Clients are smarter than everyone else

[mcbreck]

Client makes a ton of money ($400k) and does a Roth conversion which generates an additional tax bill. Sweet. They are in a high tax bracket and couldn't explain why they would do a Roth conversion except the Ed Jones rep suggested it so it's his fault.

I give them the extension and which includes an estimated penalty for underpayment and they decide to not pay it and just pay the tax bill - deducting the penalty amount. Now the IRS sends a letter requesting the penalty and the client thinks I should have to pay it because somehow it's my fault and they pay too much in taxes.

[schirallicpa]

Back to the investment people that have convinced my not so rich clients to convert all their Traditionals to Roth.  In my area, most of my clients will pay higher taxes now as they are working class.  And they will have less income when they retire.  So whose making money on conversion transactions....

[mcbreck]

53 minutes ago, schirallicpa said:

Back to the investment people that have convinced my not so rich clients to convert all their Traditionals to Roth.  In my area, most of my clients will pay higher taxes now as they are working class.  And they will have less income when they retire.  So whose making money on conversion transactions....

My financial planning software will almost always say to convert and will tell you that you've saved $x in taxes. I'm very reluctant because I don't know what the tax code will say in 15 years. How do I know they won't tax ROTH distributions over a certain level of income? At one time it was unthinkable that people would pay taxes on Social Security benefits and most people do today. My teacher friends and clients have been told their entire careers that they'll never pay state taxes on their public pensions and most of them do.

[BulldogTom]

There are so many variables that conversion decisions are just speculative in my opinion.   There are some circumstances when it makes a lot of sense (i.e. one off business loss that drives income negative, so you have room to covert for free) but if you are looking at a linear income stream, you are just making educated guesses about tax rates, inflation rates and investment growth rates.   Any of these items can make the best thought out projection look silly a couple of years from now. 

Tom
Longview, TX 

[Sara EA]

When Roths were first introduced, the law contained an enticement to convert from an IRA:  Convert all at once and spread the tax bill over four years.  I did that with mine, and two years later the tax rate went up so I ended up paying more than I bargained for.  Now the rate is even lower than it was back then.  On the positive side, the IRA didn't have that much money in it so while the tax percentage was higher than it is now, actual tax dollars paid weren't that great.  So yes, it's a crapshoot to decide whether to convert or not.  Who knew they would change the rules for inherited Roths?  Who knows what tax rates will be in the future or what other rules will change?  The fact that RMDs are not required is a big benefit for those who may not need the money, but that's the case today and it too may change.  Still, I have no regrets about converting mine.  It's nice to know it's there and I can withdraw from it if I choose but never have to withdraw (for now).

[mcbreck]

On 6/9/2023 at 11:30 AM, BulldogTom said:

Any of these items can make the best thought out projection look silly a couple of years from now.

Financial planning projections are silly but they are even more silly if you don't understand the assumptions and how they impact the final numbers. In 1999 our planning software used expected market returns for the next 10 years to be 15% per year and was told regulators prohibited me from lowering that number.

nasra.org is all public pension funds and they give what their expected portfolio rate of return is going forward - the average now is the lowest I've seen it and it's just 6.92%. They slowly (very slowly) dropped their returns during 0% interest rates so I'm guessing we are near a low.

[Corduroy Frog]

On 6/8/2023 at 12:31 PM, mcbreck said:

I give them the extension and which includes an estimated penalty for underpayment and they decide to not pay it and just pay the tax bill - deducting the penalty amount. Now the IRS sends a letter requesting the penalty and the client thinks I should have to pay it because somehow it's my fault and they pay too much in taxes.

Send them to Shifty-Eyed Sam across town.  Get rid of them.

People who make that kind of money often use their wealth to elevate their position in society, and delude themselves into thinking everyone will do what they want.

[Catherine]

On 6/8/2023 at 1:31 PM, mcbreck said:

Now the IRS sends a letter requesting the penalty and the client thinks I should have to pay it because somehow it's my fault and they pay too much in taxes.

Quick answer is "no." Long answer is also "no." After that, the response is "no, and please leave."

[JohnH]

A client this stupid is never going to change. Just be glad you advised them of the penalty and they made the choice to pay less.   May as well cut your losses at the outset. 

[BrewOne]

Wonder what y'all would do in mc's situation--would you notify your insurer of a possible claim?

[mcbreck]

1 hour ago, BrewOne said:

Wonder what y'all would do in mc's situation--would you notify your insurer of a possible claim?

What claim would there be? I'm not responsible for their penalty and I certainly wouldn't make a claim for $350.

[jklcpa]

2 hours ago, BrewOne said:

Wonder what y'all would do in mc's situation--would you notify your insurer of a possible claim?

Agree with mcbreck's response.

I'd document the dates, times, conversations, and advice given.