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Retirement Planning > Saving for Retirement > IRAs

Roth IRA Conversions Are Key to Long-Term Tax Plans, but Watch Out

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What You Need to Know

  • Long-term tax planning is a key function advisors need to orchestrate with their clients.
  • Roth conversions are one of the most potent tools to use for tax planning.
  • Make sure you work with clients' CPAs so they don't alter your careful tax planning.

Are your client’s CPAs destroying your 10-year tax plan for your clients?

Maybe we should start with a better question: Have you built a 10-year tax plan for your clients? If you are like most of the elite investment advisors that we work with, you already have a 5- to 10-year tax strategy in place.

The effectiveness of your tax strategy most likely rests on whether or not you’re using the time between your clients’ retirement date and the start of required minimum distributions from their traditional accounts.

Sure, Roth conversions have been talked to death in the last decade, but they remain one of the most potent conversations you can have with clients about tax planning, as long as their CPAs aren’t trying to foil your plans.

Each year hundreds of prospective clients email my office or schedule an appointment to learn more about Roth conversions. The main reason for that is they have heard they’re the most powerful tax planning strategy that middle America can use to mitigate their taxes in the future, but they do not know where to start.

Most of my clients retire from their primary jobs around age 60. That gives me 12 years under the Secure Act to work with my clients to convert as many funds in their traditional tax-deferred accounts to a Roth IRA as their tax tolerance will allow.

Tax Tolerance

Tax tolerance is the amount of taxes that a taxpayer is willing to pay to capitalize on the benefits of having tax-free funds available in the future. Spoiler alert: when you ask your clients their tax tolerance, the first number you hear will be $0.

But if you’re able to guide your clients through the benefits of performing a Roth conversion every year that it is possible to do so, their only statement in their 70s will be, “Wish I could have done more!”

Like all good financial planning, this begins with ensuring that your client understands the long-term benefit of controlling their taxes. Yes, taxes can be controlled.

The key is looping in the client’s CPA to your tax planning strategy, because if you do not, they will undo everything that you carefully put together.

A typical scenario is converting $100,000 from a traditional account to a Roth in October. Then, in April, when the CPA shows up at the party, they say to the client, “If you had not done that Roth conversion you would have received a refund, but because your advisor had you do one, you now owe thousands of dollars in income taxes that you did not have to pay this year.”

I can sit here and blame the CPA for throwing me under the proverbial tax bus, or I can step back and reflect on the execution of my planning advice.

Of course, the client doesn’t want to pay the taxes in April — we talked about the benefits of doing a Roth conversion in October. But, unfortunately, six months have gone by, and the client has completely forgotten how powerful the conversion will be in their long-term financial planning.

We solved that: We shortened the timeline between when the client completed the conversion and when they paid their taxes. We ran a tax projection for the client, looping their CPA or tax preparer into the conversion, and said: “By the way, so that we do not have any April surprises, we will go ahead and make the estimated tax payment now.”

Micah Shilanski, CFP, is a financial planner within Shilanski and Associates Inc. and a co-founder of The Perfect RIA and Retirement Tax Services in Anchorage, Alaska. Micah is a leader in the concept of lifestyle design for financial planners and has spoken at conferences across the country.


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