Converting to a Roth IRA Right Now is a Very BAD Idea

Financial "experts" are bombarding the American public with advice about how to salvage their depreciating wealth - courtesy of the stock market's freefall. One very popular - but TOXIC - piece of advice is that now is a great time to convert qualified funds (pre-tax dollar accounts) to Roth IRAs.

Just so we are on the same page, this is NOT a discussion about Roth conversions, in general - we'll discuss that at a later date. Rather, I am challenging those financial "pundits" who are specifically advocating that converting to Roth IRA is smart and prudent after experiencing investment losses. Then again, maybe I'm a bit slow? Continue reading and then decide for yourself.

What They Are Claiming

Here is the whole rationale behind the current movement to convert to Roth IRAs: Since your IRAs/401(k)s have suffered significant losses, converting now will save you on taxes. A recent USA Today article claims, "An IRA conversion is a smart move in a bear market..."

But let's examine this thought process. For instance, assume you had $100,000 in a traditional IRA in January 2008. If you had converted it to a Roth at that time, your tax bill would have amounted to $25,000 (assuming a 25 percent marginal tax bracket). You would net $75,000 in this example. Then, going forward, you would be able to keep your money, income tax-free.

Common-Sense View

The investment choices that these same advisors are advocating withered up your savings, leaving you with around $70,000 (assuming a 30 percent drop in the value of your IRA/401(k), given the fact that the major markets tumbled more than 30 percent in 2008). If you were to convert now, based on their BAD advice, you would net only $52,500, after paying 25 percent ($17,500) in taxes.

Yes, the portion that goes to Uncle Sam is less ($17,500 instead of $25,000), but notice that YOUR portion is down from $70,000 to $52,500. Investing 101 and plain old common sense - a supply of which anyone needs a ton when it comes to financial planning - teaches that a larger seed is better than a smaller seed when starting your Roth IRA.

Financial professionals agree that Roth IRAs enable people to amass larger nest eggs, due to income tax-free withdrawals (provided you are past age 59-1/2 and have had the account for at least five years). And I am in total agreement with that assessment.

What I wonder about, though, is the fact that Roth IRAs have been around since 1997. Where have these so-called financial gurus been all that time? Why did they wait for their clients to experience significant losses - LOSSES! - before it became a good idea to convert to the Roth IRA? Now those clients are ending up with less money. Why are more than 95 percent of financial advisors STILL advocating qualified plans instead of income tax-free alternatives?

Income Tax-Free Withdrawal Is Always Better

I have always maintained that in almost every instance, income tax-free withdrawal is better. And we have always taught and helped our clients to "strategically roll out" their qualified funds at the most opportune time, tax-wise - NOT when they have incurred signifcant investment losses. Notice, there's a HUGE difference.

There's a $100,000 income limit, known as MAGI (your tax advisor is familiar with this term, and if he/she is not, find a new one), on the ability to convert to a Roth IRA. This limit is scheduled to end in 2010. But that should not, and has not, been a challenge for any of our clients. Why not? Because we DON'T use Roth IRAs.

No-Strings Roth

Why bother with a Roth that still has strings attached when the accumulation tool I refer to as "Roth on Steroids" is available? Now that I have your attention, GET THIS: There are cash accumulation vehicles under current law that, when structured and distributed properly, allow for income tax-free access without all of the strings attached to Roth IRAs.

Like, for instance, you can convert qualified dollars, regardless of your income. And my personal favorite: should you die too soon, the portion you paid in taxes due to the conversion is replenished (in most cases, several times over) to your beneficiary, income tax-free, giving your beneficiary way more than you paid in, all things being equal.

Of course, each individual's situation is different, which is why I recommend very careful analysis and consideration by competent tax and financial professionals, in all situations.

To find out more and determine what is best for your situation, request a free consultation with one of our strategists today.

White House to Target Tax Loopholes: Are YOU Affected?

The Obama administration announced last Monday that it intends to close supposed tax loopholes currently being utilized by companies and individuals alike.

OK, to prevent you from wondering, yes. This is not a political blog. However, this proposal may have a direct impact on your financial future, if you live and accumulate your retirement wealth in the United States.

Taking Advantage of Tax Loopholes

It is critical for you to understand that a tax loophole is simply an alternative or way out that is perfectly LEGAL. It would have been another story if they were illegal, but notice that no one is claiming otherwise – although I personally believe that most news outlets packaged their reporting about this proposal in a way that indirectly suggests the loopholes are illegal.

Suppose you lived next to a state with no sales tax and you figured you could save, say, $200 on a major purchase by driving 25 minutes across state lines. Would you make the drive? How about if you regularly commute to another state where sales taxes are waaaaay lower? Would you shop there for the exact same items you could buy at home for more? What about online purchases, if they save you money on sales tax? If you answered yes to any of those scenarios, you just used – or proposed using – a tax loophole. And, in case you were wondering, I live in Maryland, Virginia, West Virginia, D.C. and Delaware! Awesome, huh?

However, Laser Financial Group has always maintained, on our website and in all of our printed materials, that people and companies should NEVER plan around tax loopholes. Man, do we feel like geniuses today!

How Will It Affect You?

Regardless of what the political pundits say, I contend that the #1 headache of ANY administration is to figure out how to pay for stuff. And, as I have always taught, the federal government (Democrat, Republican, or whoever) has only one form of revenue: TAXES.

If you’ve heard me speak or read any of my writings on this subject, you know that I’m not a fan of higher taxes. Who is? Wait, Uncle Sam is – shhhh! However, the reality is crystal clear. The only way the federal government will be able to get a handle on our humongous national debt – and pay for new stuff – is to tax more now, and in the years ahead. It MUST happen, and it’s going to happen. The only alternative is to spend less, and you know how completely unlikely that is to happen.

According to a CNN story, “The administration expects the initiative to raise at least $210 billion over the next 10 years.” And, that’s the whole purpose – to raise revenue. Not to fix illegal behavior, because this behavior is NOT illegal.

Is It SMART to Have Your Wealth in a Taxable Environment?

Sadly, the majority of Americans are using tax-deferred retirement accounts – e.g., 401(k)s, IRAs, TSAs, and 403(b)s – because their so-called advisors are completely clueless, brainsick, or simply do not care. Look, none of those advisors can remotely guarantee that you’ll be in a lower tax bracket when you begin drawing income for retirement and Uncle Sam cares about paying his bills, NOT yours.

Why not join the select few who have discovered and are using the absolutely income TAX-FREE alternative? It is perfectly legal, no loopholes (President Obama approves of that), and based on existing tax law. Why is only a tiny percentage of the population using it? It’s because more than 95 percent of financial advisors don’t know what they are talking about when it comes to retirement planning.

Call us today at (301) 949-4449 for your free consultation so that you can work with one of the five percent of financial advisors who can set you up for this income tax-free alternative!

Remember Stewart vs. Cramer? Someone Was Left Out

Whoa! On the March 12, 2009, episode of "The Daily Show," Jon Stewart - for lack of a better word - hammered Jim Cramer of CNBC's "Mad Money." My regular readers can probably guess my reaction. For those of you with short memories (or who somehow missed the brouhaha), this statement sums up Stewart's entire point:

"I understand that you want to make finance
entertaining, but it's not a ... game."

I really, really wish I could emphasize the missing word indicated by the ellipsis in that statement, but this is a family blog.

Watch the clip yourself and you can fill in all the blanks.

The Daily Show With Jon Stewart	M - Th 11p / 10c
Jim Cramer Pt. 2
thedailyshow.com
Daily Show Full Episodes Economic Crisis First 100 Days

Here are my thoughts on the Stewart-Cramer conflict, and the crisis to which they were referring:

1. Aren't we supposed to be living in the land of freedom, where we are all accountable for our own actions? Why in the world should poor Jim Cramer take all the blame? I'm sure if I were on Cramer's show selling a stock, he would insist, "Buy, buy, buy - right now!"
   
   
2. Don't folks know that stocks roller-coaster? And always will? And don't they realize that our self-proclaimed prediction gods - or rather, devils - are worthless, at best?
   
   
3. What about all the other "Cramers"? These so-called "experts" that surround us? The newspaper articles, websites, and blogs that rain down Cramer-like advice by the second? I suppose we could argue that they are exercising their freedom of advice, and the public should likewise exercise their freedom of choice to tune them out.
   
   
4. Have we learned anything at all? Or are we simply awaiting the next catastrophe that will give another pundit or expert the chance to rally us to do something against our own best interest so that Jon Stewart can invite that person on his show and entertain us some more?

_______________

Laser Financial Group provides a common-sense approach to finance without all the hype.
_______________

The “Paper Loss” Garbage

Majority of those who have investments in the stock market are freaking out – and rightly so. They are looking for answers as well as ways to halt further evaporation of their savings. In 2008, all the major stock market measures (S&P 500, DOW and NASDAQ) plunged well over 30 percent.

To bring this point home, a hypothetical nest egg valued at $500,000 on January 1, 2008 would have had a balance of $350,000 as of December 31, 2008 – assuming no withdrawals and that no fees were accessed on it. That is a reduction of $150,000 in one year!

And, it gets worse: As noted by USA Today, the average stock fund fell approximately 9.1 percent in the past three months. Are we at the bottom yet? When is the freefall going to end? Is this what millions of investors signed up for?

Called Your Adviser Lately?
I’m pretty sure you have been told by your financial adviser (if he/she invested your money in the stock market- with your consent), heard the experts say, or read this golden solution: “Your losses are only on paper - you’ll be okay.”

Here’s the truth, those losses are REAL. I repeat, every bit of your losses are REAL! You see, once you lose in the stock market’s game, that investment is – GET THIS - lost FOREVER. These - in my opinion – shady advisors/experts are twisting the fact.

When the market recovers (and I’m praying for that to happen ASAP), it is “NEW” gains! In effect, if you had not lost, you’d have ended up with new gains on top of your previous earnings – Theoretically speaking if you are already in the stock market.

If these financial advisors are right (about the “paper loss” thing) then investing is like a big joke. Where, sometimes, your fund company shows you $350,000 instead of your previous $500,000 balance. Something tells me the only reason you see the lower value is because that’s your ACTUAL, LEGAL value.

Could You Have Avoided These “Paper Losses”?
Whether investors knew to ask or not, they needed to know the answer to THIS question: Is there a strategy that can get me decent returns when the stock market is positive and protect my account values so I don’t lose a DIME when the market declines? A qualified advisor should have been addressing this question all along.

As I indicated in my recent interview with the Frederick News Post, the answer is YES! That’s exactly what our firm has been teaching, recommending, and implementing for clients. I can tell you this much: They are NOT tormented by the safety of their investments. You may learn more by attending our next seminar or requesting a complimentary consultation or webinar.

Will You – REALLY- Need Lower Income in Retirement?

There is this completely bizarre idea that one year you are working - looking for ways to beef up your income - and the next you can comfortably survive on a much lower income. Simply, because you are in retirement.

What The Experts Say

Some so-called financial experts say you need 70 percent of pre-retirement income after retiring, while others claim its 80 percent, 85 percent or 90 percent.

Then, there are those (financial gurus) who advocate what is called the 4 percent rule. It simply holds that if you withdraw no more than 4 percent of your portfolio in the first year of retirement and then increase that amount for inflation each year, your money should last at least 30 years.

Yes, it gets that ludicrous sometimes. Whatever it is, I would ignore it - if I were you. One could only wonder if these experts are allergic to reality.

Real Life

May be our seminar attendees and retired clients have been living in a different United States of America. The last time I checked (last night), retirees pay the EXACT same prices – like everyone else - for things like groceries, gasoline, clothing, cable, newspapers and airplane tickets. When they patronize restaurants they do NOT receive a 30-percent discount.

The – I guess unusual- retirees I meet everyday face health care costs that threaten the roofs over their heads. But, to be fair, I must concede: they pay nine bucks for movie tickets that regularly cost $10 – courtesy of senior citizen discount.

Almost everyone desires to do things like, travel the world, have fun with family/friends and live comfortably (you know what that implies).

Exactly how are they going to afford these on the percentages of pre-retirement income suggested by the “experts”? Or, since they are the “experts” we should shut-up and believe (it’ll be wiser to hope) things will turn out exactly as prescribed?

Try This

I’m not asking you to agree with me. But, may I suggest a really simple, common-sense, real-life approach to gauging the kind of income you’ll need in retirement? I mean here in this United States.

1. Decide (with some specificity) what you desire to do in retirement. (If you still don’t get my point after this, steps 2 and 3 below will nail it home).
2. Locate a retiree who is doing the stuff you desire to do (or at least close).
3. Find out how much they are spending?
   

I bet you’ll conclude that to survive on the percentage(s) of pre-retirement income the experts are trumpeting you MUST be the greatest magician of all time. Hey, if that’s you please let’s talk.

Investment Losses Can Lower Your Tax Bill (?)

Investors who are not disturbed by this title should – seriously - check their investment IQs. If you have investments in the stock market my guess is, they are in hell at the moment. It would be the biggest understatement to mention that 2008 was a horrific year – with the DOW, NASDAQ and S&P 500 Index each plunging well over 30 percent.

Investing directly in the stock market - in my opinion - is dangerous, speculative and unnecessary in building a steady, realistic nest egg. By that I mean, financial advisers (regardless of the college they attended or the length of time they’ve been wearing suit and tie) cannot predict the future movements of the stock market, but there’s absolutely NO need to gamble and risk crashing.

Just for the record: our clients have NOT lost even a penny during this meltdown! Wondering how? It’s simple; we use common-sense instead of speculation. Hopefully, investors are finally waking-up to smell the coffee.

In an effort to calm frayed nerves, so-called financial advisers (who live on Mars) are arguing that those significant, troubling losses may actually be good for investors (haha). They suggest:

1. Capitalize on the opportunity to convert your 401(k), 403(b) or traditional IRA to a Roth IRA. To paraphrase: since you just lost over 30 percent of your nest egg, your tax bill will be lower – because -you get to convert the lower value.

2. You can use your realized capital losses (from the sale of your depressed securities) to offset up to $3,000 in ordinary income annually. Any unused losses may be rolled forward to cover any gains and income until they are all used up.

So you see after all it’s a “good” thing! Boy oh boy - no further comments.

Why Did You Invest?

People invest in order to build retirement nest eggs period! Their well-paid financial advisers promise to “manage”, “properly diversify” and “re-balance” their portfolios. As well as keep (very) close eyes on them. These investors were – and are still - being advised to relax and focus on the long-term. You see, in the long-term they’ll all of a sudden enjoy amazingly comfortable lifestyles! (or at least that’s what conventional advisers tell angry investors).

How much would you have invested if your adviser told you something like this: If you invest directly in the stock market, your nest egg may experience significant losses. But never mind, you can use the losses to reduce your taxable income by as much as $3,000 per year?

The sad fact is many retirees have watched helplessly as their life’s savings evaporate within a matter of months. They have losses to write-off for the rest of their lives and still have enough to last their children and grand children. Are there people who invest so they could write-off losses (LOSSES!) on their tax returns? Could someone tell those so-called experts to get real? PLEASE!

If Roth IRAs were that awesome (in the view of these advisers), how come their clients were (and are) invested in different plans? Let me guess: so they can lose significant amounts of their life’s savings – to make way for “the Roth conversion advice”. Sounds smart to you? Sounds – sort of – stupid to me.

How I See It

Every retiree facing this predicament has to endure living on a drastically reduced income (assuming a nest egg is presently generating income or about to). And that means lower taxable income. Therefore, they may not need the supposed – very expensive – additional break provided by realized capital losses. Yet, some so-called financial advisers see “good” news in that.

Numbers Don’t Lie, They Just Muddle

I see a bunch of confusing, twisted numbers in hundreds (if not thousands) of colorful, convincing 401(k), 403(b), IRA and TSA brochures – and on some websites. These sources usually portray – and wrongfully profess - that all things being equal using pre-tax contributions and deferring taxes will result in a bigger nest egg. Therefore, those who use such accounts will end up with higher net spendable incomes. That’s simply not true.

Our firm has proved over and over again that, if a nest egg is taxable (all qualified plans are under current law) you can still run out of money! Someone who uses after-tax contributions - under the same set of circumstances - will end up with the same outcome but with much less restrictions and more certainty (in terms of taxes).

Mathematical ILLUSION

Let’s assume a return of 7.2 percent (Rule of 72 makes for easy math) and a 25 percent federal marginal tax rate (presently every dollar over $33,950 -single and $67,900 – married filing jointly - is taxed at this rate).

$200,000 in pre-tax contributions will double to $400,846.27 in ten years. If you take the same $200,000 and pay tax on the front end ($200,000 minus 25 percent tax), it amounts to $150,000. When that doubles, it grows to $300,643.70. It looks - as if – using pre-tax dollars is better than using the already-taxed (75-cent) dollars. So the illusion is that there is $100,202.57 less in the after-tax-dollar account. Or is it?

What those brochures/websites (and the consultants who use them) don’t explain is that taxes are due and MUST be paid on the entire $400,846.27 tax-deferred nest egg – upon voluntary withdrawal or when compelled by the IRS.

Once that happens, you end up with the same amount of money! Based on our example, the $400,846.27 minus 25 percent tax will net you $300,634.70. There is no difference between funding a retirement account with after-tax dollars or pre-tax dollars, assuming the same tax bracket and provided that the account funded with after-tax money grows and stays tax-free upon withdrawal (as they are under current law). Interesting, huh?

Y’see, the misconception is that because the pre-tax dollars grow to a bigger number it’s better. Remember, the supposed bigger balance includes unpaid taxes and the last time I checked, the IRS doesn’t play.

Other worthwhile facts to note

• As you approach retirement (if you’re like most retirees), you’ll have fewer deductions and exemptions compared to your earning years. That would probably bump up your tax bracket.
• Tax due on a pre-tax contribution account is based on rates in effect at the time of withdrawal (whether voluntary or compelled by the IRS).
• If you were the owner of the $300,634.70 tax-free account used in this example, you’ll not lose sleep over future tax rates. Why? Because your income is NOT taxable.

The next time you see one of those colorful brochures think about YOUR retirement.