Stick with the basics in your IRA’s September 30, 2011
Posted by forwardfinancialplanning1 in Retirement Savings, Roth IRA, Traditional IRA.add a comment
Occasionally we are approached by people who express an interest deploying the funds in their IRA’s in more “exotic” investments. We’ve heard stories of individuals who desired to invest monies held in IRA’s in rental real estate—-and we’ve seen some severe compliance problems created by the scheme. IRA’s have numerous limitations, rules and regulations that cause them to be problematic accounts in which to hold real estate. Nonetheless, promoters of these ideas are sometimes successful in convincing people to go overboard on the “self-directed” element of IRA’s.
Now, from the SEC’s Office of Investor Education and Advocacy and the North American Securities AdministratorsAssociation (NASAA) comes still another warning about self-directed IRA’s: Fraud
Besides real estate, the investor alert includes promissory notes, tax lien certificates, and private placement securites. NASAA notes an increase in reports and complaints of fraudulent investing schemes using the self-directed feature of IRA’s. Our advice would be to heed these warnings. Stay with the traditonal mutual funds, ETF’s and registered stocks and bonds offered by the traditional IRA custodians such as Vanguard, Fidelity, T Rowe Price, major broker dealers and commercial banks (Disclosure: This is not intended to be an all-inclusive list). You can definitely accomplish your investing goals with these traditional financial instruments and avoid the headaches and problems that may come with the non-traditional investment vehicles.
Roth IRA’s and 2011 January 2, 2011
Posted by forwardfinancialplanning1 in Retirement Savings, Roth IRA, Traditional IRA.add a comment
The year of 2010 has come and gone, as has the opportunity to spread the income tax liabilities generated by a 2010 Roth conversion over the 2011 and 2012 tax years. The loss of this special tax treatment will probably result in less media discussion of Roth IRA conversions in 2011 and subsequent years. However. the legislation that permitted this special 2010 Roth conversion tax treatment also removed income limits as an eligibility requirement to execute a Roth conversion. This has created some new retirement planning opportunities that should not go unnoticed.
Higher income taxpayers have been restricted from making Roth IRA contributions by statutory income limitations since the Roth IRA was introduced in 1998. While these income limitations are increased annually to allow for inflation, they still preclude many individuals from making Roth IRA contributions. Those limitations are still in place but there now exists a method to circumvent them.
Any taxpayer with sufficient earned income can contribute to a traditional IRA (as can the taxpayer’s spouse). And, since Roth conversion eligibility is no longer limited by income, any taxpayer can also execute a conversion of a traditional IRA to a Roth IRA. So, previously ineligible higher income taxpayers can now contribute to a traditional IRA and subsequently convert that account to a Roth IRA. If this conversion is done shortly after the contribution to the traditional IRA, there will be very little taxable income within the tradional IRA. This two step process, in essence, becomes the equivalent of a direct Roth IRA contribution.
Keep in mind, however, that this “two-step” strategy works only if the taxpayer does not have an existing traditional IRA. If that is the case, the “new” traditional IRA contribution is co-mingled with the previous IRA funds and the conversion proceeds (as well as any tax liability) are treated as if they came out of the co-mingled pool of funds.
Roth IRA conversion contingency April 26, 2010
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Previous postings on this site cautioned that the media hype regarding conversions of traditional IRA’s to Roth IRA’s may erroneously lead investors to assume that such conversions always make sense. Clearly, the subject requires thoughtful analysis prior to moving forward. And, there are inputs into the analysis that are actually “unknowable” at the time that the analysis is conducted. Estimating future federal income tax brackets obviously falls into this category, but other “unknowables” are more subtle.
For example, partial conversions can create an “unknowable” tax liability at the time of conversion if the original traditional IRA contains cost basis . This circumstance typically would have been created by the account owner having previously made non-deductible, after-tax contributions to the traditional IRA. The formula for calculating the amount of additional tax liability generated by the partial conversion is: [(Total Basis in all IRA's)/(Total Value of all IRA's)] X amount converted. The factor that makes the tax liability “unknowable” is that the denominator–Total Value of all IRA’s– is determined on December 31 of the year of the conversion. Thus, unless the partial conversion is executed on December 31, the exact additional tax liability cannot be known at the time of conversion.
Will your Roth IRA conversion make sense? April 1, 2010
Posted by forwardfinancialplanning1 in Roth IRA, Traditional IRA.1 comment so far
The financial press has been churning out article after article about Roth IRA conversions. This interest is being driven by the elimination in 2010 of the former income limits which restricted many traditional IRA holders from executing such conversions in years past. However, there are many factors that should be considered before one decides to take this step, not the least of which, is one’s anticipated tax bracket in retirement when compared to their current tax bracket. Executing a conversion generally causes the account holder to incur additional taxable income from the conversion amount and often pushes the taxpayer into a higher federal income tax bracket. Of course, future tax brackets are unknown, but one should consider the following statistics before forging ahead with a conversion of a traditional IRA to a Roth IRA.
According to the US Census, the average retired married couple lives on about $31,000 annually. This is near the bottom of the 15% federal tax bracket for 2010, which applies to taxable incomes between $16,750 and $68,000. So, the “average” retired couple will be able to take approximately $37,000 more in traditional IRA withdrawals before the income realized would push them into the next higher tax bracket. So, if a currenly employed couple (who expects to be an ”average” couple in retirement) is planning a Roth IRA conversion that will move them into the 25% or 28% bracket for 2010, statistics suggest that they would most likely be better off by declining to take advantage of this new “opportunity.”
Roth IRA conversion traps March 1, 2010
Posted by forwardfinancialplanning1 in Roth IRA.add a comment
The financial press has written numerous articles this year about the conversion of traditional IRA’s to Roth IRA’s. These conversions have moved into the forefront because of the 2010 removal of the income limits that previously restricted higher income taxpayers from executing conversions. Be aware, however, that Roth conversions aren’t appropriate for everyone, and there are numerous potential slip-ups. For instance, some older tax payers who disliked being compelled by IRS regulations to take Required Minimum Distributions (RMD) from their traditional IRA rushed to convert. But, they may be in for an unpleasant surprise if they failed to first take their 2010 RMD prior to processing their conversion. Regulations require RMD’s to be taken prior to a conversion with penalties in place for violators.
Roth IRA conversions September 23, 2009
Posted by forwardfinancialplanning1 in Roth IRA.add a comment
Since the introduction of the Roth IRA in 1998, higher income retirement savers have been restricted from contributing to Roth IRA’s due to IRS income limitations. Likewise, they have been unable to convert their traditional IRA to a Roth because of additional income restrictions. The income limits on Roth conversions are scheduled to be eliminated in 2010, however, and those who convert in 2010 will be allowed to spread the taxes incurred by the conversion over two tax years. However, a survey conducted by USAA Wealth Management found that 73% of Baby Boomers who own traditional IRA’s are not planning to process a Roth IRA conversion. In addition, 57% of households with incomes exceeding $100,000 are not aware of the elimination of the income limitations. This represents a tax planning opportunity that should not be overlooked.
