How to Model a Roth Conversion

A Roth conversion, allows you to take tax-free withdrawals in retirement and provide your heirs a tax-free inheritance. At some point in your retirement planning process, you may want to explore if the tax benefits of a Roth conversion would be beneficial for your client.

In eMoney, you can illustrate the transfer of funds into a Roth investment. You can also present a clear comparison of the client’s current situation versus the Roth conversion strategy to assist in decision-making.

Let’s take a look at how to model a Roth conversion and a few key reports you can use to see the impact of this strategy.

Modeling a Roth Conversion 

If the client has already decided to follow the strategy, you’ll model the conversion in the client’s Advanced Facts section. However, if you’re recommending this strategy, use a scenario to compare the recommendation against the client’s base case.

Today, we’ll focus on how to enter a Roth conversion within a scenario.

1. Add a new scenario. On the Client Overview page, click Plans and select ‘Add’ to the right of scenarios. After naming the scenario, click on the AP icon to open it.
2. Add a new Roth investment account. If the client does not already have a Roth investment account in their Facts, the first step will be adding one to the scenario. Under Planning Techniques, click on the drop down list beneath Add a New. Select Investment in the first box and Roth IRA in the second. Click ‘Add Fact.’
3. Fill in the Roth IRA information. Be sure to select a growth rate for the new account but leave the value blank. You’ll fund the Roth IRA using a transfer flow in the next step.
4. Add a new transfer flow. To transfer funds from the Traditional IRA into the Roth IRA within the same scenario, click on the drop down list beneath Add a New and select Transfer. Click ‘Add Fact.’ The system will know based on account types that the transfer flow triggers a taxable investment subject to ordinary income tax.
5. Fill in the transfer flow information. Be sure to enter the annual amount or the full amount you want to transfer, select the traditional IRA as the source account and the Roth IRA as the destination, and select a start and end date. If the transfer occurs all in one year, the start and end dates will be the same.

Note: To add in Advanced Facts, you will follow the same process. You’ll add a Roth investment account and move funds from a traditional IRA into a Roth IRA using a transfer flow.

Now you’re ready to look at the reports!

Fact Check Your Data Entry 

You can use two of the Ledger reports to view the Roth conversion. The Asset Ledger will show the withdrawal from the source account and the contribution into the destination account. While the Tax Events Ledger shows the annual amount subject to ordinary investment income tax.

Compare in Reports

You can use two of the Ledger reports to view the Roth conversion. The Asset Ledger will show the withdrawal from the source account and the contribution into the destination account. While the Tax Events Ledger shows the annual amount subject to ordinary investment income tax.

To see how the strategy impacts a client’s cash flow and taxes, check out the Cash Flow and Income Tax reports. You can compare Base Facts to your Roth conversion scenario in both. Once you click into each report, you’ll use the drop down lists next to ‘Show” to select the Base Facts versus the scenario at the top of the report page.

You can also use the interactive planning tools, such as Goal Planner and Decision Center to present recommendations to your clients.

Have a question? Give us a call at 888-362-8482 or send us an email.