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Life Health > Annuities

Roth IRA Conversions and Annuities: How to Move Clients to Commitment

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As of Jan. 1, 2010, several tax law changes took effect that will open up Roth IRA conversions to those with household incomes higher than $100,000. What you may not know is that this creates a huge annuity sales opportunity — thanks to annuities’ application in Roth IRAs and Roth IRA conversions.

But even if you’ve taken advantage of this opportunity to set up meetings with your existing upper-income clients and attract new clients, you may be having trouble moving clients to commitment. How, then, do you help them go from thinking about a Roth IRA conversion to actually buying an annuity? Here are four ideas that have worked for others.

#1. 2 concepts that work together or apart
At every client meeting in which you discuss Roth IRA conversion, you want to clearly present two concepts to your customers.

First, think of an annuity as chocolate. Second, think of a Roth IRA as peanut butter. Now, look at a Roth IRA conversion into an annuity as a Reese’s Peanut Butter Cup.

Present to your clients all of the advantages of an annuity, such as the safety features; the relatively high fixed or index-based interest crediting potential; and the provisions that create reliable, lasting income. An annuity is chocolate, and it can be wonderful all by itself.

Lead your client to admit that moving money to an annuity makes sense.

Then, present all of the advantages of a Roth IRA conversion — in particular how it can insulate retirement savings from future tax increases, eliminate required minimum distribution requirements, and allow your clients to pass IRA money to heirs without an income tax. A Roth IRA is peanut butter, and it can be great all by itself, too.

But then, you can combine the two by doing a Roth IRA conversion into an annuity — the Reese’s Peanut Butter Cup.

Here’s the key point: If your client decides not to do a Roth IRA conversion because they decide the peanut butter is not for them, there still should be very compelling reasons for them to want the chocolate — that is, the annuity.

If you keep in perspective that the expanded Roth IRA conversion opportunity is a wonderful excuse to schedule client meetings, and then you focus on your core message of using annuities for retirement asset safety and retirement income planning, your purpose is accomplished — regardless of whether or not your clients complete the conversion.

#2. Ask 3 no-brainer questions
There are several questions you can ask that will help lead your clients to commitment.

  1. “Given what you are hearing in the news, do you believe that federal and state income tax rates in general will increase, decrease, or stay about the same?” My experience is that almost everyone says “increase.” In fact, on Feb. 7, 2010, Alan Greenspan appeared on NBC’s Meet the Press and made this statement: “We have gotten to the point in this country where [federal government] spending is untouchable. I have no doubts that we have to raise taxes in order to close this huge deficit.”
  2. “Since you believe that tax rates are going to go up in the future, if there was a way to pay taxes now on the existing balance of your IRA (at a lower tax rate) to avoid paying taxes on that balance later (at a higher tax rate), would you be interested?” Most people will say “yes” to this, because it only makes sense.
  3. “And suppose that doing what I just said also provides an opportunity to avoid income taxes altogether on the future growth of your IRA, would you do it?” Most people will say “yes” to this, as well.

What you have done here is presented the reasons for a Roth IRA conversion, and your client has agreed that each step in this thought pattern makes perfect sense. Thus, they can understand that when they later balk at the numbers, their objection does not fundamentally make sense. As a result, when that time comes, they will actually want you to help them overcome their psychological hurdles.

#3. Show an illustration
Numbers can often help your clients overcome their psychological hurdles. Suppose that your client’s current marginal federal and state income rate is 33 percent, and they fear that in the future, it will increase to 50 percent. Suppose that their IRA balance is currently $300,000, and they think it will be $750,000 by the time they retire. If they convert today, they need to pay 33 percent of $300,000 — that is, $99,000 in taxes now. That’s a big pill to swallow.

But if they don’t convert, the future tax bill is 50 percent of $750,000, which is $375,000. Would they be willing to pay $99,000 to save $375,000? Most people would.

#4. Schedule a series of partial conversions
Your client is now on board with the concept of doing a Roth IRA conversion, but that $99,000 tax bill is just too big a pill to swallow. No problem: Propose to your client the idea of an immediate $50,000 conversion, which would only generate a $16,500 tax bill. While this is obviously not a trivial amount of money, it is a lot more palatable than $99,000.

Now you have a built-in excuse to meet with your affluent clients every year for the next five years to re-evaluate and execute not only a Roth IRA conversion strategy, but their entire retirement income plan.

And don’t be surprised if your client is willing to convert more than $50,000 at your next meeting. Sometimes, it just takes them a little while to work up their comfort level to a higher dollar amount.

Chris Conklin is a licensed agent and principal and actuary of Insurance Insight Group. He can be reached at 801-290-3320 or [email protected].


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