It was supposed to be the perfect confluence of events. Tax law changes embedded in the Tax Increase Prevention and Reconciliation Act of 2005 lifted income restrictions on those converting from Traditional IRAs to Roth IRAs in 2010. For clients hesitant about the initial tax hit, the law allowed for payments to be smoothed over years 2010 and 2011. And because of poor global economic conditions, many traditional IRAs plummeted in value, further decreasing any associated tax and clearing the way for a tax-free Roth rebound.
The opportunity for advisors from investors chomping at the bit was to be immense; a whole new area of expertise that would further diversify and increase the advisor’s suite of services.
Yet a survey from Putman Investments released last week found only 14% of respondents were considering converting some or all of their traditional IRA assets to a Roth IRA either this year or next, with a majority (56%) saying they definitely would not convert.
So what happened?
Phil Demuth has the answer. The co-author of eight New York Times bestsellers on planning and investing (along with economist, lawyer and comedian Ben Stein), he manages $100 million for 50 high-net-worth clients with a minimum investment requirement of $1 million. And did we mention his Ph.D? He and Stein’s latest is The Little Book of Bulletproof Investing: Do’s and Don’ts to Protect Your Financial Life.
Boomer Market Advisor (BMA): Why didn’t the rate of Roth conversions happen as predicted?
Phil Demuth: In a phrase–legislative risk. Clients are very suspicious of the government’s intentions. They feel it’s too easy for politicians to go back on their word. They give money to the government in the form of taxes due upon conversion, and essentially get an IOU for a promised future tax break.
BMA: And those IOUs won’t hold?