Wednesday, October 21, 2009

Are Roth IRA conversions a tough sell?

Investment News reports that Advisers find Roth IRA conversion opportunity a tough sell.

SHH warned us about this--few people really want to accelerate their tax liabilities, especially when the benefit seems vague and in the future.

However, there are two more facets that I had not considered. First, the fact that asset values are down means the taxable cost of the conversion is at what could be a historic low. I thought that made the conversion attractive, but apparently it's having the opposite effect. Traditional IRA owners feel like they already lost a ton of money in their accounts, and they don't want to make it worse with an optional tax bill.

Second, they don't trust their government.
Some particularly conservative clients are so mistrustful of the government that they are worried that Congress might decide down the road that Roth IRA withdrawals are taxable and thus they will end up paying taxes twice, Mr. Neuschwander said.

This is what happened with Social Security, he said. “Some clients have asked me, ‘What happens if Congress changes the rules and we have to pay taxes again,’” he said. “To be completely honest, that’s an unknown.”
Wow. They have a point. An item in the NY Times six or so months ago mentioned the possibility of having something like an "excess accumulations" tax on overly large Roth IRAs. Or, perhaps less insidiously, they could start counting Roth distributions in figuring the tax on Social Security benefits.

2 comments:

David Shulman said...

I think the strongest argument for conversion in January is that they have until October of the following year to change their mind and recharacterize it. In essence, they get to bet the market is going to go up, and if it doesn't they can undo it.

Furthermore, they can do partial recharacterizations. In other words, convert the whole thing in January, then next year when doing taxes, see what the tax liaiblity will be and what they can afford. Keep that amount as a Roth and undo the rest.

Philip Kavesh said...

I think more advisors need to educate themselves on all of the advantages of the Roth Conversion.

Right now, I'm doing a joint 3-part teleconference with Robert Keebler on Roth IRA Conversion (which goes over the recharacterization mentioned above by Mr. Shulman).

For more information, go to www.ultimateiratraining.com/rothtraining.html.