Tax Free Roth IRAs: Don’t Believe Everything You Read

Tax Free Roth IRA, Don't Believe Everything You Read, James Lange, The Lange Financial GroupMy wife recently told me that she didn’t think that there was anything that could keep me from blogging about my upcoming book, Retire Secure!  While she was joking, she was also right, I thought. But then, an article that was published in US News and World Report yesterday (April 20, 2015) was inaccurate on so many points that I could not let it go without commenting on it. I submitted a comment to the article and asked that the article be retracted. I can only hope that the magazine will publish a retraction, and quickly, before an unsuspecting reader takes the writer’s recommendations to heart.

The writer is a certified financial planner and registered investment advisor, as well as a published author, from Virginia. He begins by telling readers about Roth IRAs. He says that you can contribute $5,000 to a Roth IRA – that limit was increased $5,500 in 2013. If you have a Roth account in your 401(k), he claims you can add $6,000 to it if you are over 50 years old. (If you are over 50, you can add $24,000 to a Roth 401(k) in 2015this is made up of the $18,000 basic contribution limit plus a $6,000 “catch-up” contribution limit.) He claims that, if you contribute to a Roth, “the money you invest will be taxed”. (Everyone knows that, if you follow the rules, Roth accounts aren’t taxable, right? I sincerely hope that what he was trying to say was that there is no tax deduction for Roth contributions!) Then he tells readers that, after age 59 ½, “when you begin to take distributions” from the Roth, they will be tax-free”. That statement is not inaccurate, but it does omit the very important fact that your contributions can be withdrawn from a tax free Roth IRA before age 59 1/2.  (Earnings on your contributions are treated differently.) It is the traditional IRA that, in most cases, you cannot withdraw from without penalty until age 59 1/2.

The worst advice, though, came when he tried to present the pros and cons of Roth conversions.

He recommends that you take one of your existing IRAs or qualified plans and convert the entire thing to a Roth, but then warns you that you will need to pay tax on that entire conversion at once.What is omitted here is that, if you convert your entire account at once, your tax bill may be so large that you move up in to a higher tax bracket. It would be imprudent to make such a recommendation to a client! What generally makes more sense is to make several smaller conversions, in amounts that ensure that you stay in the same tax bracket. He recommends not making tax free Roth IRA conversions later in life, on the basis that you will not live long enough to enjoy the tax-free benefits. Tongue in cheek, I might argue that that’s a risk at any age, but even if you don’t live long enough to enjoy them, the tax-free benefits to your heirs, who are likely much younger than you, are indisputable. The strangest statement against Roth conversions, I thought, was that “you will potentially have to write a big check to the IRS”. It is true that you will have to pay tax on any amount converted from a traditional to a Roth IRA. But even if you don’t need your retirement money to live on, you will have to start taking withdrawals from your traditional IRAs every year once you turn age 70 ½. Those mandatory withdrawals will be taxable, and at that point you will be writing a big check to the IRS. The question is, does it make more sense to make Roth conversions while your retirement account balance is likely to be smaller, pay tax on a smaller amount of money, and generate tax-free income on all of the future earnings on the converted amount? Or, does it make more sense to wait twenty or thirty years, let the taxable traditional IRA grow as large as possible, and then pay the tax on the larger mandatory withdrawals?

In this age of electronic communications it’s easier to offer opposing points of view, and I have to admit that I wasn’t surprised when I saw the sheer volume of dissenting opinions that the article produced within hours of its publication. I also wondered if there were other individuals who read it and took the advice to heart. That made me think of another question – what would my readers have thought about that article, especially after receiving such dramatically different advice from me? Who are you supposed to trust?

My advice to you is this – trust yourself first. If a financial professional says something that does not make sense to you, ask for clarification. If the answer you are given still doesn’t make sense to you, trust your instincts. Get a second, third, fourth or fifth opinion before you act. Or, look up the answer yourself. There are number of resources that my staff and I use all the time, that are also available to you.   These include the Internal Revenue Service’s website (, the Social Secure Administration’s website (, and the website established by Medicare ( Educating yourself about your options is the best defense against making a potential mistake that you have available to you.

I’ll get off my soapbox now. Stop back soon for another update on my book.




Roth Conversions: Do They Still Make Sense?

Roth Conversions, Do They Still Make Sense, The Roth Revolution Blog, James Lange, Retire SecureThe benefits of Roth conversions have always been hotly debated among financial professionals. Some feel that Roth conversions benefit only younger individuals who are likely to have many years of tax-free growth. Others feel that anyone regardless of their age can be a good candidate for a Roth conversion, depending on their personal circumstances. Unfortunately, it’s the consumer who is frequently overlooked during these heated discussions. And many consumers just want to know, why does it make sense to pay taxes any sooner than you have to?

As many of you know, I have been an advocate of Roth conversions since they were first written in to law. I even wrote a book about the power of Roth IRAs and Roth IRA conversions called, The Roth Revolution. Since that book was written, changes in the tax law, as well as proposed changes ito future law, have forced us to evaluate many more factors when we recommend Roth conversions for our clients. Do we still recommend Roth conversions? Certainly! But the benefits of the conversion in some cases may not be as significant as they were in the past. Additionally. taxpayers who would otherwise be eligible for certain tax credits, including health care subsidies, may find themselves disqualified from receiving them in the year that their income increases because of the conversion.

Chapter 7 introduces an important concept called purchasing power, which I believe provides a better measure of the Roth advantage than by simply measuring the dollars in the account, as well as changes in the laws that you need to consider before making a new Roth conversion. If you have already done a conversion, this chapter also contains valuable information on how the beneficiaries of your existing Roth account may be affected by proposed legislation.

How do you feel about the long-term outlook for the Social Security system? Will it go bankrupt? My next post will address some ideas to give you a guaranteed income for life.

Stop back soon!


Jim Lange A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.


Sneak Peek at the Updated Retire Secure!

Retire Secure A Guide to Getting the Most Out of What You've Got, James Lange 2015The third edition of Retire Secure! has been completed and will be going to the printer shortly. Some of you may be thinking, “So what? I already read that book.” Since the second edition of Retire Secure! was published in 2009, there have been two major revisions to the tax code and several landmark court decisions that have significantly changed the way we approach the cases we handle in our office. We try to keep you informed of these changes through our newsletters. If you’re a client, we also meet with you at least once a year to review your situation and, if needed, we help you make changes so that you can achieve the best results possible based on the current laws.

So why should you read this book? Reviewing their finances regularly isn’t a top priority for a lot of individuals – although it should be – and it is human nature to become complacent about things that we’d really rather not have to think about. When we were writing Edition 3, though, I found that so much has changed since I published Edition 2 that it became necessary for me to discuss many of the old laws and the old solutions we used to use, and then explain why the old solutions are no longer effective under the new laws. The legislative changes also created new and possibly unforeseen problems for taxpayers that require proactive management on their parts. Without proactive management, those individuals can pay far more in taxes than they need to. Ultimately, it is their wealth that suffers from their lack of attention.

I’ve been accused of being a self-appointed ambassador of information, and I guess that’s true. I believe this information is so important that everyone should read my book from cover to cover, but I’m enough of a realist to know that not all of you share my enthusiasm for the subject matter. Since I’m a nice guy, though, I’ll respect your time and use this blog to point out the highlights of what’s changed in every chapter. Hopefully a sneak peek at what’s contained within will inspire you to read the whole book.

Happy Reading!


Jim Lange A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.


(7/16/2014) Tonight’s Radio Show: The View of Pittsburgh from the Mayor’s Office

The View of Pittsburgh from the Mayor’s Office

Join us tonight at 7:05 pm on KQV 1410 AM. Program also streams live at Encore presentations air EVERY SUNDAY at 9:05 am.

Tune in KQV 1410 AM tonight at 7:05 p.m. as The Lange Money Hour welcomes a very special guest, Pittsburgh Mayor Bill Peduto.

After serving three terms on City Council representing the East End, he was elected Pittsburgh’s 60th mayor last November capturing 84 percent of the vote. Inaugurated on January 6th, he has just completed his first six months in office.

A self-described progressive Democrat, Mayor Peduto has been a consistent voice for fiscal discipline in Pittsburgh. As a councilman, he was the only city politician to call for Act 47 state protection; a controversial step in addressing decades of financial mismanagement that left Pittsburgh with the highest debt ratio and the lowest pension funding in the nation. Despite some improvement in the fiscal situation, he feels the city needs to remain under financial oversight to take care of its long-term problems such as pensions, debt, and need for capital improvements. After only six months in office, Mayor Peduto has already taken active positions on a broad range of issues from same-sex marriage, achieving sustainable revenue by establishing relationships with major non-profits, and technology and efficiency, to dedicated bike lanes and supporting ride-sharing services like Lyft and Uber.

These are just a few of the subjects on tonight’s agenda, and listeners, since our show will be live, you can join the conversation by calling KQV at 412-333-9385 after 7:05 p.m. You can also email questions in advance of the show by clicking here.

If you can’t tune in tonight, KQV will rebroadcast the show this Sunday, July 20th at 9:05 a.m. The audio will also be archived on our web site at, along with a written transcript.

Finally, please join us on Wednesday, August 6th at 7:05 p.m., when we’ll welcome another financial industry giant, Dr. Roger Ibbotson, to the next edition of The Lange Money Hour. 800 387-1129 or 412 521-2732

Attention Retirement Savers: Retirement Accounts Are Different! Part 2

In my last blog post, “Attention Retirement Savers: Retirement Accounts Are Different! Part 1”, I briefly spoke about the fact that retirement accounts are different.  In this post I’m going to dive into those differences further.

Some of the differences are they:

  • Do not pass through the will (unless payable to an estate)
  • Are not subject to probate (unless payable to an estate)
  • Receive no capital gains treatment
  • Receive no step up in cost basis up death
  • Cannot be gifted (in most cases)
  • The title cannot be transferred to a trust
  • Are subject to special rules, called Required Minimum Distributions

IRA accounts are perhaps the only assets in your estate that will require you to take out a minimum distribution. Also, please remember that by placing a title of an IRA into a trust, you may cause immediate taxation. Once again, IRA or retirement assets are different!

Through proper planning, you can set up your IRA so that your heirs, whether they are your children, grandchildren or anyone else, can receive what is called an Inherited IRA. There are various tax laws, regulations, rules and even private letter rulings that may effect the decisions you make in setting up these Inherited IRAs. Investors should note that stretch or inherited IRAs are designed for individuals who will not need the money in the account for their own retirement needs.

In planning your retirement account, it is imperative that you review the importance of choosing the right beneficiary/beneficiaries. An informed decision can help you better understand your options, when considering tools like Roth IRAs, which were created by the Taxpayer Relief Act of 1997 and further modified by the IRS Restructuring Reform Act of 1998. Remember, Roth IRAs are significantly different than traditional IRAs and need proper planning as well.

Keeping current with new tax laws is another essential ingredient for successful retirement planning. In fact, The Pension Protection Act of 2006 (PPA) made some significant changes for retirement accounts.

The bottom line is retirement account distribution and planning, while it may look simple on the surface, is something that should be taken seriously and work through with knowledge of the rules, regulations and tax code. Sometimes even people in the financial arena or savvy investors are not familiar with these complicated tax laws.

Whatever you do, make sure you or who you are working with is familiar with the tax laws regarding retirement distribution rules.

Still a little unsure about some of the topics discussed?  Let us help you.  Please give our office a call today, we’d be glad to assist you and address your needs! 412-521-2732

– Jim Lange

Attention Retirement Savers: Retirement Accounts Are Different! Part 1

According to the Investment Company Institute, it is estimated that there is over $20 trillion in retirement accounts as of December 30, 2013. Retirement accounts make up the majority of many people’s assets and unfortunately, many owners of IRAs and their financial advisors are not fully aware of the complicated tax laws regarding distributions of these retirement accounts.

Many people focus on the investments within these accounts and their returns, which are very important, but they overlook the important strategies that can save investors and their heirs’ money in the long run.

Retirement accounts are different!

People often forget that retirement accounts have to be in the name of an individual and that the beneficiary designation will override any other estate planning document such as your trust, will, etc. Therefore, it is imperative that you separate the retirement accounts from any other part of your estate when establishing a proper plan for distribution of these assets.

The rules regarding these retirement accounts or IRAs can be very complex and cause many mistakes.

Many times, financial professionals refer to IRAs as “Individual Riddle Accounts” because they are significantly different from most other assets in your estate plan.

On my next blog post I’ll explain some of the differences.

– Jim Lange

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 5-8

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

5. The impact of the conversion on your current income tax rate.
By converting to a Roth IRA you are immediately recognizing, in the year of your conversion, income that could propel you into a higher marginal tax bracket. The only way to really sort this challenge out is to crunch the numbers and try to make the best decision based upon your current tax bracket versus your future income tax bracket expectation.

6. Potential estate planning opportunities.
Roth IRAs can, in certain situations, offer estate planning opportunities. For investors that have other sources of retirement income and do not need to use their traditional IRA monies during their lifetime, a conversion can help leave income tax-free Roth IRA monies to heirs for gift and estate planning purposes. Because you pay the income tax on a Roth IRA up front, your heirs inherit this Roth IRA free of income taxes. When considering a Roth IRA for estate planning purposes, please keep in mind that the conversion will immediately reduce your IRA assets if you cannot pay the conversion tax with non-IRA assets and therefore you may have less money available to grow in your retirement plan. Roth IRAs offer tax-free earnings which can be more attractive than the tax-deferred earnings of a traditional IRA. However, if you have less money in your retirement account, this may not bring the results you desire.

7. Tax laws are always subject to change.
Remember, tax laws are always subject to change. Therefore, it is advisable for anyone making this decision and/or other decisions to stay in contact with a financial professional who is current and informed of these rules. When making financial decisions that involve tax laws it is always advisable to think about the “what ifs” and make sure you make the most informed decision.

8. Roth IRA Conversions Made in 2014 Can Be Recharacterized
Under current federal tax laws, all taxpayers have the option of recharacterizing or “undoing” a Roth IRA transaction. When you choose to recharacterize a Roth IRA, you are essentially making an election to place your retirement funds back to the way they were before the conversion.

This process can be completed no later than October 15th of the year following your conversion.  Please remember that under current tax laws, there are restrictions on how you must handle a partial recharacterization of a Roth IRA. You cannot choose to recharacterize only those investments that have declined in value. This is not allowed under the Anti-Cherry Picking Rules.[1] The Anti-Cherry Picking Rules were specifically designed to prevent people who converted to a Roth IRA from recharacterizing only those investments that declined in value. The effect of this rule is to pro-rate all gains and losses to the entire Roth IRA regardless of the actual stock or investment recharacterized. One strategy that is allowed is for an investor to break up their IRA into two separate IRAs and then convert to two separate Roth IRAs. You should familiarize yourself with the IRS laws regarding recharacterization in order to implement this strategy. As a financial advisor who understands these rules, we have experience in guiding clients in this area.


In conclusion, we realize the decision to convert some or all of your retirement account to a Roth IRA is complex. While this article is for informational purposes only and should not be deemed tax advice or an individualized recommendation, we hope that some of these points are helpful to you.

Should you have any question on whether or not you should contribute or convert to a Roth IRA, we welcome the opportunity to help you map out a strategy that will be best for your situation. Saving for retirement has and always will be a priority for most investors. We enjoy helping clients and prospects explore all of their options.



New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 2 – 4 of 8

2. Married couples who file separately are now allowed to make Roth IRA conversions.
Under the prior rules, married couples who filed separately were not allowed to convert to Roth IRAs (unless they have lived apart for more than one year). The rule changes in 2010 allow married couples who filed separately to convert to a Roth IRA.

3. You can make a partial Roth IRA conversion.
Making a Roth IRA conversion does not have to be an all or nothing decision. Although the rules surrounding partial conversions can be complex, a competent financial professional can help you understand the tax impacts and rules that govern converting some, all or none of your existing IRA to a Roth IRA. Like any other decision, all of the variables of your particular situation should be considered so you can make an informed decision. You should consider running the numbers for your situation to best determine the impact of making a full or partial conversion to a Roth IRA.

4. What is your age and time horizon?
Should you elect to convert to a Roth IRA, there is a 10% federal penalty on any withdrawal made within the first five years from that Roth IRA. Also, like with other retirement accounts there is a 10% federal tax penalty on any withdrawal made prior to the age 59 ½ (unless an exception applies). This needs to be factored in when making your decision as to whether or not you should convert all or some of your IRA funds to a Roth IRA.

An advantage of the Roth IRA is that investors over the age of 70 ½ are not subject to Required Minimum Distributions (RMDs) and therefore those investors who do not need to use the money to live off can continue to grow these funds tax-exempt. A qualified financial professional can help you map out, based on your age and time horizon, a strategy that is most likely to avoid or minimize the impact of penalties involved with Roth IRA conversions.

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 1 of 8

Although Roth IRAs have been available since 1997, starting in the year 2010 many financial firms and companies started marketing campaigns discussing Roth IRA conversions.

Prior to the year 2010 there were income limits to both contributing and converting to Roth IRAs. However, the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005 made some modifications to those rules starting in 2010 that still apply today. For over a decade, Roth IRAs were available only for individuals under certain income limitations. Income restrictions still exist in terms of contributions to a Roth IRA; however, in 2010, changes have removed these restrictions for Roth IRA conversions. These changes have opened a window for investors who were previously excluded from converting to a Roth IRA to consider this conversion.

Many financial firms are capitalizing on these new rule changes with heavy marketing, but like every important financial decisions, this decision needs to be made with extreme care and is best determined case-by-case. For an investor that already has a traditional IRA or retirement plan it is best to discuss with a financial professional whether converting to a Roth IRA is the right move before making any decisions.

Here is Fact 1 of 8 that can help you weigh your decision.

Fact 1. The income limitations for Roth IRA conversions has been removed under previous IRS laws.
Prior to 2010, households with modified adjusted gross incomes exceeding $100,000 were not eligible for Roth IRA conversions. While restrictions still exist for contributing to a Roth IRA, there is no longer an income limit for who can convert an existing traditional IRA or employer plan to a Roth IRA. The IRS’s removal of these income limitations has created a marketing opportunity for financial companies to promote and encourage investors to explore this option. As we mentioned earlier, this is a major financial decision and it is typically in your best interest to discuss your situation with someone who understands all of the moving parts involved.


[1] As identified in IRS Notice 2000-39

Important Tax Birthdays

The “Happy Birthday” song is traditionally sung to celebrate the anniversary of someone’s birth. In 1998, the Guinness Book of World Records proclaimed that very song as the most recognized song in the English language, followed by “For He’s a Jolly Good Fellow.” Its roots can be traced back to a song entitled, “Good Morning to All,” which was written and composed by American sisters and kindergarten teachers, Patty and Mildred Hill in 1893.

Throughout the years, many other versions and styles of the “Happy Birthday” song were created. One of the most famous versions of this song was sung by Marilyn Monroe to then U.S. President John F. Kennedy in May 1962. Another famous version of the song was sung by John Lennon and Paul McCartney. They shifted the melody to a traditional rock song and increased its complexity and style on their unforgettable double album, “The Beatles” (commonly referred to as the “White Album”) in 1968.

Traditionally, birthdays are fun events, but when it comes to taxes, birthdays have a special place. From a tax standpoint, birthdays are not always “fun” and very often are different and not created the same.

The table below contains some important tax birthdays (after the age of 50) that can dramatically affect your income taxes:

It is very important that as you plan for or reach any of these milestone birthdays that you are working with a qualified financial advisor who can review your specific situation to determine what tax reduction strategies would be best for you.

Contact us today to discuss some of these strategies. If you are a Western Pennsylvania resident, schedule a free initial consultation with us by calling us at 412-521-2732.  Residents outside of Southwestern Pennsylvania should call for more information. Jim’s services are available via the phone or through the Internet. Send an e-mail to

Important Tax Birthdays