Investment Time
January 27, 2010
Thinking Roth Conversion? You Need to Consider This First (Part 1)
First, Happy New Year! We hope you had a wonderful holiday season and have a great start to 2010. For the next two issues or so, we will be discussing what seems to be the new kid on the block in the world of personal finances when, in fact, it really isn’t - Roth IRA conversions.
Today, we will examine why, for vast majority of Americans - probably including you - Roth IRA conversions may not be new at all. In subsequent issues, we’ll discuss certain details you must be aware of before taking the Roth leap, if you even find it necessary at all.
The general premise of Roth plans - as opposed to qualified plans - is that you contribute after-tax (nonqualified) dollars today and have access to those funds later (including any gains) tax-free, provided you meet certain conditions, which are laid out by Uncle Sam. 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.
You most likely have already heard about the 2010 Roth Conversions, since almost every conventional financial institution and advisor is marketing them like mad as “America’s new tax break.” You may have even received materials about them in the mail, seen/head about them in the mass media, or had your advisor contact you about them.
Calculating MAGI
The Tax Increase Prevention and Reconciliation Act of 2005 eliminates the modified adjusted gross income (MAGI) limits on Roth IRA conversions in 2010 and beyond. Until now, 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.
You calculate your MAGI 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
Yes, that’s quite a technical list. Our goal is not to make you tax experts, but rather to give you a bit of an understanding of the law so that you can fully appreciate our perspective.
Realistically Speaking
The fact is that millions of Americans - probably you included - do not have a MAGI of $100,000 or more. Meaning, they could have converted their qualified dollars under rules that have been in existence since the birth of Roth IRAs in 1997.
The even more interesting and unfortunate situation is that any investor - regardless of their gross income, AGI, or MAGI - could have achieved the same general benefits offered by Roth IRAs by maximum-funding an investment grade life insurance contract within the confines of sections 7702 and 7702A of the Internal Revenue Code.
So America’s new tax break is, in reality, nothing new. We believe the more serious questions that investors and some so-called financial experts should answer are:
- If the Roth principle is a preferable option for retirees - and we concur that to be true in most cases - why wasn’t the change initiated before now? Here in 2010, more than a decade has passed since 1997.
- Why are these same advisors 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?
Are we saying that you should flat out avoid a Roth conversion? Of course not. We are, however, saying that you must demand nothing short of thorough analyses based on your specific set of circumstances, not generalizations provided by a marketing brochure, website, or commission-driven salesperson.
The majority of those investors we have seen were not even aware of certain critical facts they needed to consider before making such a move. In subsequent issues, we will bring you some of these need-to-know details, so that you can be better informed as you make your critical financial decisions. We encourage you to request a private, no-obligation consultation to assess your options by visiting www.LaserFG.com or by calling (301) 949-4449.
A senior financial strategist with Laser Financial Group, Samuel is an accomplished personal finance expert, a Chartered Retirement Planning Counselor, and author with years of experience in retirement-tax planning. He regularly contributes to and is featured by various media outlets, including TV and radio. To read his weekly columns or receive your no-obligation consultation, please visit www.LaserFG.com or call (301) 949-4449 today!
Comments
Got something to say?
Advertisement
