February 2010

ROTH Conversions - Beware of the Pitfalls
Questions you should ask yourself BEFORE converting:
Is my IRA eligible for a ROTH Conversion? (Not all are.)
What happens if my portfolio drops in value after conversion? Am I stuck paying taxes for two years on wealth I no longer possess? (There is a simple way to protect against this.)
Could the taxes on the conversion end up costing me more than the taxes on required distributions?
What will it cost me to do the conversion? Besides taxes, are there extra fees and costs associated with this? Is it worth it?

Should I put all my converted assets in a single account or multiple accounts?
If I convert only after-tax dollars, could I be forced to pay taxes on assets I did not convert? (YES, that could happen if you don't plan it properly.)
If I convert a large IRA into a single large ROTH IRA, could I be missing out on possibly the greatest opportunity in the new law?
What happens if I miss my required distribution before I convert? (There is a HUGE penalty for non-compliance here.)
What might it mean to me, in dollars and cents, if they change the rule again later?
Is it a mistake for me to name my spouse and a non-spouse  (a child, for instance) joint beneficiaries?
What happens if I convert and am eligible for a 401(k) rollover that same year?
A ROTH conversion can be a great opportunity for you, but it may also be a tax trap. Email me or call and I will help you make an Intelligent Decision about converting.


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To Convert or Not To Convert -               Conventional Wisdom

The problem with "conventional wisdom" is that we are not living in "conventional" times!
They say, for instance, that one should always defer taxes to the greatest extent possible (although I have never really been sure exactly who "they" are). Conventional wisdom says that you will be in a lower tax bracket in retirement so the decision is obvious. That may have been true once but very possibly is no longer the case for you. Everyone says that the new opportunity to convert your traditional IRA to a ROTH IRA is one you should not miss. 
(Do you think "everyone" is related to "they"? Is that who is in charge of conventional wisdom?)
At any rate, the reason for all this buzz is that that a major rule change for ROTH IRA conversions went into effect this year. Now, most everyone can convert. Before, it was extremely restricted by your income. With a traditional IRA, you get a tax deduction for contributions now but must pay taxes on your full withdrawals when you take the money out, and take it out you must, by law, at some point. (There are a few exceptions but that is for a later discussion.) 
With a ROTH IRA, there is no tax deduction up front but when you take the money out later it is completely tax free. You and your spouse can defer those withdrawals forever. Under a conversion, you pay all the taxes now or in the next two years, but get all the benefits of a ROTH IRA forever.
It is pretty clear that in the near future, tax rates are going up. In the long term, however, history tells us that to raise tax revenue, eventually you must lower tax rates. That may seem to defy logic but the fact is that people change their behavior as the rules change. Economists call it dynamic, as opposed to static, analysis. Politicians, for some reason, tend to ignore that when projecting the results of such changes.
What the rule change boils down to is the government gets to collect tax revenue on a pool of assets NOW instead of later. It serves their goal of raising revenue sooner and it may be a good opportunity for you to, in essence,  "pre-pay" some taxes, possibly at a discount. You might, however, end up paying more.
All of this is according to current law, and, as we all know, that can change. It may seem unthinkable now that they would change the rule and some day tax the profits in a ROTH IRA, but we never thought they would ever tax Social Security benefits, either? Where will they turn when they need more money tomorrow? That must be considered.
Given all of this (and much more), should you convert your IRA to a ROTH IRA? The answer is a definite...... MAYBE! Truly every situation is different. Your situation is unique and many factors must be explored.
If your IRA is under my supervision, I will be in touch soon. If not, please email me or give me a call and I will be glad to review with you the opportunity and the traps specific to your situation. Together, we can make an Intelligent Decision about your IRA and your money.

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