Take the 10-second test!

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

Please take the next 10 seconds to complete this survey about your financial future. . . you might rediscover some opportunities for financial growth.

Are you concerned about outliving your income?

Would you like to reduce (possibly eliminate) your quarterly estimated tax payments?

Would you like to see your grandchildren go to college?

Are you concerned about going into a nursing home?

Would you like to earn more competitive interest and preserve the safety of your nest egg?

Are you concerned about the stock market going down?

Would you like to find out how to take money out of your IRA tax free?

Is your house still titled as joint tenancy? (If yes, you are probably making a serious mistake!)

Are you concerned about which option to make regarding your minimum distribution requirements from your IRA at age 70 1/2?

Do you want to get more information on the Inherited IRA that can possibly continue your IRA for 30, 40, 50 years or longer even after you pass away?

Are you concerned about the likelihood that the government will get over 50% of your retirement accounts after you pass away?

If you have answered, Yes, to 3 or more of these questions, you should come in for a complimentary review!  Call 412.521.2732 and ask for Alice.

Remember, what you don’t know can hurt you!

 

Never a Better Time for a Roth IRA Conversion

Posted on by in 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)

The Affordable Health Care Act and It’s Impact on Your Retirement…

Posted on by in IRAs, Medicare, Roth IRA, Roth IRA Conversions.

Now that the Affordable Health Care Act is deemed constitutional, the Medicare surtax that is scheduled to take effect on January 1, 2013 is likely.  Tax rates on certain passive income will rise to 43.4% from the current rate of 35%, and there is scheduled increases in the capital gains rates for both lower and upper income tax bracket taxpayers.  With taxes almost inevitably increasing, the appropriate response to buy your partner, Uncle Sam, out of your IRA at today’s lower tax rates.

As many of you know, for a long time I have advocated that making conversion of at least a portion of your IRA to a Roth IRA is a good idea for most taxpayers. Now, with the recent Supreme Court decision that the tax and locations of the Affordable Health Care Act, the benefits of the conversion become even more advantageous and more certain, particularly for upper income taxpayers. The benefits are making Roth IRA conversions can be measured in hundreds of thousands of dollars, even millions if you can stretch the life of the Roth IRA over multiple generations.

If you are interested in a detailed technical analysis of the Medicare surtax or the benefits of Roth IRA conversion, please call and ask our Client Service Coordinator Alice for more information.   We would be happy to provide you with an explanation or set up a meeting with  one of our professionals.

3 Myths About Social Security

Posted on by in 401(k), 403(b), Social Security and tagged .

Myth #1: By the time I retire, Social Security will be broke.

If you believe this, you are not alone. More and more Americans have become convinced that the Social Security system won’t be there when they need it. In an AARP survey released last year, only 35 percent of adults said they were very or somewhat confident about Social Security’s future.

It’s true that Social Security’s finances need work, because over the long term there will not be enough money to fully cover promised benefits. But radical changes aren’t needed. In 2010 a number of different proposals were put forward that, taken in combination, would put the program back on firm financial ground for the future, including changes such as raising the amount of wages subject to the payroll tax (now capped at $106,800) and benefit changes based on longer life expectancy.

Myth #2: The Social Security Trust Fund Assets are Worthless.

Any surplus payroll taxes not used for current benefits are used to purchase special-issue, interest-paying Treasury bonds. In other words, the surplus in the Social Security trust fund has been loaned to the federal government for its general use — the reserve of $2.6 trillion is not a heap of cash sitting in a vault. These bonds are backed by the full faith and credit of the federal government, just as they are for other Treasury bondholders. However, Treasury will soon need to pay back these bonds. This will put pressure on the federal budget, according to Social Security’s board of trustees. Even without any changes, Social Security can continue paying full benefits through 2037. After that, the revenue from payroll taxes will still cover about 75 percent of promised benefits.

Myth #3: I Could Invest Better on My Own.

Maybe you could, and maybe you couldn’t. But the point of Social Security isn’t to maximize the return on the payroll taxes you’ve contributed. Social Security is designed to be the one guaranteed part of your retirement income that can’t be outlived or lost in the stock market. It’s a secure base of income throughout your working life and retirement. And for many, it’s a lifeline. Social Security provides the majority of income for at least half of Americans over age 65; it is 90 percent or more of income for 43 percent of singles and 22 percent of married couples. You can, and should, invest in a retirement fund like a 401(k) or an individual retirement account. Maybe you’ll enjoy strong returns and avoid the market turmoil we have seen during the past decade. If not, you’ll still have Social Security to fall back on.

Five Financial Tips for Women

Posted on by in 401(k), IRAs, Life Insurance.

Five Financial Tips for Women

  1. Make it a Priority to Understand What You Already Have – For working woman, make sure you fully understand your employee benefits and your company’s retirement plan.  Make it a point to see what your short and long term disability and life insurance can offer you and then fill in the gaps with individual policies. You may be surprised what your benefits do and do not cover.  It’s better to know now then at the time you may need to use them.
  2. Fund Your Retirement Plan:  Most employers offer employees a retirement plan and you must take advantage of it. Make sure though that you consult with a qualified financial advisor when choosing your fund choices.  Leave the selection up to the professionals and review it once a year to make sure your maximizing your returns. Beyond your company’s retirement plan, look into getting your own IRA or Roth IRA, which allows you grow wealth tax-free through the course of your lifetime – it’s worth looking in to.
  3. Recognizing the Challenges is Half the Battle: There’s no doubt about it – women face obstacles that men do not.  Women still earn less than their male counterparts, live longer and are typically out of the workforce for 12 years, on average, taking care of children and now more than ever, aging parents. Recognize these challenges, set goals and build a plan to action to overcome your specific hurdles.  Things such as making a career move or initiating salary negotiations, refinancing your mortgage, opening up an IRA or Roth IRA and adjusting your risk tolerance on your investments can all make a powerful impact on your financial picture.
  4. Don’t be Afraid to Fire a Bad Advisor:  Let’s face it, there are thousands of financial advisors out there…some of which may suit you better than others.  Choosing a financial advisor is like choosing a doctor.  Choose a person who focuses on your needs and not there’s, someone who listens to your goals, keeps you on track and meets with you at least once a year to review your situation.  If you’re not satisfied with the relationship you have, move on!
  5. It’s Never Too Late:  Regardless of your age, there are ideas and options that can help your financial picture – we see it everyday.  There is no better time to start investing than right now. Make it a priority to meet with an advisor in 2011.  Ask people you trust to refer you to someone that listens and achieves results and get started as soon as possible.

Three Financial Pioneers Create the Power of Index Investing

Posted on by in IRAs and tagged , , , .

The Conception of Index Investing

In 1974 John Bogle founded and created The Vanguard Group – now one the world’s largest mutual fund companies offering 120 different mutual funds holding over $1 trillion.  In 1975, Mr. Bogle championed the first low-cost, index fund which transformed the mutual fund industry crediting him with the title “Father of Index Investing”.    His investment philosophy was simple; it advocated capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.

Bogle felt that indexing was a logically compelling method of investing. “In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows:  all mutual fund managers together provide average investment performance, but in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

His theory was supported by three crucial points: superior diversification/allocation, lower annual operating expenses and lower taxes.  Bogle felt that indexers had the advantage of these three things plus steady, cumulative power of broad diversification and lower expenses, not just short pockets of strong investment performance such as in 1995, 1996 and 1997.

 

People Begin to Take Notice

After 3 years of excellent performance, two the world’s most respected financial experts took notice and began to research Bogle’s theories – they wanted to take an acadeic approach to proving his theories.  Rex Sinquefield and Roger Ibbotson sought out to create strong theoretical support for indexing and they did just that. In 1979 they published Stocks, Bonds, Bills and Inflation (SSBI) which is now updated annually and serves as the standard reference for informaiton on investment market returns.  Together Sinquefield and Ibbotson executed a large volume of academic studies examining the performances of mutual funds under actual market conditions establishing, very convincingly, that the ‘beat the market’ efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, they found that indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is therefore unmistakably obvious: they found that the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds.

After publishing their study, Sinquefield became the co-chairman for Dimentional Fund Advisors, an index mutual fund manager that began in 1981 – a company that now holds $227.6 billion in assets.  Roger Ibbotson, who was already a professor at Yale, founded Ibbotson and Associates which continued to focus on bridging the gap between academic knowledge and industry practice on asset allocation.  For over 30 years Roger Ibbotson has been committed to delivering innovative asset allocation solutions, helping investors reach their financial goals and providing asset allocation thought leadership to money managers, mutual fund companies and other investors all over the globe.  Still today, Ibbotson supports his roots and is a Board Member, one of 9 “Academic Leaders”, which advises Dimentional Fund Avisors – the world’s leading index mutual fund manager.

You owe it to yourself to check out the benefits of index investing…

Last Minute Tax Strategies for IRAs & Other Retirement Accounts

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

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.

The Best Response to the New Estate Laws

Posted on by in Educational Resources, Estate Tax, Income Tax, IRAs, Lange’s Cascading Beneficiary Plan, QTIP Trusts.

The top estate planners in the country warn IRA and retirement plan owners to develop an appropriate response to the new estate tax laws just passed this December. We are now in a completely different tax environment ripe for the cruelest trap of all: where the standard language of traditional wills and trusts forces too much money (now up to $5,000,000) into a trust limiting the surviving spouse to income and the right to invade principal for health, maintenance and support.  If the trust is overfunded, which is likely under the new law, less discretionary income is available for the surviving spouse.  Furthermore, if this common trust is the beneficiary of an IRA or retirement plan, massive income taxes are also triggered – all this can be avoided with appropriate language in wills and trusts and appropriate beneficiary designations of IRAs, Roth IRAs and retirement plans.

Under the new estate tax laws, older traditional estate plans are not helpful, but harmful, because of the severe restrictions they place on the surviving spouse, something most couples do not want.  Many IRA and retirement plan owners have this detrimental language in their existing wills and trusts and don’t even know it. IRA and retirement plan owners with assets between $600,000 and $5,000,000 are particularly vulnerable. Both spouses have likely become quite accustomed to making expenditure decisions based on desire in addition to need. To lose that control would be devastating. Without a review of their older traditional estate plan they could be  thinking they have left everything under the control of their spouse, but in reality, they have not.

I encourage you to have your will reviewed and updated to comply with the estate planning law.  In Pittsburgh?  Please join us for one of our FREE workshops entitled, “How to Avoid the Cruelest Trap of All:  Don’t Unknowingly Restrict Your Surviving Spouse’s Independence or Access to the Family Money After the Tax Relief Act of 2010.”   See our location and times on www.paytaxeslater.com.  Not in Pittsburgh, you can purchase this workshop to view in the comfort of your own home for just $97 – to order call our office at 412.521.2732.

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.

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.

New Tax Law Creates Enormous Opportunities for Millions of Employees

Posted on by in 401(k), 403(b), Educational Resources and tagged .

FOR IMMEDIATE RELEASE
CONTACT: JAMES LANGE, CPA
OFFICE: 412.521.2732

September 27, 2010 – The President signed a new law, effective immediately, that has an enormous impact on millions of retirement plan owners.

The new law will allow employees to convert all, or a portion, of their traditional 401(k) or 403(b) retirement plan to a Roth 401(k) or Roth 403(b). The law is actually part of the Small Business Jobs and Credit Act which has implications for small businesses, but this little known provision also has a profound impact on employees with these retirement plans who will want to make a Roth conversion.

This bill would allow 401(k), 403(b), and governmental 457(b) employees to convert their pre-tax account balances into Roth designated accounts, which is the official title for a Roth 401(k) or Roth 403(b). A Roth 401(k) or Roth 403(b) will enjoy income tax-free growth for the lives of the plan owner, spouse, children and grandchildren. The amount of the conversion, however, would be considered taxable income. If an employer has an existing 401(k) or 403(b) plan, employees could immediately make the conversion to either a Roth 401(k) or Roth 403(b).

This new legislation will be extremely important to people who are still working and have substantial wealth in their employer retirement plan as it will essentially allow them to convert their traditional 401(k) or 403(b) to a Roth designated account that would still be part of their employer retirement plan. Previously, if an employee’s retirement plan was tied up in a 401(k), they would not have been eligible to make a Roth conversion while they were still working. Now, if employers have Roth designated accounts, employees can make a Roth conversion of whatever amount they wish.

Since tax rates are expected to go up in 2011, at least for upper income taxpayers, it will definitely be to their advantage to make a conversion to a Roth 401(k) or Roth 403(b) in 2010 while they can still pay a lower tax on the conversion.

One strategy that would be highly beneficial for middle income taxpayers who are still employed and have limited access to their retirement plan is that they will be able to make a partial conversion of their 401(k) to a Roth 401(k), since it might be too aggressive for them to convert their entire 401(k) and pay income taxes on that conversion. An even better long-term strategy for this middle income group is a series of multiple, partial conversions over a period of years of the pre-tax dollars in a 401(k) to the Roth designated account in the 401(k). Conversely, if a person is a high income employee or will likely always be in the top tax bracket, they should consider a much more substantial Roth conversion.

Another huge benefit of this law is that these new Roth designated accounts will enjoy excellent creditor protection since, for the most part, 401(k) and other retirement plans are controlled by a federal law called ERISA which offers better creditor protection than ordinary IRAs or even Roth IRAs. A good example of this is OJ Simpson, who is collecting substantial income while he is in jail because the judgments against him could not penetrate the ERISA creditor protection on his retirement plan.

Obviously, the law only covers employees who have access to Roth designated accounts at work, but it would be to an employer’s advantage