Technology Update

Approach Roth IRA calculators with caution

Results vary widely based on assumptions baked into the program

Jul 26, 2009 @ 12:01 am

By Davis D. Janowski

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Financial advisers beware: All Roth IRA conversion calculators are not created equal. A calculator — whether found on the web or nestled in a more sophisticated financial planning software package — isn't a bad jumping-off point when trying to assess whether it makes sense for a client to convert his or her retirement assets to a Roth individual retirement account. But it is hardly the final word on the matter. That's because many calculators take a one-size-fits-all approach to retirement planning by making assumptions about a client's expected rate of return or tax bracket. Others minimize, or even ignore, factors as basic as inflation. To be sure, the Roth IRA conversion calculators found in planning software developed for advisers tend to be more sophisticated than those found for free on the web. Many of the sophisticated calculators allow advisers to enter a client's individual tax rate or to make adjustments to assumed inflation rates. Most even allow advisers to vary withdrawal rates as the client ages. Still, even those calculators don't replace good old adviser know-how.

<b>Beverly Deveny:</b> Searching for the perfect Roth calculator.
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Beverly Deveny: Searching for the perfect Roth calculator.

“I personally have never found a Roth calculator I was 100% happy with,” said Beverly Deveny, an IRA technical consultant with E. Slott & Co. LLP of Rockville Centre, N.Y. “Just from a numerical standpoint, there are so many things to take into account.”

Ms. Deveny uses a calculator developed for financial services professionals by Brentmark Software Inc. of Orlando, Fla.

Unlike most online calculators, the Brentmark model allows users to manually change tax rates, among numerous other factors, and to measure the effects of those changes on the final outcome.

More advisers will likely be using Roth IRA conversion calculators in the months ahead. Starting Jan. 1, higher-income clients will have the option of converting a traditional IRA or 401(k) to a Roth IRA. Currently, individuals whose modified adjusted gross income exceeds $100,000 are barred from doing a Roth conversion.

As part of the Tax Increase Prevention and Reconciliation Act, which was enacted in 2006, the $100,000 cap will be lifted.

Meanwhile, clients will be weighing for themselves whether it makes sense to convert. And many of them will be going online to do so.

A side-by-side comparison of four calculators — at vanguard.com, dinkytown.net, moneycentral.msn.com, and rothretirement .com — showed that the estimated after-tax balance following a Roth conversion can vary by as much as a few hundred thousand dollars, depending on the assumptions built into each calculator.

Moreover, all four calculators were fairly limited in that they assumed a client would convert an IRA or 401(k) in one lump sum in 2010. In fact, the change in tax law allows investors the option of spreading the recognizable income from a Roth conversion over the years 2011 and 2012.

“These can give you a fast and dirty ballpark idea,” said H. Jude Boudreaux, director of financial planning at Bellingrath Wealth Management in New Orleans, who agreed to “test drive” all four calculators for InvestmentNews.

In comparing the calculators, Mr. Boudreaux, whose firm has $50 million in assets under management, assumed that his fictitious client was single, 50 years old, and earned $50,000 a year.

The client planned to retire at age 70 with $100,000 in an IRA, and taxes from the conversion were to be paid with outside funds.

Mr. Boudreaux said that he liked the calculator at rothretirement.com the best because it allowed him to see how much money his fictitious client's beneficiaries would stand to inherit.

He also liked that it came with sliders that allowed him to adjust such variables as income.

Mike Book, national director of sales and marketing for Archimedes Systems, Inc., in Waltham, Mass., which helped develop the calculator at rothretirement.com, said that the online tool is not intended to provide users with a definitive answer on whether converting to a Roth IRA makes sense. Instead, he said, it's supposed to give them a fuller view of their financial options and be something to talk about with their advisers.

“We are giving them an aha moment,” he said. “The goal is to send them back to their financial organization or adviser.”

E-mail Davis D. Janowski at djanowski@investmentnews.com.

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