Recent IRS Notice Lifts Ban on Rolling Over Your MRD

Posted on by in IRAs and tagged , , , .

In response to the economic crisis that kicked into high gear last year, Congress passed the Worker, Retiree and Employer Act (WRERA) of 2008 with the goal of providing older Americans some much-needed relief and flexibility in managing their personal finances. Part of the Act allowed for the suspension of minimum required distributions (MRDs) from IRAs and defined contribution plans. However, WRERA was enacted so late in the year, many retirees and plan administrators were unable to adjust to the new rules and many continued to take their MRDs during 2009.

If you are one of the people who unnecessarily took MRDs all year, you’ll be happy to note that on September 24th, the IRS issued Notice 2009-82 which gives you a second chance to keep the money in your account.  The normal ban on rolling over MRDs is being temporarily lifted and you now have the option to roll the money back into the IRA or defined contribution plan by November 30th for mandatory payments taken before October 1st.  If you took an MRD after September 30th, the deadline for putting the money back into your plan is 60 days after the distribution was made.

Some IRA owners are bound to be disappointed with part of Notice 2009-82.  The IRS did not change the part of the tax code which mandates a one-rollover-per-year rule for IRAs.  If you are an IRA owner who took your MRD in one lump sum – no problem.  You can roll the entire amount back into your plan.  Unfortunately, if you’re an IRA owner who took monthly MRDs, you are limited to rolling back only one of the withdrawals.

If your MRD was not taken from an IRA, but from some other defined contribution plan like a 401(k), this one-rollover-per-year does not apply to you.  Even if you took monthly distributions, you can still roll the entire amount back into your plan.

IRS Notice 2009-82 provides an excellent opportunity to extend your income tax deferral from your retirement account.  Just don’t miss the deadline – November 30th for payments taken before October 1st and 60 days after the distribution for payments made after September 30th.

For a complete look at Notice 2009-82, click on www.irs.gov/pub/irs-drop/n-09-82.pdf.

Jim Lange in Kiplinger’s

Posted on by in Beneficiary Designations, Roth IRA, Roth IRA Conversions and tagged .

Roth IRAs and Roth IRA conversions have been Jim Lange’s passion for the past decade and Jim is always happy to spread the word to the media. Jim’s latest appearance in print can be found in this month’s (September 2009) Kiplinger’s Retirement Report (Leave Your Kids a Tax-free Legacy on page 18).

To show the wealth-building potential of a Roth IRA conversion, Jim gives an example involving two 65-year old fathers.  They are both in the 28% tax bracket and both have IRAs valued at $100,000.  To simplify the example, both dads also have $28,000 in a taxable account.

The first dad decides to make a Roth IRA conversion and pays $28,000 in taxes up front.  The second dad decides to stick to his traditional IRA and will pay taxes upon withdrawal.  In Jim’s example, both dads live another 20 years and leave their IRAs to their children.

Thirty years after their parents die, the Roth IRA child has $1.8 million in future dollars.  The traditional IRA child only has $980,000.  Why the big difference?  For starters, the Roth parent never had to take required minimum distributions and the entire amount was able to grow tax-free for all of those years.  The traditional dad had to take an RMD starting at age 70 1/2 resulting in the parent and child paying taxes on the RMD every year.

This analysis really becomes powerful when you realize that a tax-law change starting on January 1, 2010 will make all taxpayers eligible for a Roth IRA conversion, regardless of income.  Considering that many wealthy taxpayers will be able to convert much more than the $100,000 in the example, the potential benefits of a Roth IRA conversion could be even more dramatic.

In the same Kiplinger’s article, Jim also stresses the importance of the beneficiary designation of your IRA.  If you hope to have your heirs stretch this tax-free shalter for their lifetimes, it’s important to get the wording correct.  Non-spouse heirs cannot roll an inherited IRA into their own Roth IRA.  Instead, they must set up an inherited IRA and the name of the deceased must remain on the account.  Jim advises using language along the order of “inherited IRA of Joe Sr. for the benefit of Joe Jr.”.  The money must then be transferred directly into the new IRA.

Remember – we are less than four months away from the big tax-law change.  Make sure that you’re up-to-speed on the benefits of Roth IRAs and Roth IRA conversions.  For a more detailed comparison between traditional IRAs and Roth IRAs, we offer another of Jim’s articles on this website.  Go to the homepage, click on articles and then click on Roth: Four Little Letters Lead to Long-term Financial Security.

As always, our excellent professional staff is available to help you with a complete Roth IRA analysis.  Get more details by calling our office at 800-387-1129.

New Website Feature

Posted on by in Educational Resources, Lange’s Cascading Beneficiary Plan, Life Insurance, Roth IRA, Roth IRA Conversions and tagged , , , .

Six months into our new radio show, The Lange Money Hour: Where Smart Money Talks, we’re happy to report that we have loyal listeners from all over the country. Calls, emails and questions have been coming in on a regular basis from California, Michigan, Texas, Ohio, Florida and New Jersey (as well as across Pennsylvania).

We’ve also discovered that many listeners enjoy listening to the shows again once they’ve been posted here at www.retiresecure.com.  Thanks to the listeners who made the suggestion that we offer shorter audio clips in addition to our full-length shows.

Since we also thought that was a great idea, we’ve created a new page featuring clips from every show.  The link is posted on the left-hand side of the homepage — click on Audio: Key Advice From The Lange Money Hour.

To make this feature even more user friendly, we provide a description of the topic and the date of the show.  Now you can get quick advice from Ed Slott, Bob Keebler, Natalie Choate and all of our other guests, just by clicking on the appropriate link.

All of our favorite topics are covered including Roth IRAs and Roth IRA conversions, safe withdrawal rates, the use of insurance in estate planning, tax-loss harvesting and the best estate plan for most traditional families — Lange’s Cascading Beneficiary Plan.

Please use and enjoy these clips at your leisure and keep the ideas coming!

New York Times Analyzes Roth IRAs

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

The Tuesday, July 21st edition of The New York Times had an article titled “Converting an IRA Into a Roth? How’s Your Crystal Ball?”. Naturally, this got our attention. Jim Lange was at the forefront of the Roth movement when he wrote the first peer-reviewed article on Roth IRAs for The Tax Adviser in 1998.  Since then, Roth IRAs and Roth IRA conversions have been Jim’s passion.

For many taxpayers, Roth IRAs have not been on their radar because of the income limitations.  Currently, if your household’s adjusted gross income is over $100,000, you don’t qualify for a Roth conversion.  However, a big change is about to take place.  Starting January 1, 2010, all taxpayers will be eligible for a Roth IRA conversion regardless of income.  If you are unfamiliar with Roth IRAs, here’s how they work.  With a traditional IRA, you take a tax deduction now and pay income taxes when you withdraw the money.  With a Roth IRA, you pay the taxes up front and then your money continues to grow income tax-free for the rest of your life and, perhaps, even the lives of your children and grandchildren.

As we get closer to the tax-law change in 2010, not only is interest in Roth IRAs heating up, but so is speculation that the rules may change down the road.  The New York Times article suggests that in the worst case senario, the federal government might try to tax the earnings on a Roth IRA after all.  Or, perhaps, the feds might impose a penalty tax on excessive balances.  This argument is especially hot right now considering the massive and growing federal budget deficit.

Others believe that Roth IRAs will remain the same, but all other accounts would change to be like them.  That means contributions to traditional IRAs would no longer be tax-deductible and pretax savings in 401(k)s and similiar plans would also stop.

Does that mean that you shouldn’t consider a Roth IRA conversion?  Not at all.  As The New York Times also mentions, many advisors believe that Roth IRAs will not only remain the same, but will become even more valuable if income tax rates increase.

If you’ve ever been to one of Jim Lange’s Roth IRA workshops, he answers the question about a possible tax-law change governing Roth IRAs by pointing out that Roth IRAs are part of The Internal Revenue Code (as opposed to Social Security taxes – which were never part of The Internal Revenue Code).  If this law were suddenly changed and taxes imposed at withdrawal, Jim has said in his workshop that this would be “a violation of due process, a violation of the constitution, and you would have a very well-financed revolution”.

Listen to the July 15th edition of The Lange Money Hour which featured one of America’s top IRA experts, Natalie Choate, and you’ll find that Jim and Natalie both agree with two other points made in The New York Times’ article.  First of all, if you don’t have the money to pay for the taxes on a Roth IRA conversion outside of your retirement plan, you should probably not convert.

Secondly, it’s not a good idea to do a 100% conversion.  As Natalie put it, “don’t put all your money on one horse”.  It’s not a good idea to ignore the Roth IRA, and it’s also not a good idea to have all of your money in a Roth IRA.  Diversification is key.

Jim Lange and the rest of our team are still very excitied about the possibilities ahead with Roth IRAs and Roth IRA conversions.  If you’re wondering what to do, we recommend a professional analysis of your situation.  It’s possible that a series of small conversions would work best for you.  The professional staff here has been doing thorough Roth IRA projections for years.  You don’t have to wait until 2010 to get started – for help, call the office at 800-387-1129.

Michael Jackson’s Estate

Posted on by in 401(k), IRAs, Roth IRA Conversions.

The circus surrounding Michael Jackson’s death and estate will, no doubt, continue for months, possibly years. No matter what you may think of Michael Jackson personally, we can all learn some lessons from the way that Michael set up his affairs.

For starters, Michael took the time to consider the matter of guardianship for his children.  Some believe that his choice is unwise – naming his 79 year-old mother, Katherine, as guardian and 65 year-old singer Diana Ross as contingent guardian.  The important thing to remember is that Michael obviously gave this considerable thought and wanted to make sure that his wishes were known.  It’s very important that all parents of minors do the same thing and take the responsible step of putting their wishes in their will.

Michael’s will was relatively straightforward — have a look for yourself  – http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will. The will is a pour-over will which basically says that all money or property that has not already been transferred into a trust should be transferred into a trust at the time of death.  For medium or large estates, a pour-over will with a family trust is an excellent way to avoid probate and to maintain some privacy since details of a trust are, in most states, not a matter of public record.

Sorting out the details of Michael’s financial situation will take quite some time.  One of the reasons is that much of Michael’s estate was not liquid.  The value placed on his main asset, a 50 percent interest in the Sony/ATV music catalog, has been reported to be worth anywhere from $500 million to $1.5 billion.  In addition, the estate is burdened by personal debt in the neighborhood of $500 million.

One lesson to be learned from this example is that if you have assets that are hard to value and not terribly liquid, you should consider life insurance.  If set up correctly, the life insurance proceeds would be tax-free and could be used to pay debts of the estate and taxes on the estate.

Finally, a piece of advice in the event that you leave behind a 401(k) plan.  While little is known about Michael Jackson’s estate planning, let’s assume that he got good advice and had set up a 401(k) plan.  If the 401(k) plan was left to Michael’s children, they could make a Roth IRA conversion of that plan in 2010.  They would pay income tax on the plan now, but all future growth of the plan would be income tax-free.  Considering the ages of Michael’s children, the difference would be measured in millions of dollars over their lifetime.

One interesting side note – if Michael had put his money into an IRA instead of a 401(k), his children would not have the option of making a Roth IRA conversion of the inherited IRA.  The ability of heirs to make a Roth IRA conversion is just one of the potential benefits of keeping your money in an existing 401(k) plan instead of doing a rollover to an IRA.

These lessons taken from Michael Jackson’s estate just scratch the surface.  There is much to be learned in the way Michael dealt with his estate while alive and we have put together a more in-depth article which you can access through our homepage by clicking on articles.  We will also be including this piece in our next newsletter.  If you aren’t receiving our newsletter, it’s easy to sign-up.  Go to the homepage of this website and click on e-newsletter sign-up on the left-hand side.

Review of Retire Secure!

Posted on by in 401(k), Roth 401(k), Roth IRA, Roth IRA Conversions and tagged , , , .

Big thanks to Nancy Shurtz, Senior Editor of the Media/Book Products Committee of the ABA’s Real Property, Trust and Estate Law Section for her in-depth review of the 2nd edition of Retire Secure! Pay Taxes Later. The entire office was thrilled when we received a copy of the June 2009 edition of Estate Planning Magazine and discovered that Nancy had rated the book highly recommended.

We appreciate that Nancy obviously took the time to thoroughly read the 2nd edition and even make a comparision to the first edition.  She noted that one of the chief differences between the two editions is Jim Lange’s discussion of the family of Roth retirement vehicles which is weighed against traditional retirement vehicles.

If you have a copy of the book and want to take a look at the comparisons between a Roth 401(k) and a traditional 401(k), turn to Chapter 3 starting on page 49.   One of our favorite chapters is Chapter 7 which explains Roth IRA conversions and the big tax law change coming up in 2010 that makes all taxpayers eligible for a Roth IRA conversion regardless of income (begin on page 127).

In her review, Nancy mentions that one of the strengths of the book is the proportion devoted to estate planning issues — including themes like charitable giving, beneficiary and survivorship issues and the role of trusts in estate planning.  She wraps up by saying, “This book is a great read, full of illustrative (and entertaining) stories, but also full of practical advice”.

It’s always nice when your hard work is recognized and we’re thankful for Nancy’s attention.  Nancy is also a chaired professor at the University of Oregon School of Law in Eugene and you can read her complete review on page 42 of this month’s Estate Planning Magazine.

Keep in mind that if you do not yet own a copy of the 2nd edition of Retire Secure! Pay Taxes Later:  The Key to Making Your Money Last, you can return to the home page and click the Order Now button (you’ll be directed to the order page on amazon.com).

Beneficiary Designations in a Second Marriage

Posted on by in Educational Resources, IRAs, QTIP Trusts and tagged .

Estate planning can be tricky to begin with — toss in a second spouse and children from different marriages and relationships and it becomes even more difficult.

Recently, Jim Lange came across an article in the Pittsburgh Post-Gazette that dealt with the estate planning challenges caused by divorce and remarriage.  The example that was used was that after 15 years of a second marriage, a husband was getting ready to retire with $1 million in his IRA.  His second wife was shocked to learn that she had no ownership rights to the account.

One of the proposed solutions listed in the article was a tool called a QTIP trust (qualified terminable interest property trust).  In this case, a QTIP trust would be listed as the beneficiary of the husband’s IRA and would then provide an income stream for the surviving spouse while protecting a portion of the assets for the children.

Jim thinks that this is the wrong approach and offered his solution in a letter to the editor.  Jim’s first point is that naming a QTIP trust as the beneficiary of an IRA accelerates income and taxes to the detriment of both the surviving spouse and the children.  The surviving spouse is left with only an income stream and the kids don’t inherit anything until the second spouse dies.  He’s also concerned about the fees generated by the QTIP trust solution — attorneys have to be paid to draft the trust and annual CPA and trustee fees have to be paid after the first death.

Instead, Jim prefers to leave a certain percentage of the IRA to the surviving spouse and give the rest to the children of prior marriages.  It’s a simple solution that provides more money for the heirs and less for the IRS.

Coincidentally, the topic of the June 3rd edition of our radio show, The Lange Money Hour, was trusts — so, we started the show with a discussion about the Post-Gazette article.  A special thank-you to a guest who agreed to join us on short notice — Tom Crowley, Senior Wealth Planner and VP at PNC Wealth Management.  While Tom agreed with Jim about the tax consequences of naming a QTIP trust as beneficiary of an IRA, he pointed out that in his practice, some clients are willing to sacrifice more money in taxes in order to gain greater control over the distribution of the funds.

During the rest of the show, Jim went on to explain the ins and outs of various trusts including living trusts, spendthrift trusts, charitable trusts and trusts for minors.  Keep in mind that every case needs to be evaluated on an individual basis.  If you have questions about any of these trusts or think that you need a thorough review, be sure to call the office at 412-521-2732 and a member of the Lange team can help.

Tax-Free Growth With Roth IRA Conversions

Posted on by in Roth IRA, Roth IRA Conversions.

With another free Roth IRA workshop coming up at the end of March, we thought it would be a good time to review why Roth IRA’s are so important – and why they are about to be even more important for wealthy seniors.

Practically all boomers can enjoy tax-free growth by taking advantage of Roth IRAs, Roth 401(k)s, and Roth IRA conversions. This article focuses on Roth IRA conversions. Two types of boomers can benefit. First are boomers who currently have less than $100,000 of modified adjusted gross income (MAGI.) The second type is most everyone else.

If your MAGI is in excess of $100,000, you will have to wait until 2010 when wealthy Americans will be granted a unique opportunity. For the first time, you will qualify for a Roth IRA conversion regardless of your income. Previously, taxpayers with a modified adjusted gross income of $100,000 (or more) were not permitted to make a Roth IRA conversion. The compelling reason to pay attention is that individual IRA owners who have modified adjusted gross incomes of more than $100,000 can enjoy a huge windfall by taking advantage of this conversion opportunity.

The Roth IRA Changes in a Nutshell

For tax years after 2009, the Tax Reconciliation Act permits all taxpayers to make Roth IRA conversions, regardless of income level. If you make the Roth IRA conversion in 2010 you will be given the option to pay all the taxes on the conversion with your 2010 return, or with the returns for the two subsequent years by claiming the conversion income on the 2011 and 2012 returns.

What Happens When You Make a Roth IRA Conversion?

When you make a Roth IRA conversion, you pay income tax on the amount you choose to convert. While my standard advice “to pay taxes later” still represents my strongest recommendation for successful long-term planning, I have always made a “philosophical exception” for Roth IRAs. With respect to Roth IRA conversions, the better advice for many individuals is pay taxes now. While each case will benefit from an individualized analysis on the merits of the conversion, the critical feature of the Roth is that, once the initial taxes are paid on the conversion, income taxes will never be due on the growth, capital gains, dividends, interest, etc. This will be particularly advantageous to high-income taxpayers.

How Will the Roth IRA Benefit the Owner in His or Her Lifetime?

How much better off will you be during your lifetime? Assume you are in the top tax bracket of 35% (earning well over $100,000), you have $1,000,000 in your IRA, and you have the funds to pay the income tax on the Roth IRA conversion from money outside of the IRA. If we assess the advantage of the $1,000,000 conversion, measured in purchasing power, you would be $517,298 better off in 20 years. However, in today’s dollars, as adjusted for 3% annual inflation, this advantage is $286,416. In 30 years you are $725,616 ahead. See the graph below:

What are the benefits to the Roth IRA Owner’s Family?

For the very high income family, the long-term benefit of a Roth IRA conversion is potentially phenomenal. An estimate is that a taxpayer’s family could benefit by as much as twice the amount converted.

Please consider this scenario for the beneficiary. If you die 20 years after you make the conversion and you opt to leave the Roth IRA to your 45-year-old child, who spends it modestly, how much better off will your child be? See the graph below:

By age 85, he is $11,742,363 better off in actual dollars or $1,993,067 in today’s dollars, as adjusted for 3% inflation. This advantage is about twice the original amount converted. Clearly the potential advantages are significant, and for wealthy individuals, the legacy advantage of the Roth is difficult to beat.

For more information about our upcoming free Roth IRA workshop, check out the homepage at retiresecure.com.