That tax-deferral system works well – until retirement time arrives and your clients realize a chunk of their fund is going to the swamplands of Washington. One plain vanilla solution to that has always been the Roth IRA. But what makes the Roth IRA, perhaps, a little more interesting these days is president Trump. Assuming we get tax cuts, now is a good time to lock into a Roth, and pay those taxes up front, thinks Gary Marriage Jr., CEO of Nature Coast Financial Advisors.
Like many retail investors, Marriage likes the conversion from traditional IRAs into Roth IRAs because of the tax free withdrawal element. That’s always been the case. But if taxes decline, it might be worth considering taxing taxes out now rather than dealing with potentially higher taxes in the future.
“Taxes are about to be on sale,” Marriage says. “Over the next four to five years, your tax bracket is probably going to be as low as it ever will be,” Marriage believes.
Marriage says he recently did a conversion for a client where he had calculated that if the client lived to be 90, they would have paid nearly $1 million in taxes with a traditional IRA. Switching to a Roth lowered that tax bill to $200,000. “I’d rather pay $200,000 than a million,” he says.
What’s he doing with his client base?
- Spacing out the conversion. Most people don’t want to take the tax hit all at once when converting to a Roth. He transfers their money into a Roth in increments over the course of a few years. Spacing out the conversion over five years means the tax is spaced out over five years as well. A few factors determine how much you can convert the first year, but Marriage says about 40% of the people he has worked with were able to convert half of it in the first year.
- Timing. This has more to do with age and less to do with market timing. Marriage says clients between 59 ½ to 74 benefit the most from the switch.
- Go Roth instead. If you’re of the mind that taxes are coming down, then put your clients in a Roth instead of the traditional pre-tax IRA. Some employers will offer a Roth 401(k) as an option, meaning RIAs will have their competition cut out for them. But those who do not have that option may want to consider the benefits of paying Uncle Sam today rather than in retirement.