IRA contributions–make them while you can

When advisors think about growth, they tend to focus on new clients, which are important for any healthy, prosperous advisory firm. But there are also a number of opportunities to expand assets under management (AUM) from your existing client base.

According to the “2022 InvestmentNews Advisor Benchmark Study,”¹ which SEI sponsored, firms gained AUM by contributions by 5.2% in 2021, on average. For context, new client growth accounted for 6.9% and market performance accounted for 12% of AUM growth.

In 2023, market growth is not something to count on to drive AUM, like it has been for the past decade, but there are attractive opportunities to increase contributions and new client growth. Specifically, now is a great time to focus on IRA contributions, which might benefit your clients and your business.

Tools to help you take action

• Our IRA Compliance Dashboard lets you see which clients haven't fully met their IRA contribution limit
• Our investor-focused communication template makes it easy to discuss with your clients
• You can open an IRA account in under five minutes in the SEI Advisor Desktop

Talking to clients about IRA contributions

The tax filing deadline is just around the corner on April 18, 2023. A few questions a financial advisor can answer are:

• How much can (and should) I consider contributing?
• What type of IRA account should I consider?
• Should I consider a Roth conversion?

To contribute to any IRA account, one must have earned income like wages or self-employment income. One of the benefits of married filing jointly is that spouses can share earned income. As an example, let’s say one spouse has $150k in wages and the other spouse is not currently working. The spouse currently not employed can use their spouse’s earned income to make an IRA contribution. 

According to the chart below, income tax bracket is a critical factor. In a lower Federal income tax bracket like the 10%, 12%, or 22% bracket, the tax deductibility of the IRA contribution is not as valuable. A Roth contribution may not be deductible now, but in the future the distributions may be tax free (with some exceptions).

As long as someone has earned income, they can make an IRA contribution. It’s the deductibility of the contribution that can come into question. Participating in a retirement plan can limit the deductibility of an IRA contribution.

Another great discussion item is a non-deductible IRA contribution that can help save for retirement. The earnings grow tax-deferred while in the IRA.

The possibility of a Roth conversion can be another topic of conversation. A Roth conversion is taking some or all of a traditional IRA and converting it to a Roth. As much as we would like to forget, 2022 was not a good investment year. Doing a Roth conversion when asset values are down is a tax-smart idea to consider. One thing to remember about Roth conversions, it’s a one way street, you can’t un-do a Roth conversion.

Tax alert: Everyone who has a traditional IRA is eligible to do a Roth conversion, without limitation.

2022 IRA account types, contribution limits, and income limits
 

2023 IRA account types, contribution limits, and income limits
 

Should your clients boost their children’s IRAs?

If children earned income in 2022, their parents can contribute to their IRA account. It’s considered a gift, but if they are under the annual gift exclusion limit of $17,000, there would be no gift tax and no gift return to file.

What about 2023?

Now might be a good time consider a 2023 IRA contribution.

Here’s how you can start to take action:

1. Identify which clients are eligible to make an IRA contribution. The IRA Contribution Dashboard in our Advisor Desktop makes it easy.
2. Communicate to your clients that the 2022 IRA contribution deadline is almost here (it’s April 18, 2023), and invite them to set up time to discuss. You can use this investor-approved communication to help educate them on this opportunity.
3. Consider getting your team involved. Set a specific communication or contribution goal and incentivize progress with a team lunch or fun outing.
4. Track the assets coming in from IRA contributions. The SEI IRA Contribution Dashboard is updated daily.  
5. The SEI Investment Services Team is an internal resource for tax, trust, and advanced planning. Reach out for updates on ever-changing tax laws and planning opportunities.

Sources:

1.  “2022 InvestmentNews Adviser Benchmarking Study” (fee required to report), InvestmentNews, investmentnews.com.

Important Information:

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).

There are risks involved with investing, including loss of principal.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes only and should not be interpreted as research, legal opinion or advice.

Your financial advisor is not affiliated with SEI or its subsidiaries.

Certain information contained herein has been provided to SEI by unaffiliated third parties. SEI cannot guarantee the accuracy or completeness of the information and assumes no responsibility or liability for its incompleteness or inaccuracy.