Americans are less confident these days that their current retirement savings will be enough to sustain them in retirement. With this information, your clients may come to you and ask what else they can do to save for retirement, or ask directly about a Roth IRA.
This article and the corresponding downloadable guide linked below can help you prepare for such conversations and answer clients' questions about investing in a Roth IRA specifically.
Client-Advisor Discussion Guide: Is a Roth IRA Right For Me?
Key Takeaways
- Understanding your client's financial situation, risk tolerance, and goals will help you show how a Roth IRA may be a useful tool.
- Consider using a pre-meeting questionnaire to help guide client education and conversations about Roth IRAs.
- Consider and explain the IRS rules governing retirement accounts before opening a Roth IRA account for clients.
- Ask clients to come to meetings prepared with the information from line 11 of their most recent 1040.
- Consider recommending backdoor IRAs for clients who do not qualify for Roths.
Client: “Will a Roth IRA Help Me Reach My Financial Goals?”
When your clients ask you about Roth IRAs, they're asking you to show them how this product will close the gap between where they are and where they want to be. There is only one place to start to give them the answer they want: Know Your Client (KYC).
Investment advisors are legally required to verify their clients' identities, but the ethical principles behind KYC go beyond asking for identification and performing basic due diligence. Understanding your client's financial situation, risk tolerance, and goals will enable you to show them how their Roth IRA can be a tool to achieve their objectives. This can be achieved by having a completed risk tolerance questionnaire and financial assessment on file.
Many advisors opt to send a client questionnaire before the initial meeting. This tool is invaluable in establishing a client's risk tolerance and financial goals. The information you gather from a questionnaire, particularly your client's risk tolerance, goals, and timeline, will be the foundation for constructing a model portfolio that aligns with their needs.
Showing your clients how their Roth IRA can help them reach their goals will have a much greater impact than just saying yes to this question.
You can also set the stage for expectation management by showing your clients projected portfolio growth based on past performance. The market will go down, but the market will also come back up, and so on. Clients who have seen this market cycle and understand a buy-and-hold strategy are likelier to stick with you and their goals when times get tough.
Client: “Am I Eligible for a Roth IRA?”
Part of KYC is knowing your client’s current financial health, which includes accounting for all sources of income. A quick way to answer your client's question about whether they are eligible to contribute to a Roth IRA is to get their modified adjusted gross income (MAGI) for their last tax year.
Even though your clients are coming to talk to you about money, this is still probably not a number they know, so ask them ahead of time.
Tell your clients to look at Line 11 of their 1040, write it down, and ask them to bring in information about any tuition-related costs or deductions, student loan interest, losses written off from rental properties, or any self-employment taxes they paid during the year.
If their MAGI is under the income threshold, they are eligible, and you can make a plan together and all live happily ever after. If their income is not under the income threshold, suggest other ways they can invest in tax-advantaged retirement plans.
Clients with MAGI that are too high for Roth IRAs can use a backdoor Roth IRA strategy to save in a Roth over their working life. Remember to recommend they take advantage of catch-up contributions if they are over 50.
You can also take this opportunity to build trust with your client by reviewing any 401(k) plans they currently participate in or can contribute to through their employer.
In many instances, clients participating in a properly allocated 401(k) do not need to work a backdoor IRA strategy additionally.
Client: “What Products Should I Use in My Roth?”
Unless your client comes to you with extensive investment experience or they've logged some serious hours researching on YouTube, telling your clients about their investment options will mean little to them. Without rehashing the entirety of the Series 7 for your clients, the easiest way to show them assets and their market reactions is to create example portfolios based on past performance.
In this case, having your client's risk tolerance and timeline on board ahead of your meeting will help you prepare for this question and any questions about market performance. Before your client arrives, create portfolios with different asset allocations within their current risk tolerance.
As a trusted advisor, you have an opportunity to educate your clients about reducing risk in their portfolios by reallocating their assets into more conservative or income-generating products as they near retirement.
Client: “How Can My Spouse and I Maximize Our Savings?”
Roth IRAs are individual accounts, but your client's investment strategy can be collaborative with their spouse. Knowing your clients' employment statuses, individual risk tolerances, and timelines will help you strategize for their collective future.
For client teams where both spouses have earned income, you should prepare sample portfolios based on their individual risk tolerances. Remember to emphasize how maxing out their Roth IRAs yearly will benefit from dollar cost averaging and the impact of compound interest. Do you know the old snowball rolling down a hill analogy? Now is the time to pull it out of your back pocket.
It's important to note that a spouse without earned income can also have a Roth IRA. As you prepare for your meeting, create a sample portfolio for the non-earning spouse. You can elevate your advisory services by anticipating your client's needs and demonstrating how they can prepare for their future. This is particularly crucial for non-earning spouses because some advisors do not consider their goals and risk tolerances.
Maximizing savings with investments involves more than just telling your clients to save more. Ensuring your clients' portfolios take advantage of all the growth their risk tolerance allows inches them closer to the goal post.
This is also an opportunity to review any of your clients' employer-sponsored plans if they have them to make sure their assets are appropriately allocated and they are participating to the full extent of their ability.
Client: “When It’s Time To Retire, Do I Have To Take This Money?”
Required minimum distributions (RMDs) can be a source of concern for many investors, and clients may approach you worried about having to withdraw money when the IRS regulations dictate. To address this, it's crucial to stay updated on IRS regulations.
When it comes to Roth IRAsand designated Roth accounts, the rules are mixed. RMDs are not required for Roth IRAsgenerally until after the death of the owner.RMDs are not required for designated Roth accounts in a 401(k) or 403(b) plan starting in 2024, but must follow the RMD rules for 2022 and 2023. Looking ahead, when a Roth IRAor designated Roth accountis transferred to a beneficiary, it then must be distributed within 10 years.
Once you reassure your clients about the status of their money in retirement, you can offer them the Easter egg of rolling over their 401(k) to their Roth IRA when they retire, too.
One of the most important things you can do for your clients, outside of really listening to them and helping them prepare a plan as individual as they are, is to explain the impact of compounding interest. Consolidating their outstanding retirement plans into one at retirement will grow the snowball, eventually rolling downhill and collecting more snow.
When you build their sample portfolio before their appointment, run a portfolio where they do not add any more money or withdraw any money after retirement. This example will demonstrate the power of compound interest. Roth IRAs are retirement plans and a substantial estate planning tool for clients who do not need the money during their retirement years.
Client: “What Happens to This Money If I Unexpectedly Pass Before I Can Retire?”
In your daily practice, it's imperative to keep up to date on the IRS's distribution, rollover, and transfer rules. If you know the rules, you can answer this question for your clients anytime. However, reassuring them that their loved ones will be cared for is more complicated.
Long-term goals like retirement planning offer advisors a chance to build relationships with clients that mature with time. As an advisor, you are responsible for periodically checking in and reassessing your client's goals, risk tolerance, and timeline and reallocating their assets accordingly.
During these reconvening periods, you should also ensure that their beneficiaries are always up to date.
It's easy to overlook confirming beneficiaries at reviews, especially for healthy investors. However, neglecting this part of financial planning can create a headache for survivors.
Retirement planning is one small part of the overall picture. That picture should involve understanding the family's goals and how each player's aims and ambitions work inside the team. Over time, you can reduce your client's concerns about the future by getting to know them and building trust with their beneficiaries.
The Bottom Line
You will be asked about and recommend Roth IRAs in your financial advising practice; it's just a matter of when. The economic uncertainties brought about by inflation, questions about the longevity of Social Security, and the dissolution of many companies' pensions make retirement planning more important than ever in your clients' lives. Understanding the ins and outs of these accounts and the regulations that govern them can help you to help your clients decide whether or not Roth IRAs are right for them.
