As more Americans prepare for retirement, the role of a financial advisor has become more crucial than ever. Multiple retirement income streams, unexpected shifts in the stock market, ever-changing tax laws, and more make the retirement income planning process confusing.

Savvy financial advisors understand that an effective retirement income strategy helps clients sidestep undesirable tax situations, so they hold onto more of their hard-earned money. One of these strategies is the Roth conversion, the conversion of a traditional IRA to a Roth IRA. Roth conversions can help clients reduce their tax obligations in the short term while lowering the total amount of taxes they’ll be required to pay in the long term when they retire.

Let’s dig into the benefits of Roth conversions for your clients and the advantages of high-quality financial planning software for you and your practice.

Why are Roth conversions helpful to clients?

In 2010, the IRS began allowing investors to convert traditional IRAs into Roth IRAs regardless of income. With Roth IRA conversions, clients pay taxes on whatever amount of money is converted. However, if they plan to retire in a higher tax bracket, they’ll still pay less in taxes in the long run.

There are numerous advantages to Roth conversions, so let’s take a look at a few of the specific benefits:

  • Reduce the amount of taxes that clients must pay in the future.
  • Any monetary gains, contributions, and earnings grow tax-free in Roth IRAs.
  • Once your clients have paid taxes on their Roth IRA contributions, they won’t be required to pay them again if they take qualified distributions.
  • Clients will likely owe less in taxes over the long-term if they keep their money in a Roth IRA versus a traditional IRA.
  • Clients can make withdrawals at any time without tax penalties, even though advisors should advise them against utilizing their Roth IRA account like a traditional checking or savings account.

How does the right Roth conversion software help financial advisors and their practice?

Although there are many different types of income tax or retirement planning software programs, the right Roth conversion software should also provide numerous benefits to financial advisors, such as:

  • Integration with other income-planning technology
  • A comprehensive perspective of clients’ overall retirement income plans, including the results of Roth conversions
  • Easy-to-understand charts, graphics, and visuals that show clients a valuable picture
  • The ability to adapt to different financial scenarios that take into account income changes, Roth conversions, unexpected financial emergencies, and more
  • A dedicated support team to answer any questions that financial advisors may have

Roth conversion software such as Covisum’s Tax Clarity® or Income InSight® can work together to display opportunities for Roth conversions for any given year, calculating the lifetime impact of a Roth conversion using simple visuals to understand for clients. This powerful combination provides plenty of ways to show your value to your clients, including:

  • Utilizing Tax Maps to illustrate where the next dollar harvested from ordinary income would have a minimal effective marginal rate
  • Following tax-related legislative bills, laws, and regulations closely and updating the Roth conversion software to reflect essential changes
  • Calculating the lifetime impact of a Roth conversion in an easy-to-understand way
  • Making assessments of multiple income sources such as Social Security benefits, pensions, and more
  • Incorporating multiple client portfolios (qualified, non-qualified, Roth).
  • Carrying out stress-test functionality in the event of long-term care, early death, a down market, and more

What else do I need to know about Roth conversions for my clients?

Converting all or part of a client’s traditional IRA into a Roth IRA can lead to long-term tax benefits. Smaller Roth conversions carried out early in retirement can reduce future required minimum distributions by spreading tax liability out over time during retirement. Show clients how valuable your advice is, so they know that working with you is worth it!

To learn more, download “The Financial Advisor’s Roth Conversion Handbook.”