For exercise (and believe me, I need it) I enjoy riding my recumbent trike. The other day I was shopping for riding socks. I asked for sock sizes and was told, "One size fits all."
When it comes to financial advice, people often seek a "one size fits all" answer to seemingly simple questions. For example, beginning next year federal tax laws open the door to anyone wishing to convert a traditional IRA to a Roth IRA. Current rules impose income limits restricting the ability to convert.
Naturally, the question follows, "Should I convert?"
Unfortunately, answering this question involves more than just a yes or no response. What is disappointing is the number of media-based "experts" dispensing general advice without considering the individual facts and circumstances of the listener or reader.
One predicts loss; other, a draw
For example, a widely quoted author concluded that if investment returns, tax rates and timing of withdrawals were all constant, Roth IRA conversion would be a money loser.
However, another expert suggested that if tax rates, investment returns and timing of withdrawals were all constant, Roth conversion would be neutral.
So, who is right?
The answers are likely neither or both. It all depends on your facts and circumstances. The conversion questions can be very complex. A calculator or general comment cannot replace your professional's judgment.
Consier the variables
For example, consider these observations:
_ When income tax rates are going down, the conversion likely makes no sense.
_ When income tax rates are going up, the conversion is more likely to make sense.
_ Conversions are likely better for the person who does not need the funds to live from.
_ Conversions are generally better for the person who has outside funds to pay the taxes.
_ Conversions for a couple before the first death can make sense.
_ Conversions with the intention to monitor the market often make sense.
_ Conversions for a person with an estate-tax problem will make more sense than for a person without an estate-tax issue.
_ Conversions to leave a Roth to grandchildren often have merit.
The human factor
We also must consider the proverbial "X-factor" in evaluating financial decisions: human nature. While one can argue the difference between paying taxes now (Roth IRA) and investing the tax dollars and paying taxes later (traditional IRA), many people will not invest the tax dollars now but will spend the tax dollars now. Oops!
Mike Jones, CPA, who chairs the editorial advisory committee on retirement benefits for "Trusts & Estates" magazine, observed how wonderful the unique relationship is between each person and that person's money.
Even two people with identical balance sheets might behave differently because they have different perspectives, different goals or other different circumstances. General studies on the conversion question can be useful only as a reference point. They are never THE answer.
One size fits all might work well with bike socks, but when it comes to the financial and tax advice of conversions, it's one size fits one.
James D. Hallett, investment advisor representative, offers advisory services through Hallett & Associates, P.S., a registered investment advisor.
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