You can’t look at only the potential cost without comparing it with a long-term benefit. You’d have to look again at the two big benefits I cited earlier: the years of tax-free compounding and no required minimum distributions. Then add in the benefit of removing the risk of future higher tax rates in retirement. You have to evaluate both sides of the equation. The money paid in taxes may seem lost, but there is a return on that money in the long-term, tax-free accumulation in the Roth IRA.
However, if the client has a certain investment opportunity (which also comes with respective risk) then you’d have to weigh that and see if the funds might be better employed in that investment opportunity.
12. The Risk That The Law Will Change At A Later Date
This is the most common question I hear from consumers. But I don’t believe it’s a reason to avoid Roth conversions. No one knows for sure if a money-hungry Congress would change the rules, but based on their track record over the years the Roth has been in existence, that is not likely. Why? Even Congress realizes that the Roth IRA is a cash cow for the government, albeit a short-term one. Legislators don’t look at the long term. They look at short budget cycles. And in the short term, Roth IRAs bring in money because Congress gets its cash fix from taxes paid up front. A tax on these accounts would kill Congress’s secret golden goose.
So there you have it. There are two sides to the Roth decision and clients will need financial advisors more than ever for a professional and thorough evaluation. There’s real value in that.
© Ed Slott and Company. LLC. Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. He will be a keynote speaker at Financial Advisor's Inside Retirement conference in Las Vegas on September 27. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group℠, please visit www.IRAhelp.com.