Posts Tagged ‘Roth IRA Conversions’

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 »

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 »

Tax-Free Growth With Roth IRA Conversions

Thursday, March 12th, 2009

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.

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Thanks for the Great Workshops

Sunday, February 15th, 2009

Everyone here at Lange would like to thank all of you who came out to one of free Roth IRA workshops in the South Hills yesterday. We literally had a record number of attendees and it was great to have all of you join us. The new law regarding Roth IRA conversions could lead to significant wealth building opportunities for many people. Hopefully, the workshops shed light on this complex - but important - topic. And for those of you who couldn’t attend, keep watching this space and our websites for more workshops in the months ahead.

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Posted in Uncategorized | 1 Comment »