Posts Tagged ‘IRA’

Is a Roth IRA Conversion Right for You?

We’ve been discussing ideas to accelerate income and pay taxes with 2012 tax rates rather than with the anticipated future increased tax rates.  Converting a traditional IRA to a Roth IRA has been a hot topic for the last few years, and continues to be in the current conditions.  This is a complicated decision and should include discussions with both your tax advisor and financial advisor.

In the past, it was almost always a recommendation for younger tax payers to make the conversion in years with large ordinary losses.  When you make a conversion, you have to pick up the entire amount as income and pay tax.  If you could pick up the income in a year with large losses, you might have accomplished the conversion with little or no tax cost.  If you anticipate ordinary losses in 2012, this is still a strategy to consider. Capital losses don’t count!

It’s also a strategy to consider for taxpayers in the higher brackets even if you don’t have losses to offset the income.  Depending on your financial forecast, it may be beneficial for you to pick up the income this year with low 2012 tax rates and have tax free distributions later in life, rather than have taxable distributions in the future at potentially higher tax rates.

There is speculation that Congress might close this “loophole” soon.  There is no other tax advantage like this where you can grow money tax free.  Therefore, if you’ve been considering a conversion or starting a Roth IRA from scratch, I strongly suggest you do it now and put as much money into it as possible. Generally limitations on Roth IRA contributions are the same as traditional IRA contributions.

Tax planning involves a lot of hypothetical considerations and future predictions.  Tax planning is about paying as little tax as legally possible over your entire life, not just year to year.  This year in particular is a good example.  We are taking a close look at our clients and asking, should we pay more tax this year to save in future years?  Not all taxpayers have the cash flow to consider these options, but if you do, this is the year to think about it.

As always, seek advice from your tax advisor when considering your planning strategies.



Two unprecedented tax planning opportunities for 2010

To:  All our Blogging Friends

From:  Paul M. Polito, CPA

Subject:  Two unprecedented tax planning opportunities for 2010

  1. Conversions of Retirement accounts to Roth IRA Accounts: 

I was recently asked to speak to a group of investors regarding Roth Conversions.  To prepare for the presentation I enlisted the help of our team to develop several financial and tax models to look at the economics for a 30 year age range.  To my surprise, with few exceptions, the investor was better off converting their retirement account to a Roth IRA than retaining their traditional tax-deferred retirement account.  Most of our clients could not make Roth contributions in the past because of a limitation based on Gross Income.  It was simply too low to work for most clients.  The gross income limit on Roth conversions is lifted effective in 2010. 

For those of you who are not familiar with Roth IRA accounts, these accounts are provide for non-deductible contributions, but the earnings inside the Roth account are never taxed; that means never taxed! 

Roth conversions are particularly attractive now that the estate tax is reinstated effective January 1, 2011.  If you pass away with a tax deferred retirement account (Qualified Plan, 401k, 403b, Traditional IRA, Simple IRA, etc.), the retirement account is includable in your taxable estate and your heirs pay tax on the income as they receive it.  The after tax yield to the ultimate beneficiary can be under 20% of the account value at death. 

We posted the hand outs for my presentation on our website which include financial models illustrating the after-tax benefits of Roth Conversions.  The greatest opportunity for a Roth Conversion is between now and December 31, 2010 because you have the option to pay the tax on the conversion in 2010 or split the conversion income between 2011 and 2012.  There is also the opportunity to use hindsight if the Roth account should decline in value to “recharacterize” the account back to a normal retirement account and avoid the tax.  If this is of interst to you, I suggest you call your tax professional before Thanksgiving to allow sufficient time.  See the article on our website with this link: Roth IRA Conversions.

2.  Exclusion of up to $10 million in capital gain on certain small business stock:

Effective September 27, 2010 through December 31, 2010 (a 95 day period) if you invest in a qualified small business as defined in the statute, and you hold the stock for at least five years, you can exclude up to $10 million from capital gain and, (and this is huge!) the exclusion is not subject to Alternative Minimum Tax!  This was part of a stimulus package but at a mere 95 days, it seems more like someone received a political favor!  If you have the opportunity to invest in a small business that qualifies, or, if you start a small business that qualifies, this could be the opportunity to save up to $2.8 million in tax.  This is ideal for start ups, Angel Investors, employees with opportunities to buy qualifying company stock, etc.  Also, if a family business is currently owned in an LLC or other non-corporate entity and there are plans to sell to the next generation, this could be a golden opportunity to reduce the tax cost of a transfer.  The rules are actually pretty generous.  Call your tax professionals for more information if this is of interest to you right away.  It takes time to set these plans and investments in motion.

Planning for our Kids’ Future

As any mom can testify, we often think about our kids’ futures.  While dancing with my baby son a few months ago, I had thoughts of him leaving me one day for another woman on his wedding day.  While his head was comfortably snuggled on my chest as we swayed to the music, I couldn’t help but think of the day that my head will be resting on his chest for the mother-son dance.  Tears anyone? 

I don’t think about his wedding day all the time, but I do think about his future.  What can I do now to prepare him for an unknown yet inevitable future?  No one even knows what the world will look like two years from now, let alone twenty!  What we do know is we can do our best to raise our children to be good citizens, hard workers, and kind men and women.  We can teach them the value of work and financial planning.

We can also begin to build a nest egg to be used to attend college, start a business or start a family; sometimes with pre-tax dollars.

 Here are a few ideas:

  • Purchase long term bonds that mature at college age
  • Buy a rental property that will have cash flow and a potential for high equity value once your kids are adults
  • If you own a company, gift your child money to buy equipment that your company uses and lease it to the company for high rental rates.
  • If your child has earned income, set up an IRA or Roth IRA account and gift them the contribution amounts
  • Set up an Education Savings Account

Of course you should always consult a professional when considering one of these options.  Each case has its own limitation and tax considerations which is too much detail for this conversation.


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