Archive for the ‘Roth IRA Conversions’ Category

Deadline is Nearing for the First-Time Homebuyer Tax Credit

Monday, October 5th, 2009

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.

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Posted in First-Time Homebuyer Tax Credit, Roth IRA Conversions, Tax refund | No Comments »

Roth IRA Recharacterization Deadline

Thursday, September 24th, 2009

A very important deadline is quickly approaching if you made a Roth IRA conversion in 2008 and suffered a decline in your investment. You have until October 15th to recharacterize or undo your conversion and recover the taxes that you paid on the conversion.

To keep it simple, let’s say, for example, that you converted $100,000 from your traditional IRA in June of 2008.  It’s quite possible that with the steep decline in the market over the past year that your Roth IRA is now valued at $50,000.  Since you had to pay taxes on your Roth IRA conversion up front (or the taxes are due by October 15th), you are probably not a happy camper right now.

The good news is that you can do something about it.  By recharacterizing, you can reverse the conversion and turn your Roth IRA back into a traditional IRA.  It’s as though the conversion never happened.  True, the value of your IRA is still only $50,000, but that’s where it would have been anyway with the market collapse and at least you can recover the taxes that you paid to make the conversion.

The recharacterization can be accomplished by filing the appropriate paperwork with the IRA custodian.  Then, file an amended tax return using form 1040-X to obtain a refund of the overpaid taxes.  If you haven’t yet filed your taxes, there is no need to file an amended return — simply file your return by the October 15th deadline.

One more point to consider - after the recharacterization, you could then do another Roth IRA conversion of the reduced amount.  This strategy leaves you with a Roth IRA of the same value before the recharacterization, but with far less taxes due to the IRS.

As you might expect, there are waiting rules for these “reconversions”.  You must wait until the calendar year after the original conversion or 30 days after the original conversion - whichever is longer - to make a conversion with the same money.  However, if you made only a partial conversion, the waiting rule does not apply.

Throughout 2009, our office has been proactive in advising our clients about recharacterizations and reconversions.  We strongly advise that if you made a Roth IRA conversion in 2008 and haven’t yet spoken with your financial or tax professional, do so immediately.  Remember, the deadline for recharacterizing 2008 Roth IRA conversions is just weeks away.  After October 15th, it will be too late. If you have the 2nd edition of Retire Secure!,  turn to page 135 for a further look at recharacterizations.   You can also call our office toll-free at 1-800-387-1129.

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Posted in Roth IRA Conversions, Traditional IRA, recharacterization, reconversion | 2 Comments »

Jim Lange in Kiplinger’s

Friday, September 4th, 2009

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.

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Posted in Beneficiary Designations, Roth IRA Conversions, Roth IRA's | No Comments »

New Website Feature

Friday, August 14th, 2009

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!

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Posted in Insurance, Roth IRA Conversions, Roth IRA's, Safe Withdrawal Rate, estate planning | 1 Comment »

New York Times Analyzes Roth IRAs

Friday, July 24th, 2009

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.

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Posted in Roth IRA Conversions, Roth IRA's | 2 Comments »

Michael Jackson’s Estate

Tuesday, July 14th, 2009

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.

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Posted in 401(k)s, IRAs, Roth IRA Conversions, Wills, estate planning, trusts | No Comments »

Tax Issues With Job Loss

Thursday, June 25th, 2009

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.

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Posted in American Recovery & Reinvestment Act, Roth IRA Conversions, Taxes | 2 Comments »

Review of Retire Secure!

Friday, June 19th, 2009

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).

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Posted in 401(k)s, Roth 401(k)s, Roth IRA Conversions, Roth IRA's | No Comments »

Making Work Pay Credit

Thursday, June 11th, 2009

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

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

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

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

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

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

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

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

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

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Posted in American Recovery & Reinvestment Act, IRS, Income Tax Returns, Roth IRA Conversions | No Comments »

Last Minute Tax Tips

Thursday, April 9th, 2009

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.

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Posted in Income Tax Returns, Roth IRA Conversions | No Comments »