Many people look at market corrections in largely a negative way. Of course, we can always talk to clients about buying low and selling high as a reason to invest or reinvest when a correction occurs. Just like making lemonade out of lemons, advisors should evaluate all angles of a client’s situation and look for ways to improve it in an ever-changing world.
Following the August 2015 market drop, a potentially good subject to bring up at your fourth quarter client meetings is the re-characterization of Roth IRAs. Oct. 15 was the cutoff to change a Roth IRA back to a Traditional IRA for the previous year. However, if your client took advantage of converting a Traditional IRA to a Roth prior to the market dip in 2015, there are reasons to look at re-characterizing the asset back to a Traditional IRA and then re-convert.
Because the client converted prior to the correction, that client will pay tax on the larger amount converted. Re-characterizing the asset allows them to eliminate the tax consequences at the higher asset value. The asset must stay a Traditional IRA for 30 days; then, the funds can be re-converted to a Roth IRA at the lower market value. Assuming the market stays lower than the original conversion date earlier this year, the client can convert the same amount of shares at a lower value and less tax. Then, any future gains (even those below the original conversion amount) grow tax-deferred and are accessed tax-free for qualified withdrawals.
Of course, the client only benefits from this transaction if the account value stays below the originally converted amount prior to the re-conversion. This is a market risk you and a client must discuss. However, this tactic allows them to potentially convert more under the same tax bracket than prior to the market correction.
Looking at ways to efficiently convert funds from a taxable consequence during retirement to a tax-free status positions the client for potentially more disposable income later in life, and it gives them a higher probability of not running out of money. That’s truly looking out for your client’s best interest. When you have that conversation, my guess is your client will appreciate your knowledge and attention to detail in handling their account.
Bottom Line: Look toward the tax code for opportunities to open up conversations with your client and help position more tax-free income for them later in life.
Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.
© 2018 Ash Brokerage LLC.