The Optimal Order for Spending Assets: Roth IRA or Traditional IRA First?

Posted on April 2, 2015 by James Lange in Educational Resources, IRAs, Retire Secure!, Roth 401(k), Roth IRA, Roth IRA Conversions, Traditional IRA and tagged assets, IRA, ira withdrawal, James Lange, Retire Secure! A Guide to Getting the Most out of What You've Got, Retirement, Roth IRA Conversion, Western Pennsylvania.

Roth IRA, James Lange, Retire Secure A Guide to Getting the Most Out of What You've Got

Those of you who have attended my workshops or read the previous editions of my book may remember a rule of thumb I used to use that said, “Spend your after-tax dollars first, tax-deferred dollars second, and then your Roth IRA”. Well, guess what? The changes in the tax laws now mean that there are no more rules of thumb! My new advice is, “Spend your after-tax dollars first, and then withdraw traditional IRA and Roth IRA dollars strategically to optimize tax results.”

Changes in the tax law that affect capital gains and individual tax brackets, as well as new taxes that are aimed specifically at high income taxpayers mean that the advice I used to give in the past is now far too simplistic. Chapter 4 presents detailed information on how capital gains and other taxes should affect your decision to withdraw money from a traditional versus a Roth IRA account. Would you have thought that your marital status could affect your decision too? Is it possible to minimize the tax on your IRA withdrawals? (Hint: oh, yes!) If you have IRA and Roth IRA money left over when you die, is it better to leave one type of account over another to a child at your death?

Chapter 4 covers many new issues that you did not have to worry about in the past, which should certainly affect these decisions. I’d like to give you one word of caution, though. Each of the scenarios presented in this chapter is based on a specific set of variables. In one scenario, I changed only the account from which the taxpayer made the withdrawal, and the outcome is significantly different. Please don’t assume that your personal circumstances will result in the same outcome shown in these scenarios. Ask us to run the numbers for you!

Be sure to stop back for my next post, which will cover some ideas for managing your Required Minimum Distributions!

Thanks,

Jim

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

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

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

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IRA Withdrawals: Should you withdraw from your Roth or traditional IRA first?

Posted on March 25, 2015 by James Lange in Educational Resources, IRAs, Retire Secure!, Roth 401(k), Roth IRA, Roth IRA Conversions, Traditional IRA and tagged Financial Planning, IRA, ira withdrawal, James Lange, Retire Secure! A Guide to Getting the Most out of What You've Got, Retirement, Taxes.

Those of you who have attended my workshops or read the previous editions of my book may remember a rule of thumb I used to use that said, “Spend your after-tax dollars first, use traditional IRA withdrawals second, and then withdraw your Roth”. Well, guess what? The changes in the tax laws now mean that there are no more rules of thumb! My new advice is, “Spend your after-tax dollars first, and then withdraw traditional and Roth IRA dollars strategically to optimize tax results”.

Changes in the tax law that affect capital gains and individual tax brackets, as well as new taxes that are aimed specifically at high income taxpayers mean that the advice I used to give in the past is now far too simplistic. Chapter 4 presents detailed information on how capital gains and other taxes should affect your decision to withdraw money from a traditional versus a Roth account. Would you have thought that your marital status could affect your decision too? Is it possible to minimize the tax on your IRA withdrawals? (Hint: oh, yes.) If you have IRA and Roth money left over when you die, is it better to leave one type of account over another to a child at your death?

Chapter 4 covers many new rules that you did not have to worry about in the past, which should certainly affect these decisions. I’d like to give you one word of caution, though. Each of the scenarios presented in this chapter is based on a specific set of variables. In one scenario, I changed only the account from which the taxpayer made the withdrawal, and the outcome is significantly different. Please don’t assume that your personal circumstances will result in the same outcome shown in these scenarios, but ask us to run the numbers for you!

Be sure to stop back for my next post, which will cover some ideas for managing your Required Minimum Distributions!

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Which Is Better the Traditional or the Roth IRA

Posted on March 11, 2015 by James Lange in Educational Resources, Income Tax, IRAs, IRS, Roth 401(k), Roth IRA, Roth IRA Conversions, Traditional IRA and tagged IRA, James Lange, Pittsburgh, Retire Secure! A Guide to Getting the Most out of What You've Got, Retirement, Western Pennsylvania.

A theme which appears consistently throughout the third edition of Retire Secure! is the question of which is better – the traditional or Roth IRA. Changes in the law since Edition Two was written, as well as additional changes that our current administration is pressing for, make it the million dollar question.

In order to answer the question, we dedicated Chapter 2 to comparing the pros and cons of each type of account as they exist under the current law. If you are not familiar with the rules of each IRA account, it is probably worth your time to read this chapter. Subsequent chapters address the proposed changes to the rules, and how they might affect your decision when reviewing your retirement plan options. And, due to popular demand, I’ve added a section about the IRS ordering rules, which explains how to avoid tax and penalty if you need to withdraw money from a Roth account before five years has passed.

The IRA illustrations were calculated using a 6% rate of return, and the maximum contribution amount as established by the IRS. We also ran an illustration that shows, for those who don’t have a lot of time left to save, the difference in the accounts when contributions are made for a very limited number of years.

A final note about tax brackets: when Edition Two was written, the maximum tax rate was 35%. Subsequent changes in the tax laws increased the maximum rate to 39.6%. This difference of almost 5% is more significant than you might think. The impact of the increased tax brackets is discussed in detail in subsequent chapters, but the concept is first introduced in Chapter 2.

Check back soon for an update on Chapter 3!

Jim

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More on Retire Secure! Third Edition…Coming Soon!

Posted on January 3, 2015 by James Lange in 401(k), 403(b), Educational Resources, IRAs, Retire Secure!, Roth 401(k), Roth IRA, Roth IRA Conversions, Social Security, Traditional IRA and tagged Financial Planning, James Lange, Retire Secure! Third Edition, Retirement, Retirement Book, Roth IRA Conversion.

The third edition of Retire Secure!, Retire Secure! A Guide to Making the Most Out of What You’ve Got is set to be released in the coming months, (stay tuned for exact date). This revised Third Edition of Retire Secure! covers how to develop an estate plan that, among other goals, seeks to continue the tax-favored status of your retirement plans or IRAs long after your death using the stretch or inherited IRA—a strategy that has been, and continues to be, threatened by congress. Lange has a history of staying ahead of the curve, seeing trends and changes in the tax laws and developing strategies for his clients in advance to keep them on the right path toward their financial goals. He was among the first to predict the coming changes to the tax law on Roth IRAs and wrote a peer-reviewed article for The Tax Advisor (official journal of the AICPA) that would go on to win article of the year in 1998. He is continuing this trend in this Third Edition by laying out the possibility of the death of the stretch or inherited IRA as we know it, and providing avenues to reach the same or better outcomes for your family including the use of charitable remainder unitrusts, or CRUTS and life insurance.

Lange offers up plenty of new content in this Third Edition including cutting edge analysis on the unique synergy between Roth IRA conversions and Social Security Maximization that his office has been developing. Using Social Security maximization techniques including spousal benefits like “Apply & Suspend,” and timing small appropriate Roth IRA conversions to take advantage of lower tax brackets in retirement can make hundreds of thousands of dollars of difference in your retirement portfolio… and he’s got the study to prove it.

Virtually every chapter of Retire Secure! contains recommendations, analysis, and case studies that have come from a deep understanding of tax law, estate planning, investing, and “running the numbers” and are proven to work.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

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

Please complete the form below to receive reminders about the upcoming release of Retire Secure! Third Edition

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More on Retire Secure! Third Edition… Coming Soon!

Posted on December 22, 2014 by James Lange in 401(k), 403(b), Educational Resources, IRAs, Retire Secure!, Roth 401(k), Roth IRA, Roth IRA Conversions, Social Security, Traditional IRA and tagged Financial Planning, James Lange, Retire Secure! Third Edition, Retirement Book, Retirement Planning, Roth IRA Conversion.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

Please complete the form below to receive reminders about the upcoming release of Retire Secure! Third Edition

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Retire Secure Third Edition Coming Soon!

Posted on December 12, 2014 by James Lange in 401(k), Educational Resources, IRAs, Lange’s Cascading Beneficiary Plan, Roth 401(k), Roth IRA, Roth IRA Conversions, Social Security, Traditional IRA and tagged Book, IRA, James Lange, New Book, Retire Secure! Third Edition, Retirement Planning, Roth IRA Conversion.

Now more than ever, one question plagues millions of Americans approaching or already in retirement, “Will my money last as long as I do?”

While no one can answer these questions with complete certainty, you can do three things to significantly improve your odds—develop an appropriate portfolio, cut your taxes, and take advantage of strategies that will improve your retirement income like Social Security benefit maximization combined with timely Roth IRA conversions.

Retire Secure Third Edition

Due for release in a couple of short months this edition explains how you can use IRAs, retirement plans, Roth IRAs and Roth 401(k)s, Roth IRA conversions, and Social Security techniques like “Apply & Suspend” as well as other tax-favored strategies to let Uncle Sam subsidize your retirement and your family’s lifestyle for the remainder of you and your spouse’s life, and perhaps beyond.
The information and examples in this Third Edition of Retire Secure! draws from the more than thirty years’ experience James Lange has as a practicing CPA. Lange provides critical advice for all stages of IRA and retirement plan savings and distribution, covering the best strategies to accumulate wealth while you are still working as well as the best strategies to spend your IRAs and retirement plans once you are retired and doing your legacy planning. Lange explains how to maximize tax-deferred savings during the accumulation phase and reveals the most tax-efficient ways to withdrawal money from your account during retirement.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

More information to come on the next blog post. Stay tuned!

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One Key to Financial Planning… a Roth IRA Conversion

Posted on November 12, 2014 by James Lange in 401(k), 403(b), Beneficiary Designations, Educational Resources, IRAs, Roth IRA, Roth IRA Conversions, Traditional IRA and tagged Investment, IRA, James Lange, Retirement Planning, Western Pennsylvania.

Roth IRA Conversion, James Lange, Lange Financial Group, LLC

If you’re approaching retirement, you might want to consider a Roth IRA conversion. A recent change to tax laws allows for the conversion to Roth IRAs, 401(k)s, and 403(b)s to gain enhanced benefits. For one, the changes made in 2010 have no income cap for Roth IRA accounts. Previously, only incomes of $100,000 were eligible for conversion.

If you’re still not sure, consider these factors that can help lead your family to financial stability.

For the most part, Roth IRAs grow incometax free. Additionally, owners are not required to take distributions at age 70 ½. Roth IRAs grow continuously as long as you or your grandchildren own it; whereas, regular IRAs are tax-deferred. The growth and investment are both taxed when money is withdrawn.

With the income cap of $100,000 gone, the Roth IRA becomes all the more appealing for retirees. At least a partial conversion is recommended, though the converted amount will require tax payment. However, as long as the conversion is strategic, your family can reap the long-term benefits. For example, converting $100,000 today can put you over $51,000 ahead in the next
20 years.

If tax rates increase, the conversion to Roth IRA sees the benefits, because conversion at a lower tax can help cut back taxable income as rates increase. While you’re planning a financial future for your loved ones, keep in mind that your living will and trust don’t necessarily establish who will inherit your IRAs, Roth IRAs, and retirement plans. Specify your IRA and retirement plan beneficiaries. For those still unconvinced, Lange Financial Group makes a limited number of free consultations available to Western PA residents. Because each case is different, it’s important to run the numbers on a case-by-case basis to find a solution that best fits you. If you want to further discuss the benefits of Roth IRA conversions, call Alice Davis, our Client Services Coordinator, at 412-521-2732 to schedule an appointment.

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Back Door IRA, The Conclusion

Posted on October 13, 2014 by James Lange in 401(k), 403(b), Educational Resources, Income Tax, Index Investing, IRAs, Life Insurance, Roth 401(k), Roth IRA, Roth IRA Conversions, Social Security, Traditional IRA and tagged Financial Planning, IRA, James Lange, PA, Pittsburgh, Retirement Planning, The Lange Financial Group.

Recharacterizations

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

Converting to a Roth IRA also comes with another very unique advantage. The IRS allows you a one-time opportunity to recharacterize or “undo” this conversion by October 15th of the following tax year. IRS publication 590 states that, “a recharacterization allows you to ‘undo’ or ‘reverse’ a rollover or conversion to a Roth IRA. To recharacterize, you generally instruct the trustee of the financial institution holding your Roth IRA to transfer the amount back to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution)”. In the case of a Backdoor Roth IRA, you probably won’t think about recharacterizing. However, if you want to explore this option, we are here to help assist you, because like many of the other rules involved this can be complicated.

Conclusion

While Backdoor Roth IRAs can be beneficial to many investors, they aren’t for everyone. They come with their limitations and complications. There are precautions that need to be taken to reap the full benefits of any financial decision. This is an area where a highly informed financial advisor can help you make an educated and calculated decision. You should always consult with your financial advisor and tax professional to help avoid tax ramifications.

As always, we are here to help and can look at your specific financial situation and chart the right path for you. If you are interested in learning more about whether or not a Backdoor Roth would be right for you and your specific situation, please call us and we would be happy to discuss this with you. As always, we enjoy the opportunity to assist you in addressing your financial matters.

Complimentary Financial Check-up

If you are currently not a client of The Lange Financial Group, we would like to offer you a complimentary, one-hour, private consultation with one of our professionals at absolutely no cost or obligation to you.

To schedule your financial check-up, please call 412-521-2732 or fill out our Pre-Qualification Form here.

Thank you,
James Lange

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Roth IRA account owners should consider the potential tax ramifications, age and contribution deductibility limits in regard to executing a re-characterization of a Roth IRA to a Traditional IRA.

The views stated in this letter are not necessarily the opinion of The Lange Financial Group, LLC, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. © Academy of Preferred Financial Advisors, 2014

John C. Bogle – A Financial Industry Giant Addresses Congress

Posted on September 29, 2014 by James Lange in Educational Resources, Index Investing, Market News, Roth 401(k), Roth IRA, Roth IRA Conversions, Social Security, Traditional IRA and tagged Finance, Investment, James Lange, John C. Bogle, Mutual Funds, Retirement Planning, Stocks, Vanguard.

Join us this Wednesday, October 1 at 7:05 p.m. on KQV 1410 AM for The Lange Money Hour, Where Smart Money Talks.

Program also streams live at www.kqv.com

Encore presentations air on KQV EVERY SUNDAY at 9:00 a.m.

The three legs of America’s retirement system are shaky, neither structurally efficient nor fiscally stable. That’s what the U.S. Senate Finance Committee heard on September 16, during testimony by a man Fortune Magazine labeled one of four giants of American Finance: John C. Bogle, founder and now retired CEO of the Vanguard Group, the world’s largest mutual fund company, with more than 3 trillion dollars under management.

To hear why Mr. Bogle believes the situation is so precarious, tune in tomorrow evening at 7:05, as The Lange Money Hour welcomes him back to the show.

Over the course of his 63-year career, Mr. Bogle has changed the face of investing. A pioneer in the concept of index mutual funds, collective portfolios of stocks that mimic the movement of a defined market sector rather than a selection of individual companies, he is credited with creating the first index fund available to individual investors, the Vanguard 500.

Mr. Bogle has written a dozen books, including his 1994 bestseller Bogle on Mutual Funds to most recently The Clash of the Cultures: Investment vs. Speculation. At 85, he remains an active industry observer, appearing regularly on national financial media outlets. He recently described the personal mission he has set for himself in his retirement – “to speak out for truth and integrity and character in the world of finance, striving to build a better world for investors—honest-to-God, down-to-earth human beings who deserve a fair shake.”

You can watch his 6-minute Congressional testimony here:

http://johncbogle.com/wordpress/2014/09/17/testimony-before-the-senate-finance-committee-september-16-2014/

We’re honored to have Mr. Bogle back as a guest on The Lange Money Hour. Please plan to join us Wednesday, Oct. 1, 2014 at 7:05 on KQV 1410 for an interesting and informative hour. The program will also stream live at www.kqv.com.

If you can’t tune in October 1, 2104, KQV will rebroadcast the show at 9:00 a.m. this Sunday. You can also access the audio archive of past programs including written transcripts on the Lange Financial Group website, www.paytaxeslater.com. Click on RADIO.

Finally, mark your calendar for Wednesday, October 15th at 7:05 p.m., when Pittsburgh City Controller Michael Lamb will join us for the next new edition of The Lange Money Hour.

Benefits of a Roth IRA

Posted on September 23, 2014 by James Lange in 401(k), Educational Resources, Income Tax, IRAs, Roth IRA, Roth IRA Conversions, Traditional IRA and tagged Finances, IRA, James Lange, Money, Pittsburgh, Retirement Planning, Taxation, Taxes.

Back Door IRA, James Lange, Pittsburgh, Retirement Planning

There are numerous benefits to converting to a Roth IRA. Please remember, it is important to review all of your retirement accounts before converting to a Roth IRA. Some benefits of a Roth IRA include;

• Required minimum distributions are not obligatory until the participant’s death.

• Withdrawals are tax free.

• They pass onto your heirs income tax-free.

• You can compound your investments in a tax-free fashion.

Am I a Candidate for a Backdoor Roth IRA?

Backdoor Roth IRAs can be appropriate for investors who:

Only have retirement account through their jobs (i.e. 401k’s) and want to increase their retirement savings in tax-advantaged accounts, but whose income is too high to qualify for standard Roth IRA contributions; and

Have the time and ability to wait for five years or until they are 59 ½ to avoid the 10% penalty on early withdrawals. (If you open and make contributions to a Roth IRA in the standard manner, i.e. not through conversion, you are not subject to this rule).

A Backdoor Roth IRA is probably not recommended if you:

Are over the age of 70½ and can no longer contribute to a traditional IRA.

Don’t want to contribute more than the maximum retirement limit through your workplace retirement account.

Already have money in a traditional IRA and because of the Pro Rata rule may end up in a non-tax advantageous position when converting to a Backdoor Roth IRA.

Plan or expect to withdraw the funds in the Roth IRA within the first five years of opening it. A Backdoor Roth is considered a conversion and not a contribution. Therefore, the funds will incur a 10% penalty if withdrawn within five years unless you are age 59 ½ or older.

Are in a high tax bracket now and expect to be in a lower tax bracket in the future.

Plan to relocate to a lower- or no- income tax state.

Stay tuned for my next blog post, Recharacterizations and the Conclusion!

Want to learn more? Give us a call at 412-521-2732.

– James Lange