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Advisors often get overexcited and overwhelm clients when discussing Roth conversions. Here’s how to dial back and effectively communicate this tax-saving strategy.
We’re intentional about every aspect of our client interactions, from the speed at which we speak to the words we use and even our body language in the conference room.
Yet, regarding Roth conversions, advisors get over-excited and recite everything they ever learned about this tax-saving strategy to clients.
Clients leave the meeting feeling overwhelmed and unable to explain their reasons for using a Roth conversion to their CPAs, spouse, or adult children.
Your clients hired you to help them make educated and informed decisions about their finances, not to make them more challenging. When explaining Roth conversions, clients often need less information, not more.
In your practice, how are you communicating Roth conversions to clients at a level they can understand?
Why suggest a Roth conversion?
At some point in their lives, clients will need a lump sum of money. The funds could be used for fun things like buying a second home or traveling the country.
But Bob and Sue may need money for something much less fun, like long-term health care or to help a family member.
In either case, Bob and Sue need to make a distribution, and the last thing they want is to be killed in taxes. I’d much rather eat that elephant one bite at a time, so the goal with Roth conversions is twofold:
- Pay the devil we know: lock in at the current tax rate.
- Create options down the road.
Financial planning is all about creating options for your clients. We want to diversify our retirement income streams, and I illustrate this in my bucket illustration I share with clients. I have a bucket strategy for diversifying cash, income, and growth.
Why?
Because I don’t know when the markets will fluctuate, I want to hedge my bets and create some diversification for my clients so they have better options later in retirement.
The same goes for taxes
I don’t have a crystal ball on my desk that I can use to predict changes in tax law. I wish I did – it would make my job so much easier! But I don’t, so I will do what I can now to improve the clients' future.
There have been unpredicted events in my clients’ lives. For example, the client could sell a business or a real estate property – something that would typically result in massive capital gains taxes.
But because we’d been doing Roth conversions for years in advance and had money in a Roth IRA, we could play the tax-bracket game, drop their income significantly, and get a lot of money out tax-free when selling a capital asset.
When we started doing Roth conversions years in advance, we didn’t anticipate Bob and Sue would sell their capital assets. But because we had worked so hard on diversification, we had many levers we could pull to help control my clients’ taxes when they needed it.
How to explain Roth conversions to clients
It’s borderline negligent not to discuss Roth conversions with all your clients each year. Whether your clients meet the requirements for a Roth conversion or not, the conversation still needs to happen.
By bringing up Roth conversions, regardless of whether they are necessary, you’re implementing the Dishwasher Rule and showing that you’re doing the work to explore all of their options.
Your Roth conversion conversation doesn’t need to be elaborate. You don’t even need to go into a ton of detail. It can be as simple as:
Great news, Mr. and Mrs. Client! We reviewed the Roth conversions, and it does/doesn’t make sense for you to do it this year. We’re still on track to do it/not do it for this year. Here’s how this will benefit you…
Sure, I used the technical terms here (clients hear about Roth conversions everywhere), so I quickly tie in the benefits so they can see how Roth conversions apply to their specific situation.
You can go through this script quickly; there’s no need to print out and read a 10-page report from a Monte Carlo generator.
Even though you have a Roth conversion conversation 50 times a week, each of your clients only hears it once. And even though we talk to them about it yearly, they often forget.
Just so you know, your clients won’t be annoyed with you for bringing up Roth conversions every year, even if they don’t need one. My clients love that we research and evaluate their options annually.
Keep it simple
Here’s a little more help for discussing Roth conversions in client meetings.
If you can’t explain a financial concept on one page, your explanation is too complex. I diagram my estate planning on one page. My tax planning is written out on one page, and my signature buckets of income in retirement illustration are – you guessed it – on one page.
I’m not saying you need to speak down to your clients. But even your most sophisticated, affluent clients hired you for your advice.
If you get too involved in the nuances of Roth conversions, you’ll lose your ability to communicate what the client needs to do, undermining your purpose.
Your explanation can be this simple:
Hey, considering your current tax bracket and future plans, I think we should do between x and y amounts in Roth conversions. Is that okay with you?
I give them a range, but I don’t share the exact amount down to the penny, and then I share my tax plan.
Every investment that generates a tax bill should pay the tax bill. We set the money for taxes aside in a separate account for the clients to access at tax time, and we send a 1099 letter with the account information in January.
Discussing Roth conversions with your clients doesn’t have to be an arduous ordeal, but it does need to happen.
Action item
During surge, flag potential candidates who need Roth conversions in the coming year.
When you review the client’s homework sheet, include their Roth conversion range so you don’t have to return later to do the math. Then, add the list of clients to your Roth conversion process.
If it doesn’t make sense for a client to do a Roth conversion, mark it in the CRM and tell them why in the next meeting.
Micah Shilanski, CFP®, is a financial planner who achieves the impossible. Micah is recognized as a leader in the concept of lifestyle design for financial planners and has spoken at conferences across the country. Micah is an advisor with Shilanski and Associates, a founder of Plan Your Federal Retirement, and a co-founder of The Perfect RIA.
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