Are partial Roth conversions right for your clients?


Roth conversions are an often overlooked tax planning strategy. Often, this potentially beneficial option is brought up by investment advisors before tax advisors.

Tax planning and advising is one of the best ways, we as practitioners have to add value to our clients, and Roth conversions can be a good fit in a number of different situations.

So when should you consider Roth conversions for your clients?

1. When it is expected that your clients’ tax rates will climb

This could be for a number of reasons, legislation being one of them. If current tax credits and deductions are allowed to be phased out when they expire, taxes will likely increase for many Americans. If your client is also expecting continued income growth, they should also consider rising taxes.

Many individuals plan for a decline in income at retirement but depending on the circumstances, that’s not always the case. Doing a Roth conversion means the client is able to be taxed on the income sooner rather than later at the higher rate.

2. Change in MFJ

Life circumstances such as divorce and death of a spouse can have unwelcome and unexpected tax consequences, for instance going from a married filing joint return to suddenly filing as a single taxpayer. Especially with estate planning and looking ahead for spouses who want to ensure that each other are financially stable in the event of a death, Roth conversions can provide a needed benefit.

Doing conversions now means the surviving spouse has non-taxable income coming when their filing status may not be as favorable.

3. Inherited IRAs

In certain circumstances, children who have inherited IRAs from their parents have a limited amount of time to deplete that IRA. This can mean in some cases that younger children, especially those still working, are taking an unexpected tax hit in the years they have to deplete IRA funds.

If this situation is impacting any of your clients, discussing a Roth conversion can be hugely beneficial. Converting those IRA funds now allows future flexibility when the funds are passed to the next generation without adding a higher tax burden.

Roth conversions done in not the right circumstances do have a downside. Slight increases to current taxable income from Roth conversions can impact other items on a return such as eligibility for other credits and deductions, Medicaid and Medicare benefits, social security benefits, or even health insurance benefits and financial aid.

Be sure to have a detailed conversation with your clients about other items that are impacted by their income.

When it comes to Roth conversions, the best laid plans often involve not just the tax preparer, but also an investment advisor and sometimes an estate attorney to ensure everyone has the full picture and ability to advise your client with the most information possible.

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