Read The Transcript Below:

Steven (00:49):

Hello everyone and welcome to the next episode of the Retirement Tax Services podcast, Financial Professionals edition. I’m your host, Steven Jarvis, CPA, and this week shocking no one, we’re going to talk about Roth, but don’t tune out yet because while some of you might feel like me in that, hey, we’ve covered Roth, we’ve said everything that needs to be said, it’s just simply not the case. It’s not the case for our industry and it’s certainly not the case for your clients. And so I’m really excited to have with me on the show today, Jim Amerman, who is a financial advisor who has taken his focus on Roth and Roth conversions to a level I haven’t seen before. So I’m really excited to hear how he’s serving clients. Jim, welcome to the show.

Jim (01:27):

Thank you. Glad to be here.

Steven (01:29):

Well, I certainly appreciate you setting aside time for this because as I indicated, especially for those of us who spend a lot of time on this, it can be easy to kind of kid ourselves into thinking everything that needs to be said about Roth has been said. Everyone either gets it or they don’t, but there’s still so often misinformation out there or misapplied information. Before we hit record, we were talking about a post that both of us had seen on social media for a specific set of clients could be incredibly misleading as far as how you talk about what Roth can and can’t do, but we’re not here just to comment what we think other people are doing wrong. Let’s start with a little bit of your background and how you got to this point where you’re at now, where you go pretty deep on helping people get Roth conversions done.

Jim (02:10):

Sure. Background wise, I’ve been in the financial planning space for about 11 years, financial services for 20 years. I was doing comprehensive holistic financial planning and I noticed that the Roth strategies, the Roth analysis always seemed to provide the most benefit. The feedback I was getting from the clients there were really impressed by what the power of the Roth could do. And then I also noticed they would want me to run that by their tax preparer, their CPA, which I would do and almost always I get a positive feedback once in a while. Some CPAs didn’t want to spend the time vetting this stuff, but a lot of CPAs were asking me to do an analysis on their own personal financial situation. So that’s kind of where I knew that I might have a niche area here that could use more focus. So I think the industry kind of the Roth slide by there isn’t a lot of guardrails around the methodology that people are using to determine how much to convert in any given year and in which year and whether they should do a Roth 401K or traditional 401K.

(03:11):

It’s kind of the wild west out there right now.

Steven (03:14):

Yeah, a topic that makes a lot of headlines, but I agree that there’s plenty of headlines. It’s often light on the details of specific execution for specific clients. But before we dive into some of those details, I want to back up for just a second because I think your experience with CPAs is different than most of the industry because you rather casually said, Hey, most of ’em went along with it. They even asked me to do it for them personally, but I hear from a lot of advisors who one of their biggest hangups around Roth is having to fight with CPAs on it. So just talk a little bit more about how you would approach that conversation. How are you having a different experience with these CPAs than so many other advisors I talked to?

Jim (03:51):

Well, I utilize financial planning software, which most of the CPA’s tax preparers do not have access to. I’m trying to be aware of their time limitations. They’re very busy if they’re a decent CPA tax preparer. And I try to jump right to the point, and this is here’s the key reports and this is the increase in the future after tax net worth that we’re going to see by executing this particular Roth conversion strategy. And I can back it up. Any questions you have, let me know. I created an article for CalCPA that lists questions that you could ask your financial advisor if they’re recommending a Roth conversion. So I make sure that I have all those things covered myself when I’m making a recommendation so that the tax preparers have confidence in what I’m recommending.

Steven (04:39):

Just as a quick side note, that’s such a great strategy when especially when you’re trying to work with other professionals, just put the content out that you know is going to set you up for success. That list of questions should absolutely be tailored to things that you know that you’re going to do really well. The other thing I want to highlight in there is that, and would love to hear your perspective on this personally as well, but often we need to make sure we’re thinking a little bit differently about how we communicate some of these things to our client versus how we communicate it to their CPA and other professional in their life. Not that we’re telling different stories, but that we’re focusing on what that particular person is most interested in. Because when we talk to the client, depending on who we serve, a lot of our clients don’t want us to go to that end level of detail.

(05:20):

They want to know why the strategy is valuable and they have a sense of where it’s headed, but they hired you as a professional because they want to leverage your expertise. But that’s not the same when you go to another licensed professional, A CPA who is more analytic, who’s more numbers driven. I like that you just skip right to it, that this isn’t, Hey, can we go golf for the day? Can I buy you lunch? Here’s the report, here’s the numbers. And you even called it out there. Were focusing on the potential future after-tax benefit of doing this. I’ve also found that to be true. I mean for myself as a CPAs, I work with other CPAs. The faster you can back it up with numbers, the faster you can quantify it as opposed to getting on a soapbox, the more responsive they’re going to be.

Jim (06:01):

Yes, exactly. If they can see the math and you’re explaining it clearly, then they’ll trust you going forward. So that’s the best approach. And then going back to what you’ve said a little earlier, yeah, you definitely want to tailor your approach. If you’re talking to a client who’s not that sophisticated financially, then you want to tailor how you’re explaining this to them so that they can get it and keep it simple, straightforward. But some clients want to go into the details and open up the hood and you have that material ready in case they do want that level of detail.

Steven (06:32):

Jim, as I work with financial advisors, I mean the first win for me is if they are helping their clients do Roth conversions of any kind, an imperfect amount is better than none. It can be tempting to get really hung up on. Let’s go. Let’s calculate this out to the penny, which I don’t believe you’re going to that level of detail, but in talking to you, I think part of it’s that you work with more sophisticated clients who are asking you for this, but you’re going beyond. It sounds to me like you’re going beyond, hey, the 22% bracket would fill up at X amount, so let’s convert 20 grand and move on. It sounds like you take it a bit further than that to say No, let’s really think about some of the different factors involved. So what are you taking into consideration?

Jim (07:11):

Well, when you do use the planning software, that’ll give you some final results at your end of life 95 or whatever age you want to use. And then I’ll look at, okay, we’ve got all these different categories. What’s the after-tax value of their final numbers here and what are their goals? Some of this going to charity. Are they possibly moving to another state that’s tax free? You want to take that into account is the goal to help their children out. And then I’ll use a spreadsheet to do another 10 years after death to quantify the benefit of the Roth in that situation. And then you can present value all of that back and find the amount that’s going to give you the highest present value results. I’m not going down to the penny, but not maybe to the nearest five 10,000 of conversion. So that’s the approach I typically use.

Steven (07:56):

I’ve got a lot of really great listeners, so I’m sure they keyed in on it, but I just want to highlight there not something I hear from people very often, but you specifically said in there that you’re not just going to, let’s pick 95, pick whatever date or age of Hey, when do we think end of life is going to be, but you’re really reinforcing that we need to be planning for the lifetime of your wealth because you said that you’re looking at, okay, let me model 10 years after death because that’s really significant. As soon as we get to a spousal beneficiary, that’s how long we have to take everything that was in the inherited IRA and pay taxes on it. So obviously Roth gets rid of the extra tax burden and I’m sure the numbers, I’ve brought it up on the podcast before, but I’ve run into so many advisors who are currently kicking the can on inherited IRA RMDs with the IRS’s rules. I want to highlight again that even just taking this as simply as doing an inherited IRA, taking the distribution all in year 10 versus evenly across 10 years can be a six figure tax difference depending on the amount of that inherited IRA. This isn’t small numbers. I mean this potentially is huge impact. So I love that you’re taking that extra step and saying this isn’t just when Mr. And Mrs. Client passes away, but it’s what comes next.

Jim (09:10):

Right. And I think I’ve heard you mention that just because they are pushing back the required minimum distributions on those inherited IRAs doesn’t necessarily mean that you should push it off. You want to look at the big picture and you might be getting pushed up into very high brackets if you postpone and procrastinate on that stuff.

Steven (09:28):

So Jim, I tout the benefits of Roth. I think it’s something that everyone should at least consider. It might not be the right situation in every year for every client. It’s not a magic bullet that way, but I think it’s something people should at least consider. And I see a lot of advisors who include this as one of the things that they do, but I mean this is really the crux of what you lead with. As I look at your profile at what you’re currently doing, you center around a lot of it around, Hey, I’m the Roth conversion guy, so tell me about how you ended up there, where you lead with.

Jim (09:57):

That’s just what I was most interested in. I am kind of a puzzles guy. I like complex logic puzzles and that’s getting fulfilled by helping people optimize their Roth strategies. So I started this business. I don’t manage assets, I don’t sell insurance, I don’t sell annuities. All I do is Roth related optimization scenario comparisons. So I do a free assessment. They can give me their information and I’ll let ’em know upfront if I see on opportunity to increase their future after tax net worth by at least 300,000 if not a million, by executing a few changes to their approach. And if that opportunity does exist, then I’ll let ’em know and then charge a flat fee to cover that analysis with them. And then if they want to have recurring meetings every year, because it might be a multi-year conversion strategy, we can look at that too if they liked the experience with me.

Steven (10:54):

So Jim, are you primarily working directly within consumers or are you helping other advisors with this analysis as well? It sounds like you go a lot deeper than the majority of advisors I know. So is it in both directions or strictly within consumers?

Jim (11:08):

It’s both. So I do have a lot of families that I help directly and then I also help some financial advising firms as an outsourced specialist, CPA tax preparation firms, we’ll utilize my services as well.

Steven (11:21):

So Jim, with the amount of time you spend on Roth, I want to ask you a couple of the questions that I get all the time about Roth because I would imagine you get ’em at times too. Okay. I mean, one of the questions I get is, Hey, well what if Congress takes Roth away in the future? Haven’t you just put all my eggs in one basket?

Jim (11:36):

Yeah, I get that one a lot. I think worst case scenario, if they start clamping down on the Roth, it will just be a situation where they stop allowing future Roth conversions after a certain date for them to take away what they’ve promised as far as the tax-free growth on conversions you’ve already done or contributions you’ve already done would be pretty egregious. I don’t see that happening. The Roth balance total versus the pre-tax total out there of 401Ks IRAs, et cetera, there’s a huge disparity. If they want to raise tax money, they could look at that big pile of money and not go back on their words so to speak. And the other thing to think about here is a lot of politicians have Roth accounts and usually politicians are not keen on reducing their net worth through their own efforts. So I feel very confident that the Roth conversions you do now will be safe, and the fact that maybe they could go away in the future means that you should be even more keen on optimizing them. Now while you can. And politicians also like to have tax revenue early during their term with a Roth, you’re basically collecting a lot of tax revenue now and then not collecting later. And with a politician, they’re thinking, well, that’s somebody else’s problem. I’ll be retired by then. So I don’t think there’s much to worry about there.

Steven (12:54):

I’m right there with you, Jim. My crystal ball is just as broken as everyone else’s. My good friend Benjamin Brandt, he recently phrased it as really we’d all be better off as Roth holders ourselves. We’d be better off getting all of our friends to contribute to Roth as well. So it becomes a bigger voting block because you’re kind of alluding to this from a political standpoint. We don’t often see changes that will immediately impact a large voting block. But the other thing that I’ll tell clients as well is that Roth isn’t the only thing written in pencil in the tax code. It turns out the entire tax code is written in pencil. They could change all of it. I mean, in theory, they could get rid of the whole thing. We could all go to a flat tax. I mean, there’s endless potential of what could happen and all we can do is make the best decisions we can now based on the information we currently have. And so this is definitely an area where I take some confidence knowing that I’m recommending to my clients the same thing that I do personally. And so if by some crazy set of events 10 years from now we’re all having to call our clients and say, Hey, they went back and Retaxed all of the Roth accounts, those are going to be uncomfortable phone calls, but I’m not too worried about that happening.

Jim (14:03):

Yeah, me neither. We’re in a big trouble if we get to that point.

Steven (14:07):

Yeah, absolutely, Jim. I always like to anytime, especially when there’s very common strategies or recommendations that get made, I always like to look at it from the other side of when isn’t this a good idea or when do you see people take the wrong approach when it comes to Roth?

Jim (14:24):

Yeah, I was just talking to a CFO the other day who, when you heard I focused on Roth, he said, oh yeah, I took my tax refund and I used that to pay the taxes on a Roth conversion. And I asked him, well, do you know if that increased your future after tax net worth? And he kind of gave me a blank stare and he goes, well, I got some tax diversification, so I’m sure it was helpful. And I guess I’m in a camp with the Michael Kitches group. They put out an article that said, tax diversification’s great, but if you do some projections and look at whether it actually helps or hurts your future, that’s ideal. I assume this guy was in a very high bracket and most folks are in a lower bracket in retirement, so doing a conversion when you’re in a high marginal tax rate isn’t always the best idea. Maybe he was going to stay in a high bracket, potentially maybe this conversion was going to help him lower his Medicare premiums in the future. I don’t know. He doesn’t know. He never did that analysis, but crossing your fingers and hoping that it’s a good idea is fine but’s just not what I do with my clients.

Steven (15:31):

I was going to say that’s generous of you to call it fine. I might disagree with that being fine. Usually I go with, if we let taxes happen to us by default, that’s when we get killed on taxes. I do appreciate though that your nuancing in there that there are circumstances where this could make a lot of sense or it might not make sense. It comes back to an individual determination. Just this last month we had our first annual tax planning summit, and one of the speakers there, he does Roth conversions in the highest tax brackets for his clients routinely because some of his clients are always going to be in that highest tax bracket. If you’re in the 37% bracket now, which is going to go up even higher when the tax cut and jobs act expires and you expect to be there forever, then great, let’s put money into Roths so that we have that tax free bucket. But to your point, this is our peak earning years we expect ’em to go down. A lot of this has to come down to your specific situation. What do we expect now? What do we expect in the future and how do we make decisions that take advantage of those relatively high or low tax years?

Jim (16:32):

And even when you’re in a low bracket in retirement, the way social security gets taxed, capital gains gets taxed. You can have actually a pretty high true marginal tax rate in retirement, much higher than you might think it is based on just the brackets. So that’s why I focus on the net worth number and not the tax brackets because that will kind of encapsulate all the different levers and the stealth taxes that are involved.

Steven (16:58):

Yeah, the stealth taxes get left out quite often. I like to call ’em shadow taxes, IRMAA and some other things like that. The other one that I’ve been seeing trending a lot more lately for people who follow things online, and I’ve called this out a couple of times of people trying to hold out taxable brokerage accounts as this magic landing place for your wealth, which there certainly are some potential benefits of having money in a taxable brokerage account. But for me, I’m still going to start with can I fill up my Roth bucket because there is a difference between one of the things that would get held out there is, oh, well, in my low income years, I could potentially recognize growth on my taxable account at a 0% tax rate. While that is technically true, there is that potential, there is a difference between 0% and tax free. And you start alluding to that with some of the shadow taxes because tax free means it doesn’t go anywhere in my tax return. It doesn’t go into my adjusted gross income, which impacts IRMAA. It doesn’t go to my taxable income. Whereas if it’s taxed at zero now, if suddenly if I didn’t do my projection correctly, I have unexpected other income, now I’m starting to get pushed into other brackets that I might not have been considering.

Jim (18:11):

And then the whole step up is something that I think a few years ago they were talking about changing that or possibly restricting that, and I wouldn’t be surprised if this step up goes away in the next 10 years. And so people think that’s going to go to their kids without any tax ramifications, but maybe not. I think the Roth is a much safer bet if that’s what you’re looking for. And you’re a backdoor Roth expert. And it’s surprising and probably surprising to you too, about how little it’s utilized and people are putting money into their taxable brokerage account when they could be doing a backdoor Roth and getting that tax-free growth and not having to worry about it much better option. But I think a lot of the advice people get can be possibly riddled with conflicts of interest because doing the backdoor means rolling IRS balances into a 401K, which maybe harder to manage and charge fees on. So I think that’s something to consider as maybe one of the causes of that.

Steven (19:09):

And I’ll also throw out there, because I’m sure I’m guilty of this at times, although I try to be really mindful about sharing who it is I’m speaking about when I make tax planning recommendations, and that’s why I always come back to this. You’ve touched on as well, these things need to be specific to an individual situation. There are certainly taxpayers where I totally get why an advisor would tell ’em, Hey, fill up that taxable brokerage account. You are on track to retire when you’re 32 and having money in these retirement accounts that you can only sort of use until you’re 59 and a half, maybe that doesn’t make sense in that specific situation, but we’ve got to make sure that whether you’re an advisor and you need to be thinking about how you communicate this to your clients or how you’re putting this on social media or newsletters on podcasts, wherever it is, we’ve got to make sure that we’re doing our clients, that we’re doing them a good service by making it clear who this is a good fit for and the questions they should be asking instead of having these really glamorous statements of, Hey, everyone should be doing X, Y, and Z.

(20:03):

Hey, this is something to consider. I get that that’s not as eye-catching on TikTok or Instagram, but let’s do what’s going to serve the end user, not just what gets us clicks and likes.

Jim (20:13):

Exactly. Exactly. You got to be a fiduciary,

Steven (20:16):

Jim. When you’re looking at a client situation, where do you start as far as gathering data to start doing your assessment?

Jim (20:25):

I’ve got a two pager of inputs where I ask questions about their assets, their income, their expenses, something I’ve kind of developed over time to try to make sure that I’m being as efficient with their time as possible, asking the key questions so that I can make the software as realistic as possible as far as their projections, future outcomes. So it’s nothing fancy, but I think the way questions are worded and the sequence is important for getting that relationship off to a good start.

Steven (21:00):

Give me an example of that where you’re seeing the importance of the sequence of the questions.

Jim (21:04):

Well, you can start out with, when you ask somebody what are your expenses, and that can just mean a lot of different things. So I start out with maybe the specific expenses, what’s your mortgage look like? Interest principle, what are your property taxes? So I start out with the key minutiae that I need to make sure that we’re being tax accurate with all their deductions. And then I’ll say after all that, okay, what are the rest of your expenses? Rather than leading with what are your expenses in general? And then there’s no direction. Everybody’s going to have a different answer to that.

Steven (21:43):

Yeah, it is fascinating what people see as an expense versus, well, I mean whatever they might call it in their mind, but I like that of making sure you’re getting really specific with the things you know need to have then having maybe a catchall to let ’em be a little bit more free flowing if it fits for them, but don’t just leave it up to the client to interpret a word the same way that you’re using it.

Jim (22:03):

Right, right. That leads to problems.

Steven (22:06):

Yes, yes, quite often. And Jim, the other question that came to mind as you’re going through this, how often as you work with the clients who say, Hey, let’s check in and review this. How often are you making changes to that initial plan that you made with them? Because it resonates with me when people talk about financial plan immediately being incorrect because we’re trying to project what’s going to happen in the future. But how big of shifts are you seeing as you work with people over time?

Jim (22:34):

Well, with most clients, after we’ve gone through the initial setup, it’s just a once or twice a year check in, do some updates, maybe let ’em know if tax laws have changed, and that’s going to change your plan this way. Some are a little more interested in meeting quarterly or possibly even a few more frequently than that. It just kind of depends on their emotional state, what they’re comfortable with. Some folks that are retired have a lot of time on their hands, and they really get excited about this and it becomes their new hobby. So they want to talk to me a lot, and that’s fine too. So I’m here to serve.

Steven (23:12):

Jim, I really appreciate your time and your perspective, you sharing your expertise on this. We always like to wrap up these conversations with action items, so people that can take the information and turn it into value. So as you think about what has made a difference in how you deliver value to your clients around Roth conversions and this Roth topic, what comes to mind for action items you can recommend to listeners?

Jim (23:32):

I would recommend that folks, if they don’t have some type of advisor or planner, tax planner like yourself, that they consider hiring one and giving it a try unless they’re extremely sophisticated with tax law themself. Taxes are the largest expense people have in retirement for a lot of situations. So there are things you can do to minimize that, and you should take advantage of that because it’s a worthwhile investment. If it’s not me, if it’s not you, that’s fine, but find somebody that you trust that has good qualifications and not just the TikTok followers, and then make sure you ask a lot of questions. So that would be my advice.

Steven (24:17):

Yeah, I appreciate that. There’s got to be somebody on the team who’s willing to understand this stuff and apply it. So whether that’s the financial advisor themselves, that’s the tax professional they work with. There’s some DIYers out there who nerd out on this stuff and want to do it themselves all day long. But I agree there’s got to be somebody on the team who is willing to go deep on this. And for financial advisors listening, A couple of things I would add to that of what Jim’s shared today. I really like that additional piece that you do that again, I don’t see very often of not just what does this look like over your lifetime, but what’s that next 10 years after death look like? Let’s make sure that we’re reflecting that Roth versus pre-tax can have a big impact on beneficiaries. And then the other thing that really stood out to me, and I don’t know that you really boiled this down into one specific action item, but I would encourage listeners to think about how you are currently communicating with your client’s CPA.

(25:10):

This needs to be an intentional process. It needs to be proactive and effective communication. And that’s not just so you can make the CPA’s life easier. It’s because it’s going to help the client actually execute on this strategy and make sure it gets reported correctly on their tax return. So if this isn’t in your process, it needs to get added. If it is in your process, you need to revisit it. And I would probably even use Jim’s success as how you measure how effective your communication is. If you’ve never had a CPA ask a question about their own personal situation based on what you’ve explained about Roth, maybe go back and look at how you’re communicating that maybe there’s an opportunity there to improve how you’re communicating the value proposition of doing Roth. So Jim, really appreciate you being here. If people are interested in learning more about what you are doing or if there’s an advisor listening who thinks, yeah, I could use an expert in my corner to help do some of these Roth analysis, how can people find more about you?

Jim (26:05):

Well, email is jim@precisionrothconversion.com. Phone number (619) 379-3880. My website will be up pretty soon. PrecisionRothconversion.com. And I’ve got some old YouTubes that are pretty good too. If you look up Fortress Wealth Roth conversions on YouTube, you can find some of my old work that you might find interesting.

Steven (26:27):

That’s awesome. Thanks for sharing all that.

Jim (26:28):

Yeah, my pleasure.

Steven (26:29):

Well, for everyone listening, thanks for being here. And until next time, good luck out there. And remember to tip the server, not the IRS.