Changes in the rules governing Roth IRAs could help wealthy clients in a number of ways in 2010—if only they knew about them.

A survey of 3,715 advisors across wirehouses, independent and banking channels shows that while over 90% of clients had heard of Roth IRAs, only 42% of those clients knew about the changes affecting Roth IRAs next year. The survey, by Financial Planning, On Wall Street and Bank Investment Consultant magazines, found that 52% of wirehouse advisors and 56% of advisors in the independent channel reported that their clients were unaware of the changes.

The lack of the awareness in the bank channel was particularly dramatic, with 74% of those advisors reporting that their clients didn’t know about the modifications.

And even advisors say they need more help in discussing the changes with clients.

As of Jan. 1, for the first time, people earning a modified adjusted gross income of over $100,000 will be able to convert any amount of assets in their traditional IRAs to Roth IRAs. Investors in Roth IRAs pay income tax on the money they invest now and withdraw it tax-free in the future, the reverse of the traditional IRA structure. Investors will also be able to spread those upfront tax payments over two years.

As a result, Roth IRAs should definitely find their way back into wealthy clients’ advisors’ toolboxes.

However, unfamiliarity with this product is very high for many reasons, advisors say.  “At this stage my clients are worried about a lot of things; very few have asked about the Roth opportunity in 2010,” confirms Ron Rosselot, president of Rosselot Financial Group, a financial planning firm in Cincinnati. “People would be interested if they paid attention, but many of my clients are running businesses at a very stressful time in the economy; it’s just not their top priority right now. They’re more interested in recovering their portfolios and getting their businesses to where they need to be.”

Patrick Daxon, director of financial planning at Raymond James Financial in St. Petersburg, Fla., says, “because of the modified adjusted gross income (AGI) threshold in the past, many clients didn’t qualify, so while they were aware of the basics, their eligibility was limited. For clients who weren’t eligible before, Roth IRAs fell off their scopes.”

Rosselot agrees. “The opportunities for conversion are different now. There were income limits to even qualify and now there aren’t. Also, there’s the option to do a partial or full Roth conversion depending on each client’s tax situation.”

Roth conversions are doubly attractive now that the market is down, particularly for clients with longer time horizons, says Kelly Campbell, principal and founder of Campbell Wealth Management in Fairfax, Va. “The younger you are, the better off you’ll be,” he says. “Imagine taking what you’ve already built up in an IRA and earning tax-free income on that.”

Sure, clients have to pay tax now on the assets they’re converting, but thanks to the market downturn their assets are depleted. This means that, hypothetically, a client would be paying tax on, say, a $70,000 portfolio that was worth $100,000 before the market crashed. “You’ll be growing all that back tax free,” Campbell says. “It’s a great opportunity.”

“Most of my clients believe taxes will be higher in the future, so that’s another incentive,” adds Rosselot. Roth IRAs can also be used as wealth-transfer tools for passing assets on to children and grandchildren tax-free.

About 80% of advisors equally across all channels reported discussing Roth changes with clients, and some 96% said they planned to do so. For instance, Campbell says he’s been mentioning the 2010 Roth conversion opportunity to clients for the past two years, but he’ll send out a letter solely addressing Roths in November. His plan is to start conversions as soon as possible next year. He expects the market to pick up throughout 2010, so the goal is to pay taxes when the assets to be converted are valued at their lowest.

Rosselot, too, is planning to address Roths in fourth-quarter client meetings. “It’s the top of our agenda for next year,” he says. While many clients are still in the dark about Roths, “our job as planners is to educate our clients and let them know that they should look at the changes to Roth IRAs in 2010 as part of their planning process,” he says.

The majority of advisors across all channels felt they needed more information about the new rules affecting Roth IRAs. In fact, 61% of advisors in the survey said they were not getting extra training or literature on these changes from their firms or that the information they were getting was not useful. But their broker-dealers insist they are preparing their advisors to discuss the Roth IRA changes in 2010 with their clients.
 
“At UBS we plan to spend a lot of time and resources in the next month to make sure advisors are equipped and their clients are aware,” says Ed O’Connor, head of retirement and fund services at UBS in Weehawken, N.J. Advisors at UBS started beating  the drum this summer, which is good news because it means more clients will be receptive when UBS starts its firm-wide program, he says.

LeAnn McCool, national sales manager at Primevest Financial Services in St. Cloud, Minn., says her firm is also addressing the general lack of client awareness and advisor confidence in Roth information. Her firm’s two-pronged attack will consist of in-depth Webex events for advisors at the start of October followed by marketing materials for advisors to disseminate to their clients from mid-October. “This is probably the best opportunity from an outreach standpoint to distill what the changes mean to each client’s individual situation,” she says. “If nothing else advisors need to reassess their clients’ situations.”

Raymond James has also put together a number of materials to urge advisors and their clients to revisit the topic, including technical audio presentations for advisors plus supporting materials for clients. “Clients really should now be looking at Roth IRAs as 2010 approaches, as part of changes across the board from a tax-planning standpoint,” Daxon says. “Part of that is really making advisors aware that this does play a role in their clients’ financial pictures.”