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

Posted on by in Estate Planning, 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.

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.

Deadline is Nearing for the First-Time Homebuyer Tax Credit

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

Even though the First-Time Homebuyer Tax Credit deadline is November 30th, the real deadline is upon us. That’s because the November 30th deadline refers to the closing date. Since most home purchases take between 45 to 60 days between contract signing and the closing date, you need to start house hunting in earnest in order to take advantage of this tax credit.

Qualifying taxpayers who buy a home by November 30th can get up to $8,000, or $4,000 if married filing separately.  Even better news — this credit does not have to be repaid as long as the home remains the main residence for 36 months after the purchase date.

Taxpayers can claim 10 percent of the purchase price up to $8,000, but the credit amount starts to phase out for taxpayers whose modified adjusted gross income (MAGI) is more than $75,000 ($150,000 filing jointly).  If you do qualify for this tax credit, think about how you want to use it.  You can use it towards a nice tax refund – or – use the benefit of the tax credit to make a Roth IRA conversion if eligible.

Technically, you don’t have to actually be a first-time homebuyer to qualify for this credit.  If you did not own any other main home during the three-year period ending on the date of purchase, you will be considered a first-time homebuyer.

One side note for those who purchased homes between April 8, 2008 and December 31, 2008 – you do not qualify for this tax credit, but you may qualify for a different tax credit which amounts to 10 percent of the purchase price up to $7,500 ($3,750 for married individuals filing separately).  The big difference is that this tax credit must be repaid in 15 equal installments over 15 years beginning with the 2010 tax year.

With the success of the First-Time Homebuyer Tax Credit program – over 1.4 million homebuyers have used this credit so far – there is talk of extending the November 30th deadline.  However, Congress has yet to make a decision on an extension.  In the meantime, good luck house hunting!  If you would like more details on this tax credit and to see if you qualify, visit www.irs.gov.

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 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), Estate Planning, 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.

Tax Issues With Job Loss

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

Despite the fact that there have recently been encouraging economic signs, the national unemployment rate continues to inch higher. At the end of April, the unemployment rate was 8.9%. By the end of May, it stood at 9.4% and in a June interview with Bloomberg News, President Barack Obama predicted that the country will soon see a 10% unemployment rate.

As shocking as it is to lose a job, it’s even worse when you suddenly realize that there are also tax consequeneces to deal with.  Be aware that severance pay and unemployment compensation are taxable.  Payments for accumulated vacation or sick time are also taxable.  Make sure that enough taxes are withheld from these payments or arrange to make estimated payments.

There is one bright spot — you get a bit of a break this year thanks to the American Recovery and Reinvestment Act of 2009.  This new law temporarily excludes up to $2,400 of unemployment compensation from a recipient’s gross income.  Remember, this is for 2009 only and anything over $2,400 is fully taxable.

Sometimes unemployed individuals resort to withdrawing money from their IRAs and qualified retirement plans.  This creates another tax issue and is not a course of action that we recommend.  Generally speaking, if you withdraw money before you reach eligible age and don’t roll it into another plan within 60 days, that amount must be reported as taxable income.  One exception allows an umemployed individual to take penalty-free distributions from an IRA to pay health insurance premiums.  This exception does not apply to qualified plans.  In addition to possible taxes, your IRA or qualified plan withdrawal may be subject to a 10% tax on the early distribution.

The other big question is whether or not expenses incurred while looking for a new job are tax deductible.  Don’t rely on your peers for the answer to this question!  Check with a tax professional or see IRS Publication 529, Miscellaneous Deductions.  As a rule, you can deduct employment agency fees, resume preparation and travel expenses associated with job interviews.

The Lange team sincerely hopes that unemployment tax issues aren’t something you have to deal with this year.  However, if you find yourself in this situation, you can get detailed information at www.irs.gov.

We also suggest that if you are facing unemployment, but have the means to make a Roth IRA conversion, you give it serious consideration.  You would likely be in the lowest income-tax bracket of your life — the perfect time to make a Roth IRA conversion.  As always, our office is available to help with Roth IRA conversion analysis.

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).

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.

Tax-Free Growth With Roth IRA Conversions

Posted on by in Estate Planning, 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.