To be eligible to convert a Traditional IRA to a Roth IRA, a person must have an adjusted gross income (AGI) of $100,000 or less regardless of marital status. Often, individuals age 70 1/2 or older want to convert to a Roth IRA to avoid required minimum distributions (RMDs) from their Traditional IRA. In many cases, these individuals are ineligible for a conversion because any RMDs received by the individual must be taken into account when determining their AGI limit.
Good news! Beginning January 1, 2005, required minimum distributions are no longer included in adjusted gross income calculations. This change in the income formula means more individuals are now eligible for a Roth conversion!
You may be a good prospect for a Roth conversion if you:
•Desire to pass IRA assets to heirs that are free from federal tax
•Are over age 70 1.2 and previously ineligible for a Roth conversion because your RMDs cause your AGI to be over $100,000
•Are nearing age 70 1.2 and have an AGI of less than $100,000
•Do not need RMDs to sustain your standard of living
•Have access to other assets to pay the income taxes associated with a Roth conversion
•Believe future tax rates will be higher
It is important to note that you must take your 2005 required minimum distribution from your Traditional IRA prior to converting to a Roth IRA. Also, extra taxable income due to a Roth conversion could impact the ability to take advantage of certain itemized deductions because the deductions phase out at higher AGI amounts.
Your financial advisor can assist you with IRAs and other retirement planning options. Contact your financial advisor today to implement the comprehensive wealth management solutions you deserve.
What are the advantages and disadvantages of converting to a Roth IRA?
Since the introduction of the Roth IRA, many people have converted all or a portion of their existing Traditional IRAs to Roth IRAs. A conversion has both advantages and disadvantages that should be carefully considered before you make a decision. Some advantages are:
•A lower tax bill in the future
•The ability to invest a larger dollar amount in a federally tax-free vehicle by using other savings to pay tax on the conversion ∞ Your money may be invested in a tax-free vehicle for a longer period of time by avoiding required minimum distributions (RMDs) after age 70 1/2
•A reduced estate tax when you pay income tax on your IRA before you die (as you have already paid income tax, thus reducing the size of your estate). Also, upon your death, your Roth IRA will pass to your beneficiaries free from federal (and often state) income taxes. However, estate taxes continue to be payable.
A key potential disadvantage of converting a Roth IRA is rate shifting. This occurs when you pay a conversion tax at a higher rate than what you would have paid if you had left the money in a Traditional IRA and withdrew it later. Another issue to consider would be whether you have enough funds to pay the conversion tax. If the characteristics described above do not apply to you, or if you have concerns regarding the potential disadvantages of converting, talk to your financial advisor to discuss your options.
International stocks. U.S. small-cap stocks. Real estate. Alternative investments and commodities. Do these investments sound risky to you? In and of themselves, each of these asset classes is volatile—that is, subject to a relatively wide variation of returns. However, when these risky investments are combined with more “conservative” investments—for example, U.S. large-cap stocks and fixed income—the result is a portfolio that, as a whole, can be less risky.
Nobel laureate Harry Markowitz’s economics work asserted that portfolio risk* falls when certain risky asset classes are combined with more conservative asset classes, if the return patterns are less than perfectly correlated. Risky asset classes like U.S. small-cap equity and international equity have higher expected returns, but also have higher expected risk compared to cash and high-quality fixed income assets. A smoother portfolio result can potentially be accomplished by combining these asset classes of varying volatility. An example of the benefits of properly combining certain asset classes is illustrated in the graph below. Line A illustrates the broad performance variations of an index of commodities over 10 years. Line B illustrates the narrow 10-year performance variations of a high-quality fixed income index. Line C combines the two relatively diverse asset classes in 50-50 weightings. This last line shows how portfolio volatility could have been reduced by utilizing a combination of two asset classes with different variations of return.
Selecting asset classes properly lies at the foundation of a long-term investment philosophy. Portfolios designed utilizing this philosophy may help you achieve the long-term return objectives that are in line with your investor profile, whether ultra-conservative, conservative, moderate, growth or aggressive growth. A sensible investment strategy can help protect your investments from the brunt of market fluctuations. Having an asset allocation strategy and a properly diversified portfolio will help you stay the course over the long term, regardless of short-term market behavior and economic and political swings. Investment discipline and proper portfolio structure are key tools to help protect your current and future lifestyle. Consult Russell Ingledew CPA, Inc./R.I. Financial Services, LLC to see how a sound multi asset class asset management program can help you reach your investment objectives.
*As measured by variation of returns around average performance. Past performance is no guarantee of future results. The above-listed indexes are unmanaged. It is not possible to invest directly in an index. Each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Diversification of your overall investment portfolio does not assure a profit or protect against a loss in declining markets. Investing in micro, small or mid-sized companies involves risks not associated with investing in more established companies. Since equity securities of small companies may not be traded as often as equity securities of larger, more established companies, it may be difficult or impossible to sell. Investing in emerging markets involves greater risk than investing in more established markets. Such risks include exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity, and the potential lack of strict financial and accounting controls and standards.
Did you know…
•That retirement can last for 30 years or more?
•That a common rule to follow is that retirees will need up to 80 percent of their annual income today to retire comfortably?
•That the average amount paid monthly by the Social Security Administration in the form of a benefit is $962.70*?
A retirement plan allows you to invest for the future while providing many benefits for you, your business and your employees. As a bonus, you and your employees may receive significant tax advantages and other incentives.
Benefits for Your Business:
•Employer contributions made on behalf of eligible employees are tax-deductible.
•Businesses may receive a tax credit of 50 percent on the first $1,000 in administrative and/or education costs.
•Assets in the plan grow tax-deferred.
•A retirement plan can attract and help retain good employees, consequently reducing your cost of training new employees.
Employee Benefits:
•Federal income tax on contributions in the retirement plan is deferred until distributed.
•Investment earnings that accumulate in the plan are not taxed until distributed.
•Retirement assets are eligible for rollover to other employer plans.
•Contributions can be made automatically through payroll deductions.
•A tax savers credit up to 50 percent is available to individuals within certain income limits.
•In many cases, long-term retirement goals are more likely to be met through early and full participation in a retirement plan.
•Qualified contributions reduce employees’ taxable earned income.
Establishing a Retirement Plan:
Depending on the type of plan that is right for your business, the range of administrative steps to establish a retirement plan varies.
•First, talk to your wealth management professional to discuss the appropriate retirement plan for your business before the end of the year.
•After the type of retirement plan is determined, you and your wealth management professional will select the investment vehicle to house plan assets.
•Your company will then adopt a written retirement plan before the end of the year.
•Lastly, you will notify all eligible employees about the details of their retirement plan.
How can you get started setting up a retirement plan before the end of the year? Call your wealth management advisor today. He or she can gather the census data for your business and craft a retirement proposal that is designed to fit your unique needs and goals.
*U.S. Social Security Administration Office of Policy, Monthly Statistical Snapshot, August 2007
Created by 1st Global for use by our financial advisors
We are pleased to announce that Russell Ingledew, CPA has been voted ” Best Accountant” by the La Jolla Village News. Thank you La Jolla and La Jolla Village News!
Voted Best Accountant 2011
In our onward commitment of keeping our clients informed and up to date on important financial issues, Russel Ingledew CPA, Inc. & RI Financial has added a blog to our website. Please stay tuned for future blogs.
Russell Ingledew CPA, Inc. & RI Financial Services is one of the premier tax and wealth management services firms in La Jolla. We deliver comprehensive financial solutions to our most-valued clients. We utilize a truly tax-advantaged approach to wealth management to help our clients maximize the growth, protection and distribution of their wealth.
Through a unique combination of proven capabilities and expertise, we customize and implement wealth management plans designed to help our clients reach their financial goals and make their aspirations a reality. From securing their ideal retirement to helping their children and grandchildren fund their education, we help our clients achieve true financial peace of mind.
January 7th, 2011 in
Russelll | tags:
Russell |
1 Comment
