A Simple, Elegant Solution to the Roth Conversion Calculation

By Joel Bruckenstein, CFP

Although we have a reprieve until May this year, April 15^th is traditionally known as Tax Day to both professionals and lay persons across the USA. To mark the occasion, FP Alpha, an AI-driven comprehensive planning solution that identifies actionable insights for advisors by analyzing tax returns, estate documents, and insurance policies, has announced the general release of their Roth Conversion Simulator. The release of this tool is timely. With many clients of advisors incurring income shortfalls in 2020, the silver lining may be an opportunity to do a partial or complete Roth conversion at a favorable marginal income tax rate. 

According to Andrew Altfest, the Founder of FP Alpha and President and principal advisor at Altfest Personal Wealth Management, a $1.5 billion SEC registered advisory firm in New York City: “The Roth Conversion Simulator provides our firm with tremendous time savings over current Roth conversion analysis which can take a lot of time to model and complete, limiting which clients can receive the analysis, and that left the value of that advice vague. Not only does this automate the process, it also allows us to integrate valuable specific information from the client’s tax return.

There are many Roth calculators available on the market today, but the Roth Conversion Simulator has a number of characteristics that make it highly desirable. Most calculators out there today require the advisor to run multiple scenarios with differing variables in order to arrive at an optimal solution. This simulator does the heavy lifting for you with the click of a button. Using the optimization feature, it automatically arrives at the number of dollars to be converted given the data provided (filing status, current account owner age, beginning IRA value, life expectancy, and the heirs expected tax rates if the goal is to pass the Roth on to the next generation. The optimization engine can create an optimal scenario for a single conversion event or multiple conversions over a number of years. In each case, it will calculate the dollar savings to the client so that the advisor gets full credit for the conversion and the optimization.

“FP Alpha’s new Roth Conversion Simulator tool is unique because it delivers on something traditional calculators cannot do. Prior to using it, we had trouble talking to clients about Roth conversions. Usually, it was either a hit or miss comparing the impact of 10 years or 15 years. But the Roth Conversion Simulator allows clients to see the most optimal number of years with a click of a button”, says Evan Fitzpatrick, Senior VP of Planning at Interchange Capital Partners

A common Roth conversion strategy is to fill up the current marginal tax bracket that the client is in. Since many have experienced financial hardships this year, it is likely that a portion of your client base is in a lower marginal bracket than is normally the case. The Roth Conversion Simulator can, with the click of a button, calculate the exact dollar amount that can be converted this tax year to make full use of the client’s marginal bracket, so the release of this tool still provides advisors with the ability to identify Roth conversion opportunities for the 2020 tax year. 

The Simulator dynamically adjusts calculations and illustrates them right on the screen as you compare scenarios. For example, if you want to see the impact of doing the conversion over three years instead of two, you just change the one field within the input screen, and all of the relevant calculations will appear. There is no need to run a report or wait to see the results. 

The Roth Conversion Simulator is a perfect companion to FP Alpha’s recent enhancement, the Tax Snapshot. The Tax Snapshot suggests when a Roth conversion may be appropriate, identifying the remaining dollars available for conversion to maximize the current tax bracket while the Simulator allows the advisor to run the numbers, optimize the strategy, and quantify the value of their recommendation. 

We think that the timely release of the Roth Conversion Simulator will allow more advisors to take advantage of the opportunity to do Roth conversions this year by quickly illustrating the benefits of the strategy and automatically calculating the appropriate conversion amounts.