable income dips and they drop to lower tax brackets, and before they must take RMDs. Such clients can gain greater lifetime tax efficiency in this period by using other savings, such as brokerage accounts, for income and to pay taxes due on the conversion.

Conversions Demand A Steady Hand On The Wheel
Withdrawals to fund Roth IRAs must be managed with finesse in a sequence sensitive to clients’ tax brackets and other income (including Social Security) year to year.

Other factors that affect the timing and relative tax alpha you can generate with Roth conversions are clients’ filing status (married or single), work status (working full or part-time or retired) and income, relative ages, health, and their taxable accounts.

There are generally more opportunities for future tax savings with Roth conversions when both members of a married couple are alive. Joint filers have more variety in tax brackets and higher standard deductions.

After the death of one spouse, the widowed spouse will have a standard deduction that has been roughly cut in half, less flexibility in tax brackets, and might no longer have the reserves to make Roth conversions.

It’s surprising to many clients in their late 50s through early 70s how dynamic tax management becomes in those years. Wasn’t life supposed to get simpler?

Roths Help Cover The Vagaries Of Life—and The Need To Plan For Death 
People often underestimate the costs they’ll have if they have the good fortune to live into their 80s and 90s. People who were comfortably living on their budget are diagnosed with a disabling disease. They can no longer live alone. They need in-home help, around-the-clock nursing care, or a memory care residence.

Isn’t this what the “probability of success” is all about in your financial planning software?

Roth assets, along with brokerage assets, can provide a financial life raft for retirees. They’re a buffer against having to withdraw—and pay taxes on—assets from traditional IRAs. They’re also a better place to hold assets with potentially high returns.

A Roth conversion strategy supports tax-efficient estate planning for HNW households, too. For these clients, there are generally two over-arching goals for minimizing taxes while they’re alive and after they’ve passed away:

• Empty IRAs and similar accounts for which assets are taxable upon withdrawal and subject to RMDs.

• Leave in bequests—to family, friends, associates, or charities—a combination of Roth IRAs and stocks with significant unrealized gains held in brokerage accounts.

Achieving tax alpha for clients and their heirs can be daunting if you’re still using spreadsheets to determine clients’ tax liabilities.

Luckily, there is software available to financial services companies that can evaluate a household’s portfolio and the factors I listed. Then the software produces recommendations for one-time or sequential Roth conversions based on different scenarios for your clients’ futures.

After all, who doesn’t like to tell a client, “I can save you some money in taxes.”

Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.