Never a Better Time for a Roth IRA Conversion

Posted on by in Estate Planning, Income Tax, Roth IRA, Roth IRA Conversions.

According to the September/October edition of Private Wealth Magazine there has never been a better time to make a Roth IRA conversion.

“”Roth IRA conversions never looked so good as they do now,” says Jones. Not only will 2012 conversions be taxed at rates no higher than 35%, today’s slow economy may lead to a legitimately low valuation of illiquid IRA assets – and a relatively low tax bill. “IRAs must be valued each year, “says Slott. “If a client is reporting a low value because of the week economy, less tax will be due on a Roth IRA conversion. ”

Paying the tax from non- IRA investment assets can trim a client’s taxable holdings, reduce future taxable investment income, and therefore reduce exposure to schedule tax hikes as well as to the coming 3.8% Medicare surtax. after five years and after age 59 1/2,all Roth IRA withdrawals will be tax-free. in essence, a Roth IRA conversion this year can move mega – IRA money from surtax straits into tax-free territory.”

Taken from : (Korn, Donald. Private Wealth Magazine, Sept./Oct. 2012. p. 54)

(The quotes in this selection are from Ed Slott, “America’s IRA Expert” and Michael J. Jones of Thomson Jones LLP, a tax consulting firm in Monterey,California)

Are you self-employed?

Posted on by in Income Tax, Tax Law.

IRS lawyers confirm that self-employeds can deduct Medicare premiums. Premiums paid for all parts of Medicare are included in the deduction for health insurance on the front page of the 1040 form. This easing also applies to partners, provided the partnership paid the premiums or reimbursed the partner, and the amounts are reported as guaranteed payments that are taxed as income. The premiums must be included as taxable wages on the shareholders W-2 form.

Medicare premiums paid by a spouse qualifies well, the Service says filers who didn’t take the deduction in prior years can file for refund.

(Kiplinger’s Tax Letter, September 2012)

(Kiplinger’s (Kiplinger’s (Kiplinger’s Fantasy Kiplinger’s Parentheses Lingers

2011 Changes in Tax Law

Posted on by in Estate Planning, Estate Tax, Income Tax, Lange’s Cascading Beneficiary Plan.

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010” (the “2010 Tax Act”), signed by President Barack Obama on December 17, 2010, makes important changes to the taxation of estates and gifts, which will affect many grandparents. This Act significantly increases the prior exemptions for estates and gifts. It will affect many existing wills and estate plans, so it would be wise for grandparents to review their estate-planning documents with their attorneys to determine if changes are appropriate.

The 2010 Tax Act reinstates the federal estate tax at rates of 35 percent (as opposed to 45 percent under prior law) and provides for a federal exemption of $5 million for individuals and $10 million for a husband and wife for 2011 and 2012. It also keeps the tax rate at 35 percent for gifts made in 2010 through 2012. The lifetime gift-tax exemption amount is reunified with the $5 million estate-tax exemption, providing for a unified gift and estate tax exemption of $5 million for decedents in 2011 and 2012. This makes lifetime gifts much more attractive as an estate-planning vehicle.

Keep in mind that even though federal estate taxes have been eliminated on estates of less than $5 million (or $10 million, in the case of a surviving spouse), there may still be significant state estate taxes on estates of less than $5 million. New York State, for example, has not changed its $1 million exemption to conform to increases in the federal estate-tax exemption, and thus, a decedent with a $5 million estate who dies in New York will be subject to state estate tax of approximately $400,000, even though there is no federal estate tax.

Last Minute Tax Strategies for IRAs & Other Retirement Accounts

Posted on by in Estate Tax, Income Tax, IRAs, Roth IRA, Roth IRA Conversions, Tax Law.

Make your 2010 IRA contribution as late as April 18, 2011: 

You can contribute up to $5,000 (or $6,000 if you are 50 or older) until the time you file your income tax return, but no later than April 18, 2011.  If you participate in a retirement plan at work, the IRA deduction phases out if you are married and your joint AGI is $89,000 or more, or if you are single and your adjusted gross income is $56,000 or more.  Filing an extension will not buy you additional time.  Non-deductible pay-ins to IRAs and Roth IRAs are also due by April 18, 2011.

Make a deductible contribution to a spousal IRA:

If you do not participate in a workplace-based retirement plan but your spouse does, you can deduct some or all of your IRA contributions on your 2010 income tax return as long as your adjusted gross income does not exceed $177,000.

Make a contribution to a Roth IRA: 

Contributions to Roth IRAs are not tax deductible, but the earnings on them may be withdrawn totally income tax-free in the future as long as the distributions are qualified.  A Roth IRA distribution is qualified if you’ve had the account for at least five years, the distribution is made after you’ve reached age 59½, you become totally and permanently disabled, in the event of your death, or for first-time homebuyer expenses.  Contribution limits are the same as traditional IRAs, except the maximum contribution for both Roth and traditional IRAs is still limited to $5,000 or $6,000 for persons age 50 or older.

To make a full Roth IRA contribution for 2010, your AGI cannot  exceed $177,000 if you are married or $120,000 if you are single.  You are subject to the same limitations for a non-working spouse.  Subject to some exceptions, I usually prefer Roth IRAs to traditional IRAs or even traditional 401(k)s.

Look into Roth IRA conversions:

The rules for contributions to Roth IRAs are different from the rules for Roth IRA conversions.  Prior to January 1, 2010, you could only convert a traditional IRA to a Roth IRA if your AGI was $100,000 or less (before the conversion).  However, this dollar cap is now removed starting January 1, 2010 and there is no limit to your earnings in order to qualify for a Roth IRA conversion.  Please remember that a conversion to a Roth IRA may place you in a higher tax bracket than you are in now and have other adverse consequences, such as subjecting more of your Social Security to be taxable due to the increase in your AGI.  Please also note that a Roth IRA conversion does not have to be all or nothing. You can elect to do a partial Roth IRA conversion and you can convert any dollar amount you decide is best for your situation.  Our most common set of recommendations after “running the numbers” is usually a series of Roth IRA conversions over a number of years.  Please remember that a Roth IRA conversion may not be appropriate for all investors.

5 Things Taxpayers Can Proactively Do To Best Take Advantage of the New Income and Estate Tax Law

Posted on by in 401(k), 403(b), Estate Tax, IRAs, Tax Law.

There are some BIG changes for taxpayers in the creation of the new 2010 Tax Relief/Job Creation Act.  How can you best respond to this law?  Take a look at these 5 things all taxpayers can proactively do to best take advantage of the changes:

1.  With the money you save on the reduction of your social security tax, you should contribute at least that much additional money to your retirement plan.

2.  Contribute to your retirement plan in the following order:

  • Contribute whatever an employer is willing to match or even partially match
  • Contribute to your Roth IRA and if married to your spouses Roth IRA, even if your spouse isn’t working
  • Maximize your contribution to your Roth 401(k) or Roth 403(b) if available
  • If not available, maximize your contribution to your traditional 401(k) or 403(b)
  • If your income is too high to qualify for a Roth IRA, contribute to a nondeductible 401(k).

3.  Since we have two more years of low tax rates, make Roth IRA conversions.  Consider multiple conversions since you can “recharacterize” or undo them.  If you do multiple conversions, you can keep the ones that do well and undo the ones that don’t.

4.  Review your wills and trusts.  Many, if not most of the wills done for taxpayers with estates of $1 million are now outdated.  Not only will you not get optimal results, but your existing wills and trusts might be a huge restriction on the surviving spouse.

5.  Now that you can either leave or gift $5,000,000 or $10,000,000 if you are married, you should rethink potential gifts to children and grandchildren without tax laws that would otherwise restrict gifts you would like to make.

Making Work Pay Credit

Posted on by in Income Tax, IRS and tagged , .

For the past couple of months, you’ve probably noticed a little extra money in your paycheck. Those extra few dollars are thanks to the Making Work Pay Credit which was part of the American Recovery and Reinvestment Act of 2009 signed into law by President Obama in February.

While you’re no doubt grateful for the extra cash, you may be wondering exactly how this works. The Making Work Pay Credit is administered through a reduction in wage withholding and provides up to $400 per individual worker and $800 per working married couple. However, this credit phases out for individuals whose modified adjusted gross income (MAGI) exceeds $75,000 or $150,000 in the case of married couples filing jointly.

The amount of credit you receive will be reported on your 2009 income tax return, but it’s not taxable and you won’t have to pay it back if you received the correct amount. If, for some reason, you do not have taxes withheld this year, you can claim a lump sum credit on your 2009 return.

Since these changes will be made automatically through your withholding, most taxpayers can sit back and relax and enjoy the additional spending money. However, there are potential problems for some taxpayers and we don’t want you to be caught off-guard.

For instance, if you are claimed as a dependent on someone else’s return, you do not qualify for the Making Work Pay Credit. College students, in particular, need to be aware of this restriction. These taxpayers will have to return any credit paid to them — either through a payment to the IRS or through a reduced refund.

Married couples who both work should also be very careful about “over withholding”. This can happen if each spouse’s employer makes the adjustment, but the couple’s combined income hits the phase out amount. If this is the case, make adjustments now so that you don’t have a problem next April. Either adjust your form W-4 or set money aside.

It’s also important to note that only individuals with earned income qualify for the Making Work Pay Credit. If you do not have earned income, you are not eligible for the credit.

To be sure that you don’t have any unpleasant surprises when you’re filing your 2009 tax return, it’s a good idea to take a look at your withholdings now. The few minutes it will take to do this could save you headaches down the road. Then, if you’re still concerned, make adjustments now or talk to your tax professional.

One more suggestion from the Lange team — if you are in a position to save rather than spend the credit, you may want to consider using that money towards covering the taxes on a Roth IRA conversion. Let’s take the example of a married couple in the 15% tax bracket. They qualify for both the Make Work Pay Credit and a Roth IRA conversion. Assuming they have IRAs, they could do a $5,000 Roth IRA conversion and use the $800 tax credit to pay the $750 of federal income taxes due on the conversion (with $50 left to treat themselves to dinner).

Tax-loss Harvesting — Reduce Your Taxes

Posted on by in IRS, Tax-Loss Harvesting and tagged , , .

Possibly the single most important tool for reducing your taxes is tax-loss harvesting. Usually, tax-loss harvesting is done at the end of the year. But, as Jim Lange and radio guest Bob Keebler pointed out during the May 20th edition of The Lange Money Hour, the current down market has created an opportunity to harvest losses right now.

Bob is a partner with Virchow, Krause & Company in Wisconsin and has been busy all year executing this strategy for his clients. (By the way, congrats to Bob on being named one of the Top Most Influential CPAs in America by CPA magazine 4 out of the last 6 years).

If you have never used this strategy before, tax-loss harvesting is the art of selling securities at a loss in order to offset a capital gains tax liability. It truly is an art and Bob strongly advised against trying to execute this strategy yourself. Turn first to your trusted financial professional for their advice.

The key to this strategy is to take losses at their deepest point without getting out of the market completely. As Jim and Bob mentioned, you don’t want to miss a good run in the market. Therefore, a slow and methodical approach to tax-loss harvesting is the way to go.

What if you’ve accumulated thousands of dollars in losses, but don’t have an equal amount in capital gains? There are a couple of things to consider — a capital loss can offset only $3,000 of ordinary income as adjusted to your AGI (Adjusted Gross Income). The good news is that tax losses may be carried forward onto future tax returns.

If you have the bright idea that you can buy an asset and sell it solely to pay less taxes, you’ll have to think again. The IRS figured that taxpayers would try this, so their rule is that your loss won’t be allowed if you purchased the same asset within 30 days.

Tax-loss harvesting takes some serious analysis, but the results can be well worth it — especially in this down market. Jim and Bob’s final piece of advice was to sit down with your CPA now if you have losses. Don’t wait until the end of the year when the market may be on a rebound.

Thanks again to Bob for his great advice. His material is always incredibly helpful and informative and his latest product is designed to make the complicated topic of IRAs easy to understand. It’s called The Big IRA Book (literally big with 11 x 17 pages) and is packed with charts, graphs and tools to help you make informed decisions. For more information, call 800-955-0554.

As always, if you’d like to listen to Jim and Bob, the audio is available on this website.

The Importance of a Safe Withdrawal Rate

Posted on by in Tax Law and tagged , , .

Now that tax season is behind us (thanks to the whole Lange staff for another great year), we are working on a newsletter that will direct you to some outstanding resources designed to help you with your financial planning. If you are not currently receiving our newsletter, sign up for the e-newsletter on retiresecure.com.

One area that we think deserves special attention, especially since most portfolios have dropped in value, is a review of the sustainable withdrawal rate during retirement.  A good plan is critical to ensure that you don’t outlive your money.

With that in mind, Jim invited Paul Merriman to be his guest on his radio show, The Lange Money Hour, on April 22nd.  Paul is the author of “Live It Up Without Outliving Your Money” and founder of Merriman, an investment advisory firm based in Seattle that manages over $1 billion in assets.

Both Jim and Paul agree that many variables come into play when trying to determine a safe withdrawal rate.  You have to consider the client’s portfolio, age, risk-tolerance, other sources of income and current market conditions.  An excellent article on the subject can be found on Paul’s website www.FundAdvice.com. On the right hand side of the home page – under articles – click on ‘Retirement: When Your Portfolio Starts Paying You.’

Jim and Paul also discussed what they consider to be the number one mistake that most investors make.  Jim believes the number one investment mistake is letting your emotions guide you (instead of logic.)  Paul believes the biggest investment mistake is trusting in the wrong people.  For instance, many investors act on financial advice solely from their co-workers or relatives.  Paul says that you can’t even trust Wall Street – believe the academics instead – they have the research to back up their claims.

It was another show filled with great advice — thanks to Paul for taking the time to join us.  If you missed the show, look for the complete audio on retiresecure.com the week of April 27th.

Last Minute Tax Tips

Posted on by in Income Tax, Roth IRA Conversions and tagged , , , , , , .

Big thanks to Lange team member Steve Kohman for being a part of our radio show The Lange Money Hour: Where Smart Money Talks on Wednesday night, April 8th on KQV am 1410. Steve is so dedicated to his clients that we had trouble prying him away from the office to do the show.

We’re glad that Steve finally agreed because his tax advice was excellent. He’s a technical machine – answering questions off the top of his head with no notes!

So is it too late to do something about your 2008 tax return?  Not according to Jim and Steve. For starters, you can still fund an IRA for 2008.  Individuals can contribute up to $5,000 — $6,000 if you’re 50 or older.

Steve also pointed out that many tax deductible medical expenses are overlooked.  Double-check to make sure you haven’t forgotten long-term care insurance premiums, prescription expenses, Medicare insurance premiums, prescribed weight-loss programs, therapy and even miscellaneous improvements to your house (adding a wheelchair ramp, for instance).

The tax code can be tricky to navigate. This year, there are several new developments, including The Housing and Economic Recovery Act of 2008. First-time home buyers will have until December 1, 2009 to claim a new refundable tax credit for a qualifying home purchase.  There are certain restrictions, so make sure you check with your tax professional.

The Worker, Retiree and Employer Recovery Act of 2008 allows retirees to suspend their Required Minimum Distribution for 2009.  Jim and Steve believe this has created an ideal opportunity for seniors to make a Roth IRA conversion.

What should you do if you realize you’ve made a mistake on your return?  Simply file an amended return.  To make it even easier, you have three years to take care of the paperwork.

If you think you could work night and day on your return and still not get it done by April 15th, you can always file an extension. It’s important to note, though, that it’s an extension to file – not an extension to pay.  Uncle Sam still wants you to estimate your taxes and, if you miscalculate, you could be subject to a penalty and interest.

We don’t know what came over Jim and Steve, but they offered listeners who are PA residents a free tax extension!   The Lange team is offering to take care of all of the paperwork and will even deliver your return hand-stamped. Then, after April 15th (and some much needed R&R), one of the accountants will meet with you and take a closer look at your return. If you’re interested, call the office at 800-387-1129.

Jim and Steve also covered various strategies for Roth IRA conversions, ideas for 2009 tax planning, what documents your tax professional really wants you to bring to the office and which one of them has already finished his personal tax return and which one hasn’t.

If you missed any part of the show, a rebroadcast is set for Sunday, April 12th from 9-10 a.m. ET and the audio will be available on retiresecure.com early next week.

The next show is set for Wednesday, April 22nd from 7-8 p.m. ET with special guest, author and money manager, Paul Merriman. Paul promises to make his prediction on when the economy will recover and explain the common mistakes that investors make.

Our Debut Show was a Big Success!

Posted on by in Tax Law and tagged , , , , , , , .

Thanks again to Ed Slott, ‘America’s IRA Expert,’ for taking the time to join us for the premiere of our radio show “The Lange Money Hour: Where Smart Money Talks” which aired on March 25th. Ed was a great guest and Jim and Ed ended up covering a lot of excellent tax-saving strategies. If you missed it, be sure to check out the audio that’s posted on retiresecure.com.

In their first appearance together, Jim and Ed explored how seniors can exploit the new law suspending required minimum distributions for 2009, Roth IRA conversion strategies for 2010, how to protect your IRA by using life insurance, planning for after-tax dollars inside a retirement plan after retirement and how to pick a good financial advisor. They even chatted about Bill Mazeroski and his 1960 ninth-inning, World Series-winning, home run against the New York Yankees (believe it or not, it’s a baseball analogy that relates to IRA investors today.) Come to think of it, it’s amazing that they were able to cover all of that in just one hour!

By the way, Ed Slott’s latest book Stay Rich For Life: Growing and Protecting Your Money in These Turbulent Times comes with a companion workbook that is very helpful. Jim was actually using it during the show!

Exciting news for the next show which is scheduled to air on Wednesday, April 8th from 7-8 p.m. ET on KQV 1410am. One of our Lange team members has agreed to join Jim to talk about taxes. Steve Kohman is a CPA, Certified Specialist in Estate Planning, Certified Valuation Analyst and a Resident Insurance Provider. He’s also an incredible “numbers-runner” – crunching the numbers to determine the best plan of action for you.

One week from the tax deadline, Jim and Steve will explain why it’s not too late to do something about your 2008 return. They’re happy to take your questions, so feel free to call the studio line at 412-333-9385.

Catch Jim and Steve on Wednesday, April 8th from 7-8 p.m. ET with a rebroadcast on Sunday, April 12th from 9-10 a.m. ET. Thanks to everyone who’s been listening around the country online at kqv.com. We’ve recently had listeners check in from Florida, Michigan, New Jersey, Ohio and Texas – we love hearing from you!

Keep listening!

Don’t forget that the audio to all of these shows is always posted on retiresecure.com.