The strategy of a Roth conversion is premised on the arbitrage, or the difference, of a client’s current and retirement tax brackets. The advantage is paying taxes today and none in retirement’s tomorrows. The additional feature to this conversion strategy eliminates exposure to the provisional income test for Social Security taxation saving benefit taxes because Roth IRAs are not subject to the test.
But keep in mind the client may not have to pay taxes at all with the standard and senior tax deductions (age 65 or older) at $27,400. Many seniors will file the easy form and take both deductions, offsetting any qualified plan income. Because of these tax deductions, many Roth conversions are unnecessary, i.e. the taxes paid triggered by the conversion is a complete waste of money and exposes the agent or investment adviser to arbitration or lawsuit.
This is the next big liability for financial professionals who discuss the tax arbitrage when they shouldn’t be discussing it at all much less executing a trade that will cost most conversion clients unnecessary taxes.