Developing a solid approach to advising clients on Roth IRAs.

• Author: Sarenski, Theodore J.
• Position: Individual retirement accounts

Roth IRAs are a popular personal financial planning tool, owing to the various benefits they offer. Building profiles of the "ideal" Roth IRA owner and then using analytical tools to model various scenarios is a practical approach to identifying clients who may benefit from these tax-advantaged retirement accounts.

Before digging into this profiling model, it may be helpful to briefly look at the mechanics and history of the Roth IRA. Created in 1997 and named after Sen. William Roth, R-Del., the Roth IRA expanded retirement planning opportunities and took the popular traditional IRA concept to a new level (Taxpayer Relief Act of 1997, RL. 105-34). Roth IRAs differ from traditional IRAs in that contributions are nondeductible and they require no minimum distributions, yet qualified distributions are tax-free.

Since the creation of Roth IRAs, taxpayers have been allowed to establish one through direct contributions or by converting a traditional IRA into a Roth IRA. These options were not initially available to all individuals, since eligibility for direct contributions and conversions was limited by a taxpayers modified adjusted gross income (MAGI). This left many high-income taxpayers ineligible to use this retirement planning tool.

In 2005 (effective for tax years beginning after 2009) the MAGI limitations were repealed but only for traditional IRA conversions to a Roth IRA, commonly referred to as a Roth conversion (Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222). Bearing in mind that a Roth conversion generates taxable income, the opportunity to recharacterize the Roth IRA back to a traditional IRA within a certain period was certainly reassuring to those partaking of this new opportunity. The reset ability proved *useful when converted Roth IRA values suddenly dropped during the period in which taxpayers were allowed to undo the transaction.

Now that Roth IRA conversions are accessible to all taxpayers regardless of income level, they have grown in popularity and have become a staple of financial planning. However, investors are witnessing the governments sentiment toward Roth IRAs slowly change with the repeal of the ability to recharacterize the Roth IRA back to the traditional IRA (a change contained in the law known as the Tax Cuts and Jobs Act, P.L. 115-97) and the shortening of the stretch period. This latest change--made in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, P.L. 116-94--now requires most nonspousal inherited IRAs to distribute the entire account within 10 years. Prior to this change, distributions from an inherited IRA could be stretched over a beneficiary's lifetime. This was a major change to the...