The Roth Conversion Scam

[BobKamman]

So far this year I have berated one client (a PhD) for doing this on the advice of her high-school-diploma "financial adviser," and fired another one because her "financial adviser" wanted to jack up her income so she could take advantage of a DAF donation.  (The extra income eliminated the senior deduction, and raised her 2027 Medicare premiums by at least 50%.  The IRA, of course, could have been used for QCD's with no tax consequence.)

This is how I try to explain the lack of any benefit from paying tax now instead of ten years from now.  I'm sure there are situations where a Roth conversion is a good idea.  For example, someone moving from Florida to New York.  But am I missing something here?  Have you ever recommended a Roth conversion? Why?

This is 8th grade math.  

1) Take 20,000, tax it at 25% (as you are doing this year), result $16,000, invest what's left in a Roth at 8% (reasonable yield on S&P Index) for 9 years, and (see Rule of 72) it has doubled to $32,000.

2)  Keep the whole 20,000, let it double in 9 years to 40,000, then tax it at 25% and what do you have?  Surprise!  $32,000.

Except in 10 years, you might not be in a 25% tax bracket.  It might be down to 10% or 15%, now that you're retired.  Or you might be in assisted living, paying $10,000 a month that is deductible as a medical expense, so your tax bracket is zero. 

What I don't understand is how these people who "manage" your assets for a percentage of your net worth, encourage people to reduce their estate by 25% before they even get started.  

[TaxGuyBill]

I agree that they are way overrated.

They can be good with really large retirement accounts, where their RMDs will be in a really high tax bracket, cause more Social Security to be subject to tax, and/or trigger IRMAA.

They are great when they are tax-free.  I have some clients that only have Social Security income and maybe some interest or dividends, so they can do conversions tax-free  If/when their kids inherit the retirement accounts, the Roth will be tax-free to the kids.

Otherwise, I'm not a fan and tend to discourage them.

[Skylane]

I ask many of my clients to provide their year end statements along with the 1099s to get a better ‘feel’ for the value received for their 20k+ fees…. Most will do better if they simply put it in the S&P and call it a day.

[Skylane]

@BobKamman said What I don't understand is how these people who "manage" your assets for a percentage of your net worth, encourage people to reduce their estate by 25% before they even get started.  

…over the last 5 years, I’ve reported 2 FAs to FINRA,  One funded an annuity for a 79 YO woman by selling 500k of blue chips that she had inherited in 1985. 

[BobKamman]

@Skylane I used to shock one or two clients a year with the FINRA report on past transgressions of their financial-products salespeople.  Lately, I have fewer clients and they stay away from the worst losers.  I took a client's case to FINRA arbitration and won, a decade or so ago.  Sold a 91-year-old with a terminal illness (disclosed) a bond fund paying 3%, with a 3% commission.  Client died within six months, as expected.