Should You Convert to a Roth IRA? (Part 3)

Should You Convert to a Roth IRA? (Part 3)

I must reiterate that I am not quite sure how long this series will end up being. My intention is to discuss the salient points that you, as an investor, must understand and take into consideration as you decide whether or not converting to a Roth IRA is something that will benefit you and your family. Today, we will begin tackling the tax issues surrounding these conversions.

How Is One Taxed on the Amount Converted?

The answer to this question depends on whether the contributions were made with deductible (pre-tax) or nondeductible (after-tax) funds.

Accounts With Deductible Contributions ONLY

Since the contributions, as well as growth up until the time of the conversion, have never been taxed, the entire converted amount is considered ordinary income in the year of the conversion. There is a special 2010 only exception which I’ll discuss shortly.

By way of an example, say Peter used to work for XYZ Inc. and participated in the company’s 401(k) program by making pre-tax contributions. His 401(k) balance is presently $100,000. Peter is no longer employed at XYZ and now wishes to convert the $100,000 into a Roth IRA in 2010. The entire $100,000 will be added to his income for this year (assuming he’s not using the special exception). However, his taxes will be based on the applicable rate, depending on his taxable income.

It is hugely important that you pay close attention to my choice of words here. As I pointed out in my book, 5 Mistakes Your Financial Advisor Is Making, mistake #1 is still being made by tons of so-called financial advisors/experts: perpetuating the myth that your income always depends on how much money you earn.

Here’s what I mean. Say Peter talks to a savvy strategist from Laser Financial Group, who helps him create legally allowable income offsets to reduce his $100,000 gross conversion income down to $50,000, or completely eliminates any taxable income. Peter would then owe tax on the lower amount ($50,000 or zero), instead of the full $100,000. We continue to help numerous clients to achieve similar results.

Accounts With Nondeductible Contributions ONLY

Such funds will owe tax only on the growth up until the time of conversion. Say Mary contributed $50,000 to a traditional IRA but did not deduct any portion of the contributions for tax purposes. If that IRA now has a balance of $70,000, she will owe tax only on the $20,000 gain. Again, it is important to consider the possibility of reducing or even eliminating those tax consequences.

Accounts With BOTH Deductible and Nondeductible Contributions

The law demands that taxes are paid on a “proportionate share” of the conversion. But what does this mean?

Assume that Katie’s traditional IRA is currently worth $100,000, and $10,000 of her contributions were after-tax. Katie decides to convert $10,000 to a Roth IRA. Only 10 percent (in this case $1,000) of this $10,000 will be tax-free, meaning she will be taxed on 90 percent (or $9,000). By law, 10 percent of the account is tax-free, so 90 percent of the funds released are taxable. If Katie really wants to withdraw all $10,000 tax free, she’ll need to convert the entire $100,000 and pay tax on 90 percent ($90,000). Interesting, isn’t it!

What Is the Special 2010 Exception?

NOTE: This arrangement applies ONLY to conversions completed in 2010. For such conversions, you may decide to either pay ALL of the taxes due in 2010 or split the amount converted – not the taxes due – EQUALLY between 2011 and 2012. These are the only options and they are non-negotiable.

Remember Peter from the earlier example, who wishes to convert $100,000 in 2010? He may recognize the full $100,000 as income in 2010 or include $50,000 as income in 2011 and $50,000 in 2012. However, he cannot do the 50/50 split for 2010 and 2011 – yes, the law is that rigid.

Here is something you must consider as you decide whether to convert your retirement income to a Roth IRA. If you choose to do the 50/50 split in 2011 and 2012, your taxes will be based on your applicable rates in 2011 and 2012, not 2010 rates. As you may already know, the 2001 tax-cuts are due to expire at the end of this year, which means it behooves you to ponder where YOUR future rate is headed, beginning in 2011.

Look for more conversion-related tax information in Part 4 of this series. And if you’ve missed the other segments in this series, read them here:

  Part 1

  Part 2

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Interested in converting your IRA/401(k) with little or possibly no tax consequences, like our clients have done and continue to do? Or do you simply need some advice deciding whether it even makes sense, given your situation, to convert? Please call (301) 949-4449 or visit our website to schedule your free, no-obligation consultation.

Should You Convert to a Roth IRA? (Part 2)

Should You Convert to a Roth IRA? (Part 2)

As I pointed out in my most recent blog, I am not quite sure how many parts this series will end up containing. My intention is to discuss the salient points that you, as an investor, must understand and take into consideration as you decide whether or not converting to a Roth IRA is something that will benefit you and your family. As a result, I will focus on only one or two areas per blog post.

This is what I know for sure: You will receive factual information presented in a clear, simple, unbiased manner.

Is It True That Only Traditional IRAs Can Be Converted?

There seems to be a lot of misinformation out there, one of the significant distortions being that you must first convert your investment into a traditional IRA, and then into a Roth. In reality, basically any qualified plan may be converted. Qualified plans are those into which you deposit before-tax dollars and defer taxes on the growth as well. Examples include traditional IRAs, 401(k)s, 403(b)s, and tax-sheltered annuities.

Must My Employer Allow Me to Convert My Work-Related Funds?

Although the law permits you to convert and you may want to, your employer’s retirement plan policy supersedes everything else. Most employers’ policies do not allow the transfer of retirement plan funds while you are still employed by that establishment.

For instance, say George has accumulated $400,000 in his employer’s qualified 401(k) program. Now George wants to convert all or a portion of his funds to a Roth IRA; however, his employer’s policy does not allow any transfers unless he is no longer employed at the firm. That’s tough luck for George unless, of course, he resigns.

How Is the Transfer Made?

The transfer can happen in one of two ways:

1. You may request that your current fiscal custodian transfer the funds directly to a new Roth custodian.
2. You may request that the funds first be released to you, and you then turn them over to your new Roth custodian. However, if you use this indirect approach, the new account must be set up and the money deposited into it within 60 days.

Are There Minimum and Maximum Amounts That Can Be Converted?

The amount you convert is completely up to you. You alone make that decision. The “new” law is not an all-or-nothing situation. I must tell you, though, that most investment firms require their own minimums to maintain an account with them, but those limits have nothing to do with the law. And I can virtually guarantee that you needn’t worry about the maximum amount.

Say Sarah has $100,000 in her traditional IRA. She may decide to convert $5,000, $10,000, all $100,000, or any amount in between.

Is 2010 the Only Year That Such Conversions May Take Place?

As the law stands now, you may convert beyond 2010. Of course, just like any other laws, Congress may suddenly decide to change or repeal it at any time. More to the point, this is one of the primary areas where investors are receiving misinformation and being rushed into making decisions, some of which are not financially savvy.

As I laid out in Part 1 – please read it if you have not done so already – these conversions have been available for the past 13 years, so any advisor who is behaving as if you are doomed if you don’t do it now is, frankly, projecting a false sense of urgency, and I would be very careful dealing with such folks. The more interesting and more important question is where has your advisor been all these years?

Having said that, as a retirement planner, I understand the power of time and compounding, so I’d want my investors to take advantage of good opportunities that will enhance their wealth as soon as possible, BUT only after performing proper due diligence.

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If you would like FREE assistance in determining how YOUR numbers play out in your decision-making process, call us at (301) 949-4449 to give us some quick information, and we’ll send you a year-by-year analysis of YOUR numbers.

Should You Convert to a Roth IRA? (Part 1)

Should You Convert to a Roth IRA? (Part 1)

You may have received materials about them in the mail, seen or heard about them in the mass media, or had your advisor contact you about them — the 2010 Roth Conversions that financial professionals are madly marketing as “America’s new tax break,” when, in fact, it really isn’t new at all.

For the next few posts, I intend to bring you certain facts that I believe you, as an investor, must know, understand, and definitely consider before taking the Roth leap, if you even find it necessary at all.

What Is a Roth Plan?

The general premise of Roth plans — as opposed to qualified plans — is that you contribute after-tax (nonqualified) dollars today and can access those funds later (including any gains) tax-free, provided you meet certain conditions which are laid out in the tax code.

All things being equal, given the fiscal climate of our nation and the bad tax planning advice most Americans receive when preparing for retirement, the Roth premise is better than traditional qualified plans for maximizing spendable income. I explain this in greater detail in two of my books, 5 Mistakes Your Financial Advisor Is Making, and Is Your 401K a Trap? If you haven’t already done so, please download your free copy!

Suddenly I’m realizing that pretty much out of nowhere, almost every financial advisor/expert now agrees with the common-sense concepts and strategies I have been promoting and implementing for my clients over the past decade or so. I wish they could have done so earlier, but it truly is better late than never.

So, What Is This “New” Stuff?

Congress passed a law called The Tax Increase Prevention and Reconciliation Act of 2005 which eliminates the $100,000 modified adjusted gross income (MAGI) limit on Roth IRA conversions in 2010 and beyond.

PLEASE NOTE — Until the passage of the new law, you were allowed to convert qualified funds only if your MAGI (before income from the conversion) was $100,000 or less, regardless of whether you were single or married.

MAGI is calculated by adding back certain items to your Adjusted Gross Income (AGI), which can be found on line 38 of your Form 1040; or line 22 of your Form1040A:

* Traditional IRA contribution deductions

* Student loan interest deductions

* Tuition and fees deductions

* Domestic production activities deductions

* Foreign income or housing costs excluded on Form 2555

* Foreign housing deductions taken on Form 2555

* Savings bond interest excluded on Form 8815

* Adoption benefits from an employer excluded on Form 8839

If Your MAGI Is $100,000 or Less

If your MAGI totals $100,000 or less, you have been able to convert your qualified dollars since the introduction of Roth IRAs in 1997. Meaning this new law changes nothing in your situation. Here’s the thing, though: most Americans’ MAGIs have always been and still continue to fall below $100,000.

Those With a MAGI of $100,000 or More

Now, if your MAGI is $100,000 or more, you also could have achieved the same general benefits of Roth IRAs by maximum-funding an investment grade life insurance contract within the confines of sections 7702 and 7702A of the Internal Revenue Code. You see, under those rules — regardless of your gross income, AGI, or MAGI — you many contribute any amount you want, and I mean ANY amount, and have access to those funds (including any gains), tax-free. Even better is that you do not have to wait 5 years and also be age 59½ in order to enjoy the tax-free access. Now that’s sweet — even better than a Roth, if you ask me.

So if your financial advisor really knows their industry, America’s “new” tax break is, in reality, nothing new.

Here Are the Real Questions

1. If the Roth principle is a preferable option for investors (including you) — my clients and I agree that this is true in most cases — why did your financial advisor delay making such a suggestion until now? This is 2010 — it’s been 13 years since Roths were introduced! One can logically suggest that certain so-called advisors don’t know what they don’t know, or they just don’t care. But since they are supposed to care, my only logical conclusion is that they’ve been living on Mars until now.

2. Can someone offer a sensible explanation as to why these same advisors are still encouraging younger investors to fund qualified 401(k)s, 403(b)s, 457s, and tax-sheltered annuities? Don’t they realize that they are literally building retirement-tax bombs, since these same so-called experts are, ironically, predicting an increase in future tax rates?

Look for Part 2 in next week’s post.
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To fully CONTROL your wealth, call us at (301) 949-4449 or schedule your free, no-obligation consultation.

Why 14% is Waaaay Better Than 40%

Why 14% is Waaaay Better Than 40%

This week I was planning to begin a series of columns discussing the “new” Roth Conversions that seemingly everyone in the personal finance industry is “crazy” about. Then I realized I had to clear up a distortion I have been noticing recently – especially this past week. So look for the Roth series to begin next week.

WHICH WOULD YOU PREFER YOUR INVESTMENTS TO RESEMBLE?

We all know that 2009 was a better year than 2008 when it came to investing in the stock market. But all of a sudden, certain financial advisors are now pointing investors to what their investments earned in 2009. Remember, these are the same who were not returning investors’ telephone calls when the market crashed in 2008, either because they were extremely busy, or perhaps because their voice mails were deleting the messages before they could listen to them.

I can think of two credible reasons why these advisors are trumpeting your 2009 returns:

1. To divert attention from the fact that because so many investors’ portfolios are still significantly down, they may now be questioning the validity of their advisors’ strategies.
2. These advisors are truly and completely clueless.

Personally, I’d vote for Number 1 because I cannot convince myself that any advisor could be this clueless.

Joseph’s story

In one particular case that I know of, Joseph’s investment advisor is tooting his horn and patting himself on the back because Joseph’s portfolio earned 40 percent in 2009. While I understand that plusses are good in investing, here is what’s bizarre about this advisor’s view:

In 2008 – just a year earlier – Joseph’s portfolio, which was managed by this very same genius advisor, took a 35 percent nosedive. WAIT!!!! Before you say that over the past two years, Joseph’s portfolio is then up by 5 percent (down 35 in 2008, but up 40 in 2009), let me show you something that millions are missing.

Actually, Joseph’s total return over those two years is NEGATIVE 9 percent! No, this isn’t the “new math,” but it does sound odd, so let me explain. Joseph’s portfolio was worth $100,000 at the beginning of 2008. He lost 35 percent that year, so he ended with $65,000 (his original $100,000, less 35 percent). He then gained 40 percent on the $65,000 (which totaled $26,000), meaning his ending balance was $91,000.

Now it’s clear that over those two years, Joseph’s value is still down 9 percent, compared to the $100,000 he began with in 2008. This math not only applies to Joseph’s portfolio, but it is applicable to every investment. When you lose 35 percent and then gain 40 percent, you net negative 9 percent. For Joseph – or any investor – to have broken even in 2009, his portfolio would have had to earn approximately 53.6 percent – which we all know did not happen.

I am still trying to understand Joseph’s advisor – and the scores of others just like him. In 2008, he advised Joseph to ignore the 35 percent loss, apparently because it was “just one year” and instead focus on the long term. In 2009, he is now advising Joseph to focus on the 40 percent gain and ignore the huge loss he experienced in 2008. Interesting, isn’t it? How quickly the rules change depending on whom they favor.

Marvin’s story

Marvin is one of my clients, and his results were dramatically different from Joseph’s.

In 2008, Marvin’s portfolio earned plus 6 percent, and he earned plus 14 percent in 2009. Before you conclude that 14 percent sucks compared to Joseph’s 40 percent, I’d encourage you to do the math first. Marvin also started with $100,000 at the beginning of 2008, and it increased to $106,000. Then in 2009, his $106,000 earned 14 percent, leaving him with an ending balance of $120,840.

It is EXTREMELY important that you also notice that Marvin’s investment is in a vehicle which, under US the tax code, he can access tax-free, even before he reaches age 59½; he can also transfer any remaining funds to his heirs, income-tax free!

In just two short years, Marvin has $29,840 more than Joseph (Marvin’s $120,840 versus Joseph’s $91,000). And remember that they both started with $100,000 at the beginning of 2008.

Whose investment strategy would you rather pursue?

Do you really want to pay attention to and make your investment decisions based on all the noise about returns, especially when they can be so distorted?

Can you now see how easily someone could have been led to believe that Joseph’s strategy must be better, and that he therefore must have a larger balance than Marvin, when in fact the exact opposite is true?

Perhaps you now understand why our investors are completely “crazy” about us.

Call us at (301) 949-4449 or visit our website to schedule your free, no-obligation consultation and let us explore whether you could get more bang for your bucks! Isn’t that the whole purpose of investing anyway?

Freedom of Choice: Big Banks vs. Community Banks and Smart Financial Advice vs. RISKY Advice

Freedom of Choice: Big Banks vs. Community Banks and Smart Financial Advice vs. RISKY Advice

An associate brought this ABC News report to my attention. The gist is that average, everyday folks who feel taken advantage of by some of the "Big Banks" have decided to fight back. The movement is known as "Move Your Money," and their beef is that these banks are nickel-and-diming them unnecessarily, by raising credit card rates without any merit whatsoever and hitting customers with a $30 fee for a $5 overdraft.

On the one hand, it could be argued that we live in the land of freedom where the markets are supposed to dictate pricing. So it’s our responsibility to understand what we sign up for with these banks. And we are all free to leave whenever we feel we can get a better deal elsewhere, or for whatever other reason impels us. I think there's a saying that goes something like, “One man’s meat is another man’s poison.” Isn’t that the whole idea behind the free market system?

On the other hand, though, we can also argue that if any institution in a free market system thinks it is OK to take advantage of unsuspecting clients by trying to outsmart them with hidden garbage, that institution should be heckled as hard as possible and punished by the consuming public who takes their business elsewhere. And if such a trend leads to the demise of the institution, so be it. That is also how the free market system is supposed to work.

I am pretty sure my economics professors would be incredibly proud of me right now. Seems like I did pay attention, after all! Well, whichever school of thought you subscribe to, you’re welcome here!

A Question More Worthy of Exploration

How come no one is standing up to question the conventional financial planning industry when they encourage Americans to simply dump their funds into variable investments and wait for the day when they will retire in peace with milk and honey? When in fact every time the stock market experiences a correction, tens of millions of retirees, as well as those on the brink of retirement and those just starting out and those in midstream, experience complete devastation as their life savings are diminished – in some cases to as little as 50 percent of its original value?

Is this inevitable? Of course not! Those working with financial professionals who apply common sense and reality to their investments do not lose when market dips. It seems, for now, as though the storm has subsided, but who knows when it will rear its ugly head again? Could it be just as YOU are preparing to retire?

In this free market system, some choose to pursue investment strategies that protect them against any losses when the stock market tanks; there are also those who continue to follow a strategy whereby their future retirements are completely at the mercy of the unpredictable stock market. Which movement do you belong to?

PS: You’ve seen the images and heard the horror stories. Please reach out to assist those in need in Haiti in any manner you can. While you should be extremely mindful of scammers who prey on international incidents like this to take advantage of your generosity, there are excellent organizations that work hard to ensure that your contributions actually reach those in need. If you need help finding such an organization, please let me know in the Comments Section below and I’ll get you some names.

Please note that the simplest act of kindness can go a long way. If someone you know is experiencing emotional pain, simply letting them know that you care and are praying for them might help enormously. At the end of the day, we all belong to one big family – humanity. Thank you.
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For your free, no-obligation consultation regarding how you can better plan to withstand the ups and downs of the market, please visit LaserFG.com or call us at 301-949-4449.

Financial Experts, Including Mellody Hobson, Continue Encouraging Investors to "Wait It Out." WRONG!!

Financial Experts, Including Mellody Hobson, Continue Encouraging Investors to "Wait It Out." WRONG!!

A few days ago, I was glancing through the January 2010 edition of Black Enterprise, a monthly magazine. An article authored by Mellody Hobson drew my attention because it covered something of great interest to me: people’s investments. The article is titled “Apocalypse Then: Lessons from the Crash.”

According to the bio that accompanied the article, Hobson is a big Kahuna, president of Chicago-based Ariel Investments and a regular contributor to ABC’s Good Morning America. (OK, the Kahuna part is not in the bio: that’s mine.)

Before I continue, let me reiterate that my goal with this blog is NOT to engage in personal attacks. Rather, my goal is to educate and equip you with proven, secure, common-sense tools so that you can actually break the inadvertent poverty cycle that seems to plaque the majority of retirees, many of whom continue to fall prey to financial advice and guidance that amounts to little more than myths.

Back to the article. Hobson concludes her piece with the following:

Many of you might be mentally pushing back: Sure, Mellody, but how did you know when the market would push back? I didn’t. Nobody did. With investing, the great thing is, you don’t have to know exactly when things will turn. You just have to have the time and patience to wait.

Eloquent and cute, isn’t it? And doesn’t it sound all too familiar to you? That’s because this is the message just about every so-called financial expert has been telling the scores of worried investors whose retirements have either been delayed or completely destroyed by the recent turmoil in the stock market: just have the patience to wait it out.

I Completely Agree with the First Part

Hobson is not completely wrong. In fact, she is spot on with her admission that nobody can predict the market’s exact movements. I have been writing and speaking that very message for years.

However, I Vehemently Disagree with the Second Part

Hobson loses credibility with her admonition that “just” having the time and patience to wait will solve the problem.

Follow Along with MY Explanation

We can’t predict when the market will – to borrow Hobson’s words – push back. But we can predict with 100% certainty that it will fluctuate – both up AND down. So why would you expose your serious cash, earmarked for your retirement or your kids’ college, directly to the market with no downside protection when, in fact, you don’t have to? Because there is a proven means by which you can make strong returns when the market is up and completely avoid losing any value when “the market pushes back.”

Many folks have worked hard, made sacrifices, and accumulated their retirement nest eggs over the past 25, 30, or even more years. Some of them are already in retirement, and some were planning to retire in 2008 or soon thereafter. However, due to the recent market setbacks – get this – in 2008 alone, millions of these individuals lost 20, 30, or even a greater percent of their entire life’s savings!

So, is Hobson really telling these folks to “just have the time and patience to wait”? And what exactly are they waiting for? Are they supposed to wait another 10 or 20 years before retiring? Or they are being asked to have the patience to deal with the fact that they may eventually be dead broke – if they aren’t already?

Try Common-Sense; It Always Works!

Here’s what I want to know: Do any of these gurus know that it is completely unnecessary for investors to lose even a dime of their investments’ values when the market “pushes back”? So why do they continue exposing people’s futures to what are really nothing more than unnecessary risks?

Any investor who followed the simple, proven, and common-sense strategy we teach and implement for our clients DID NOT lose even a penny during the recent stock market crash. Therefore, they do not need to have the patience and time to wait for their portfolios to rebound.

In fact, our investors actually made money at the exact same time that so many others’ retirements were delayed or destroyed, the result of which is that Hobson and all the other experts are now urging their followers to have the patience to wait it out.

My one-word answer to all the preachers of patience is, SERIOUSLY?!

My Very Real Challenge

I have been making the case for common sense for years now. In fact, I discussed this very issue in my August 3, 2009, blog post and this article on our website.

To you the investor: please, please, please stop falling for all that emotional nonsense when it comes to your money! Wake up soon so you can smell the coffee! And remember, your biological clock does not have the patience or time to wait; get sound advice today so that your nest egg can grow and reflect reality!

To Ms. Hobson and all the experts selling the patience and waiting game: please let me know where I am wrong.

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PS: We have only a few seats left for our workshop this Saturday – and, yes, I will be the speaker. Reserve your seat here or call (301) 949-4449.

Why Pay Income Taxes When You Can LEGALLY Avoid Them?

Why Pay Income Taxes When You Can LEGALLY Avoid Them?


First of all, Happy New Year! And Decade! And Century! Wow! Did you notice we are now officially living in the 21st Century? No doubt, 2009 was a challenging year for many – but with all those challenges behind us, we still have the privilege of being alive. And, things will definitely get better!

Now that the celebrations are officially over, everyone is focused on dealing with our favorite uncle – Uncle Sam – at least until April 15. Everyone, and I mean everyone, is looking for ways to minimize their taxes and pay the least amount possible. Who wouldn’t like to keep as much of their hard-earned money as possible – unless, of course, they are absolutely nuts?

Particularly dear to my heart are our retired seniors, many of whom are faced with sky rocketing health care and other expenses and could use all the income they’ve worked so hard to accumulate over the years. Yet the IRS is not, well, particularly friendly in that respect – as in, you have to pay what is due OR ELSE.

But It’s Completely Preventable

Under current tax laws, there is a means by which you can accumulate and access your money, completely tax-free! Even before you reach age 59½ By tax-free, I mean zero taxes. I know this because our clients use these vehicles, so I am 100 percent sure of the information I am imparting here. In fact, I just reviewed the IRS’s 2009 Publication 525 (Taxable and Non-Taxable Income) and this information is right on target – the law is the law!

Just so we are clear, I never engage in discussion of tax loopholes because I personally think seeking them is a big fat waste of your time. As always, I am talking about a legitimate way you can create a zero percent tax bracket, year-after-year, based on current law.

Your Chance to Discover

If you are in the greater Washington, D.C. area, I will be teaching a workshop on Saturday, January 16, at 11:30 a.m. to discuss in clear, concise language how you can achieve this very scenario. Regardless of where you are in your planning process – or even if you are already retired – you will want to attend this event! Please feel free to share this information with your family and friends as well.

By attending this seminar, you’ll also receive a complimentary copy of my latest book – yes, another one! – “Is Your 401K a Trap?”

Wouldn’t this be one of the most worthwhile ways to begin a new chapter in your financial life? Learn to KEEP your money instead of – unnecessarily – giving it to the IRS! Click here to reserve your seats now. 

P.S. Please note that seating is extremely limited and are on a first-come/first-served basis.

Again, Happy New Year!
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If you live outside the greater Washington D.C. area and are interested in the workshop but cannot attend, please call us at (301) 949-4449 or contact us via our website  for your complimentary one-on-one consultation.