9 Ways Roth IRA Conversions Can Trip Up Advisors

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In a certain sense, the logic behind when and why you should use Roth individual retirement accounts versus traditional IRAs is relatively straightforward.

Put simply, the key planning point is to favor traditional IRA contributions while a client’s tax bracket is higher and to favor Roth contributions when their rates are the lowest.

As financial planning expert Ed Slott recently told ThinkAdvisor, timing and sizing Roth contributions and conversions is “all about the tax rates, and how much income can be pushed into the lowest tax brackets.”

Putting this seemingly straightforward framework into practice on behalf of clients with dynamic earnings and spending needs, however, is an entirely different matter — one that requires significant planning expertise and close collaboration among the financial advisor, the client and their tax professional.

Fortunately, advisors have a lot of places to turn to for information about efficiently managing Roth contributions and conversions, including a recent webinar hosted by Michael Kitces, head of planning strategy at Buckingham Wealth Partners.

During the webinar, Kitces offered a number of insights about how Roth contributions and conversions work in practice, especially the different ways that advisors and their clients can make mistakes that result in the payment of excess taxes.

As Kitces emphasized, there are few techniques that can generate as much excess wealth for retirement-focused clients as well-timed and carefully coordinated Roth conversions. At the same time, making mistakes in the process can be costly.

See the slideshow for a rundown of nine Roth account considerations that financial advisors and their clients should keep in mind. Some are more straightforward than others, but all of them can help ensure that Roth contributions and conversions achieve their intended results without any unexpected surprises (or tax bills).