traditional IRA Archives - Hanover Mortgages

Apache is functioning normally

June 7, 2023 by Brett Tams

By Peter Anderson 3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 28, 2013.

Assuming you are investing for future retirement, you should seriously consider the Roth IRA (Individual Retirement Account). I am already a huge fan of the Roth, but as the national debt increases with each federal bailout, the Roth is looking better all of the time. Let me explain why.

Save Taxes on Down The Road With The Roth IRA

With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement. So whatever your tax rate is in retirement, that’s what you’ll be paying.

The Roth, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn. Nothing like getting tax free withdrawals in retirement and not having to worry about paying taxes, right?

When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA. Why? Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.

Will Tax Rates Get Cheaper?

But I ask you: do you seriously believe that the tax structure when you retire will be essentially the same as it is today? Is it possible that even if your retirement income is less than your working income, your tax rate could be higher than it is today?

I just don’t see how we can ever pay down our $10 trillion national debt without hiking taxes. My longhand math (calculators don’t have that many zeroes) indicates that we owe $30,000 for every man, woman and child in America.

To compound the problem, the Social Security Trust Fund is scheduled for depletion in about 30 years unless “something” is done. That ”something” will have to be higher taxes or less benefits.

Our future tax structure is very uncertain because of our national crash course with debt. Pay your taxes today with a Roth instead of gambling your retirement on the uncertainty of future tax rates.

Tax rates aren’t the only reason to be checking out the Roth IRA. Check out this list of 10 Reasons To Own A Roth IRA. Among the reasons that you’ll find include the flexibility of being able to withdraw your contributions (but not earnings) at any time, being able to save for college or home costs in the account and being able to diversify your tax treatment on your retirement accounts if you continue to have a traditional IRA as well.

More Roth IRA Details

Want some more infomation on the Roth IRA, who is eligible, how much you can contribute and more? Check out these articles on 2013 Roth IRA rule changes, phaseout limits on the Roth, who is eligible for the Roth IRA and everything you need to know about the Roth Conversion Event.

Joe Plemon of Plemon Financial Coaching is the Money Columnist for The Southern Illinoisan.

Source: biblemoneymatters.com

Apache is functioning normally

June 7, 2023 by Brett Tams

This year, it happened — something many have been predicting for years: Taxes went up. And most likely, the hikes will just keep coming. There’s no other way to pay off the country’s debt and fund the ballooning entitlements due the baby boomers as they retire. The increases may not affect everyone, and those who earn more will pay more, but someone’s gotta pay.

One way to hedge against higher tax rates is to contribute to a Roth retirement account. Your contributions aren’t tax-deductible, but the withdrawals are tax-free once you turn 59 ½ and you’ve had a Roth account for at least five years. Who wouldn’t want tax-free money if tax rates are just going higher?

Well, as attractive as the Roth can be, it’s not always the best choice for everyone. You see, a contribution to a Roth means you are forgoing a contribution to a traditional retirement account, which might give you a tax-deduction today in exchange for paying taxes in retirement. So the choice is: Should you pay taxes today or in retirement?

Here’s the rule of thumb: If you’re in a higher tax bracket today than you will be in retirement, stick with the traditional account. However, if you expect to be paying a higher tax rate in your golden years, go with the Roth. The same math applies when considering a “conversion,” which is turning a traditional account into a Roth. The amount in the traditional IRA that comes from deductible contributions or investment growth is taxed as ordinary income in the year of the conversion, but then it grows tax-free.

That’s all handy-dandy, but there’s one problem: While it’s a safe bet taxes will go up, it’s difficult to predict what that will mean for any given individual. Still, here are some considerations:

For many reasons, such as a drop in income, most people pay fewer taxes in retirement than they did while they were working. Plus, it’s likely that senior citizens, as a group, will bear the smallest brunt of future tax hikes.
Make sure to factor in the difference in tax rates between the state where you currently live and the state to which you’ll retire, if you plan to move.
A traditional vs. Roth calculation assumes that any tax savings from contributing to the traditional account is invested and saved for retirement. If you’ll instead spend those tax savings, then the Roth looks much more attractive.

As an example, consider the situation of a Motley Fool reader, who posted his Roth conundrum on one of our discussion boards. He’s in the 33 percent federal tax bracket, and pays a 9 percent state income tax to boot. It’s possible he’ll move to Texas after he retires, which is among the seven states that don’t have an income tax. (The others include Florida and Nevada, also popular retirement destinations.) So if he were to contribute $10,000 to a Roth rather than a traditional account, he’d be giving up on a $4,200 tax deduction, factoring in both federal and state taxes. He’s better off sticking with the traditional account, especially factoring in the possible move to Texas.

Sneaking in through the backdoor

The fellow can contribute to a Roth 401(k) because his employer offers the option. Otherwise, he’d be out of luck since his income makes him ineligible for a Roth IRA. Once you earn a modified adjusted gross income (AGI) of $112,000 if you’re single or $178,000 if you’re married, your ability to contribute gradually phases out.

However, all is not lost for those who don’t have a Roth account at work, are ineligible for a Roth IRA, or have already maxed out their 401(k)s. It gets complicated, so stick with us.

First off, not all contributions to a traditional IRA are deductible. If you have a plan at work and are single with an AGI of $59,000 or are married and have an AGI of $95,000, your ability to deduct the contributions gets phased out. If you’re above those income limits, you can make a nondeductible contribution to a traditional IRA. As the name implies, you can’t deduct the contribution, but the investments still grow tax-deferred.

Now, here’s where the Roth comes in. If you don’t have any pretax money in traditional IRAs, including SEPs, SIMPLEs, and rollovers from prior employers’ plans, you can immediately convert that traditional IRA to Roth. (And by “you,” we mean that you can ignore what your spouse has.) Here’s the real bonus: Because you couldn’t deduct the contribution and because the account didn’t have an opportunity to grow, you won’t owe any taxes on the conversion. This little trick has become known as the “backdoor Roth.”

It gets complicated if you have pretax money in a traditional IRA, since the amount is prorated across all the accounts for tax purposes. For example, if you have $50,000 in pretax IRAs, and then you make a nondeductible contribution of $5,000 to a traditional IRA and immediately convert that account to a Roth, only 10 percent ($50,000 divided by $5,000) will be tax-free. However, there’s one possible way around this. You can transfer those pretax assets to your existing 401(k), if your employer allows it. The downside: 401(k)s have limited and often pricier investments, and most don’t allow individual stocks and bonds.

Finally, based solely on the math, younger people in the 15 percent or lower tax bracket who expect to build up a large portfolio over their careers should choose the Roth.

Other benefits of the Roth

That’s the math. But there are other perks to the Roth that might tip the scales in its favor if the math is fuzzy.

Contributions to a Roth IRA – not earnings – can be withdrawn tax- and penalty-free before age 59 1/2. This has its downsides, since it makes it more tempting to spend money that should be left for retirement. But there are some proponents of using the Roth IRA as a college savings account, and even an emergency fund.
Unlike the traditional IRA and 401(k), the Roth IRA does not have required minimum distributions (RMDs) at age 70 ½. The Roth 401(k) does, but you can transfer the money to a Roth IRA after you retire to get around RMDs.
Anyone who inherits a traditional IRA will have to pay ordinary income taxes on the distributions. However, the Roth account will still maintain its tax-free status. And nothing says “I love you” like giving someone tax-free retirement savings. (However, all retirement accounts are included in the calculation of whether estate taxes are due.)

The bottom line

We know the direction of tax rates (i.e., up), but we don’t know the magnitude and the targets. They’re decided by Congress, and who knows what those folks will do? Of course, they didn’t put themselves in office, which means the decision ultimately lies with the voters — and they can be even crazier. Some people argue that we can’t even assume that distributions from a Roth will remain tax-free. But just as diversification is important in your portfolio, tax diversification can also make sense. For many retiree wannabes, one way to hedge against future significant tax increases is to have at least some assets in a Roth account.

Source: getrichslowly.org

Apache is functioning normally

June 6, 2023 by Brett Tams

By Jason Topp 24 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited May 14, 2012.

Oh what a great year for debate on Roth IRA’s and Roth IRA Conversions! Roth IRAs are a great tool for building up retirement savings, but some things have changed for conversions.

2010 has ushered in some new Roth IRA rules -here’s what you need to know about the 2010 Roth conversions.

I recently received a comment from a reader that I thought garnered a little more attention. Here’s what the reader asked:

My wife and I had traditional non-deductible IRAs and converted at the beginning of this year. We assume that the Roth conversions wouldn’t cause us any tax liability since our contributions to the traditional IRAs exceeded their values at the time of the conversion. Have you heard anything about the tax implications of Roth conversions from traditional non-deductible IRAs?

So what we know from the statement above is that they converted to Roth IRAs from Traditional, non-deductible IRAs. We also know that there were no gains in the account, meaning it was strictly contributions – and they’re wondering what their tax implications will be on this move.

This is a GREAT question!

What is a Traditional Non-Deductible IRA

Let’s define what a traditional, non-deductible IRA is so that we are all on the same page.

Generally speaking a traditional IRA allows money to be contributed pre-tax, which means that you get to take a deduction for it. It’s deductible off of your gross income. This also means that when you withdraw from your IRAs this money becomes taxable at that time!

So, for example, you put in $5,000 to a traditional IRA, you are allowed to subtract $5,000 from your income, which in turn gives you less reportable income to pay taxes on.

Of course the IRS has some funky little rules to spoil how much you can stash into traditional IRAs.

Basically, if you already participate in an employer-sponsored retirement plan – meaning you have a 401k, 403b or SEP IRA etc. – AND you make too much money then you get phased out of your “deductibility” of the IRA and the contributions then turn into non-deductible IRA contributions!

It’s as if you put after-tax money into the IRA.

What are the Income Limitations for Deductible IRAs

Let’s take a look at the rules for tax year 2009:

If you are a single filer and are covered by an employer-sponsored retirement plan you begin getting phased out of your deductible IRA contributions if you have an adjusted gross income (AGI) between $55,000 and $65,000.
If you’re married filing jointly, covered under an employer-sponsored retirement plan then you begin getting phased out between $89,000 and $109,000 AGI.

If you’re making more than this then your entire contribution to the Traditional IRA is non-deductible!

What are the Tax Implications of a Non-Deductible IRA to Roth IRA Conversion

Back to the question at hand – how will this affect me on my taxes?

So here’s a couple things to consider:

What is your basis (contributions to the IRA) and what is the earnings amount? In the reader’s case they didn’t have any gains to worry about. But if they did, they’d have to pay tax on the earnings portion.
If you had no other IRAs in place (including SEP, SIMPLE and Traditional) then you’re good to go – no taxes due!
If you did have other IRAs in place, then you may not be in as great a shape as you thought – you may owe Uncle Sam!

Here’s what I mean on the last two:

The rule with a Non-deductible IRA is that you MUST aggregate all your non-Roth IRAs together as one big account when doing a Roth conversion in order to determine the tax liability.

Here’s an example:

Let’s say you have two IRAs with a total value of $30,000. One is a traditional IRA that has a $15,000 balance and all of that is pre-tax.

The other is a non-deductible IRA that includes $15,000 of nondeductible, or after-tax, contributions and no earnings as in the reader’s case.

If you decide to convert all $30,000 of your IRA money, then $15,000 (the amount you contributed to the non-deductible IRA on an after-tax basis) would not be taxable since you’ve already paid the tax on that money.

But the remaining $15,000 would be taxable because Uncle Sam hasn’t got his piece of that pie yet (it’s pre-tax contributions plus earnings that have not been taxed yet)

Let’s say you only want to convert your non-deductible IRA funds since there are no gains and you’ve already paid tax on the contributions – what happens?

In theory, this is a great strategy, but as mentioned, you have to consider all non-Roth IRAs as one big pie.

The Uh-Oh

In the example above, your already-taxed nondeductible contributions of $15,000 account for 50% of your total, while the $15,000 of pre-tax deductible contributions and investment earnings represent the other 50% of your $30,000 IRA pie.

Whether you convert the entire $30,000 or just a slice of it, 50% is considered taxable income.

It doesn’t matter where you take that slice from (non-deductible or pre-tax) – each has the same ingredients of taxable and nontaxable money as the whole!

What You Need to Do

If you find yourself in this situation, you’ll need to fill out IRS form 8606 and wade through the instructions and the mire!

Source: biblemoneymatters.com

Apache is functioning normally

June 5, 2023 by Brett Tams

Getting divorced can cause both emotional and financial upheaval for everyone involved. One of the most important questions you and your soon-to-be former spouse may have to decide centers on how to divide retirement assets.

Understanding the key issues around divorce and retirement can make it easier to untangle them as you bring your marriage to a close.

Taking Note of Your Retirement Accounts

The average cost of divorce can range from several hundred to several thousand dollars, so it’s important to know what’s at stake financially. Managing retirement accounts in divorce starts with understanding what assets you have.

There are several possibilities for saving money toward retirement, and different rules apply when dividing each. Here’s a look at what types of retirement accounts you may hold and thus will need to consider in your divorce.

401(k)

A 401(k) plan is a defined contribution plan that allows you to save money for retirement on a tax-advantaged basis. Your employer may also make matching contributions to the plan on your behalf. According to the Census Bureau, 34.6% of Americans have a 401(k) or a similar workplace plan, such as a 403(b) or Thrift Savings Plan.

IRA

Individual retirement accounts, or IRAs, also allow you to set aside money for retirement while enjoying some tax benefits. The difference is that these accounts are not offered by employers. There are several IRA options, including:

• Traditional IRAs, which allow for tax-deductible contributions.

• Roth IRAs, which allow for tax-free withdrawals in retirement.

• SEP IRAs, which follow traditional IRA tax rules and are designed for self-employed individuals.

• SIMPLE IRAs, which also follow traditional IRA tax rules and are designed for small business owners.

Each type of IRA has different rules regarding who can contribute, how much you can contribute annually, and the tax treatment of contributions and withdrawals.

💡 For more info, check out our guide on individual retirement accounts (IRAs).

Pension Plan

A pension plan is a type of defined benefit plan. The amount you can withdraw in retirement is determined largely by the number of years you worked for your employer and your highest earnings. That’s different from a 401(k), since the amount you can withdraw depends on how much you (and your employer) contribute during your working years.

How Are Retirement Accounts Split in a Divorce?

How retirement accounts are split in divorce can depend on several factors, including what type of accounts are up for division, how those assets are classified, and divorce laws regarding property division in your state. There are two key issues that must be determined first:

• Whether the retirement accounts are marital property or separate property

• Whether community property or equitable distribution rules apply

Legal Requirements for Dividing Assets

Marital property is property that’s owned by both spouses. An example of a tangible marital property asset is a home the two of you lived in together. Separate property is property that belongs to just one spouse.

In community property states, spouses have an equal share in assets accrued during the marriage. Equitable distribution states allow for an equitable — though not necessarily equal — split of assets in divorce.

You don’t have to follow state guidelines if you and your spouse can come to an agreement yourselves about how divorce assets should be divided. However, if you can’t agree, then you’ll be subject to the property division laws for your state.

If retirement assets are to be divided in divorce, there are certain steps that have to be taken to ensure the division is legal. With a workplace plan, you’ll need to obtain a Qualified Domestic Relations Order (QDRO). This is a court order that specifies how much each spouse should receive when dividing a 401(k) or similar workplace plan in divorce.

IRAs do not require a QDRO. You would, however, still need to put in writing who gets what when dividing IRAs in divorce. That information is typically included in the final divorce settlement agreement, which a judge must sign off on.

Protecting Your 401(k) in a Divorce

The simplest option for how to protect your 401(k) in a divorce may be to offer your spouse assets of equivalent value. For example, if you’ve saved $500,000 in your 401(k) and you jointly own a home that’s worth $250,000, you might agree to let them keep the home as part of the divorce settlement.

If they’re not open to the idea of a trade-off, you may have to split the assets through a QDRO. That could make a temporary dent in your savings, but you might be able to make it up over time if you continue to make new contributions.

You could skip the QDRO and withdraw money from your 401(k) to fulfill your obligations to your spouse under the terms of the divorce settlement. However, doing so could trigger a 10% early withdrawal penalty if you’re under age 59 ½, along with ordinary income tax on the distribution.

Protecting Your IRA in a Divorce

Traditional and Roth IRAs are subject to property division rules like other retirement accounts in divorce. Depending on where you live and what laws apply, you might have to split your IRA 50/50 with your spouse.

Again, you might be able to protect your IRA by asking them to accept other assets instead. Whether they’re willing to agree to that might depend on the nature of those assets, their value, and their own retirement savings.

If you’re splitting an IRA with a spouse, the good news is that you can avoid tax consequences if the transaction is processed as a transfer incident to divorce. Essentially, that would allow you to transfer money out of the IRA to your spouse, who would then be able to deposit it into their own IRA.

Divorce and Pensions

Pension plans are less common than 401(k) plans, but there are employers that continue to offer them. Generally, pension plan assets are treated as marital property for divorce purposes. That means your spouse would likely be entitled to receive some of your benefits even though the marriage has ended. State laws will determine how much your spouse is eligible to collect from your pension plan.

Protecting Your Pension in a Divorce

The best method for protecting a pension in divorce may be understanding how your pension works. The type of payout option you elect, for instance, can determine what benefits your spouse is eligible to receive from the plan. It’s also important to consider whether it makes sense to choose a lump-sum or annuity payment when withdrawing those assets.

If your spouse is receptive, you might suggest a swap of other assets for your pension benefits. When in doubt about how your pension works or how to protect pensions in a divorce, it may be best to talk to a divorce attorney or financial advisor.

Opening a New Retirement Account

Splitting retirement accounts in a divorce can be stressful. It’s important to know what your rights and obligations are going into the process. If you’re leaving a marriage with less money in retirement, it’s a good idea to know what options you have for getting back on track. That can include opening a new retirement account.

SoFi offers individual retirement accounts for people who want to invest with minimal hassle. You can open a traditional or Roth IRA online and choose between active or automated investing to fit your needs and goals.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How long do you have to be married to get part of your spouse’s retirement?

If you’re interested in getting spousal retirement benefits from Social Security, you have to be married for at least one continuous year prior to applying. The one-year rule does not apply if you are the parent of your spouse’s child. Divorced spouses must have been married at least 10 years to claim spousal benefits.

Is it better to divorce before or after retirement?

Neither situation is ideal, but divorcing before retirement may be easier if there are fewer assets to divide. Getting a divorce after retirement can raise questions over how to divide retirement and non-retirement assets. It may also lead to financial insecurity on the part of one or both spouses if the distribution of assets is unequal.

Who pays taxes on a 401(k) in a divorce?

If you’re dividing up your 401(k) prior to divorcing then you would be responsible for paying any taxes or penalties owed. Waiting until after the divorce is finalized to split your 401(k) with your former spouse could reduce the amount of taxes and penalties you owe.

Photo credit: iStock/FG Trade Latin

This article is not intended to be legal advice. Please consult an attorney for advice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
SOIN1122015

Source: sofi.com

Apache is functioning normally

June 4, 2023 by Brett Tams

By Jason Topp 8 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited November 5, 2018.

There’s been a lot of talk about Roth IRAs this year.

Some folks still aren’t sold on them – and of course no one particular investment vehicle is right for everyone.

But, for the right person, the Roth IRA is a great way to save some additional cash for retirement!

Here’s three important things to remember about investing into Roth IRAs.

You Can Access Your Principal At Any Time

This is a huge advantage! Your contributions are available to you at any point in time regardless of age and regardless of how long the money has been in the account.

Don’t confuse this with earnings. Only your principal is available, not any of your earnings.

Your earnings must stay in there until age 59 1/2 to avoid the 10% premature distribution penalty.

The great thing about this is that it makes the Roth a viable long-term investment vehicle, but also gives some flexibility in terms of needing to access the money for an emergency.

Of course, don’t start the Roth with this idea in mind – in other words, emergencies should be handled from your emergency fund, not from your Roth! But, it is nice to have this in your back pocket if you really were in a desperate situation.

There Are Income Limits

Yes, unfortunately there are income limits to these things. Of course, Uncle Sam doesn’t want any one and every one having the ability to max fund these things so they set limitations.

Generally, the IRS will phase you out of your contribution or reduce the amount you can put in if you make between two set amounts and then they will deny you a contribution altogether if you make too much.

In 2019, your Roth IRA contribution limit is reduced – or phased out in the following situations.

Your filing status is married filing jointly or qualifying widow(er) and your modified adusted gross income (AGI) is at least $193,000. You are phased out completely if your modified AGI is $203,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
If you’re a single filer and your modified AGI is at least $122,000, you’ll be phased out up to $137,000. You cannot make a Roth IRA contribution if your modified AGI is $137,000 or more.

You Do Not Get A Tax Benefit Up Front

This one is pretty basic, but it bears repeating. It seems like a lot of people ask about how the Roth IRA works. The thing to remember is that your contributions are NOT tax-deductible. You do not realize any tax benefit up front.

So someone who contributes to a traditional IRA instead of a Roth IRA (provided they meet certain qualifications) gets an immediate tax savings equal to the amount of the contribution, multiplied by their marginal tax rate. Someone who contributes to a Roth IRA, however, does not get this immediate tax reduction.

Contributions to a Roth IRA do not reduce a taxpayer’s adjusted gross income (AGI). Compare that to a Traditional IRA where contributions reduce a taxpayer’s AGI.

Because you are using after-tax dollars for contributions, if you fund a Roth while in a moderate or high tax bracket, you will likely pay more income taxes on the earnings used to make the Roth IRA contribution than a Traditional IRA contribution.

This is simply because, as stated, contributions to traditional IRAs or employer sponsored tax deductible retirement plans result in an immediate tax savings equal to the taxpayer’s current marginal tax bracket multiplied by the amount of the contribution.

If you think your income in retirement will be lower, or that you will be in a lower tax bracket than what you are in right now, then that means you may be paying more tax on that money now than you would in the future. The higher your marginal tax rate, the greater the disadvantage.

Don’t forget though, that if you don’t diversify yourself from a tax standpoint you could be creating a huge retirement time-bomb for yourself!

What are your thoughts – Do the advantages of the Roth outweigh the disadvantages? Tell us your thoughts in the comments!

Source: biblemoneymatters.com

Apache is functioning normally

June 2, 2023 by Brett Tams

By Peter Anderson 11 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 25, 2010.

Over the past week we’ve been writing quite a bit about retirement accounts, which ones are better for different situations, and talking about what the Roth IRA contribution limits are. Now I want to talk about another hot topic in retirement accounts, the 2010 Roth IRA conversion.

In case you haven’t heard all the buzz, this year marks a one time Roth IRA conversion event in which people can convert their traditional IRA’s, SEP IRA’s, Simple IRA’s, old 401k’s, old 403b’s into a tax free Roth IRA account. Because of the conversion event, waves of people are expected to take advantage this year and convert their traditional taxable investment accounts into tax free Roth IRA accounts.

Is It A Good Idea To Convert My Traditional IRA To A Roth IRA?

Before you even go down the road of converting your traditional taxable accounts, you’ll need to think about whether or not converting them is a good idea for your situation. There has been a lot of talk about it throughout the blogosphere, with some saying it’s a great idea for most to have their money grow tax free, while others aren’t as enthused because it seems like a way for the government to collect tomorrow’s tax income today, at a higher rate. As always consulting a financial professional before you make any moves is a good idea.

Among the things you need to consider:

Do I want to pay tax now or later? Depending on what your tax rate is currently vs. when you retire, your amount of tax can vary quite a bit. The problem is, it can be hard to guess what tax bracket you’ll fall into in the future, much less predict if tax rates will go up in the future.
Is my income too high to contribute or convert to a Roth IRA in the future? If you want to do a bit of tax diversification and your income is currently too high to contribute to a Roth IRA, this year may be one of your few chances to convert your traditional taxable account to a Roth.
Do I want to spread out my tax liability from converting? As part of the conversion event people who convert will be able to spread out their tax liability over 2011 and 2012.

Benefits Of The 2010 Roth IRA Converson

There are quite a few benefits of converting to a Roth IRA this year

$100,000 AGI rule removed: 2010 is big for so many because the $100,000 MAGI rule is lifted, making a conversion possible for even higher earning singles and couples. Previously only singles and married couples making less than $100,000 were able to convert.
Tax doesn’t have to be paid 2010: 2010 is the year that you’ll actually convert to the Roth IRA, but the income to be claimed on your taxes is able to be deferred until 2011 and 2012. You can claim 50% of the conversion amount as income in 2011 and the other 50% in 2012. Remember, this stipulation is only good for the 2010 tax year, and then goes away.
You can convert a 401k directly to a Roth IRA: If you have a 401k from an old employer, or another old retirement account, you can convert those this year as well.
Tax free growth of assets, and tax free withdrawals: Converting means the money will grow tax free, and won’t have minimum distribution requirements once you turn 70 1/2.

Contribution Income Limitations Still Exist For New Roth IRA Contributions

Even though high income earners can convert their existing retirement accounts in 2010, that doesn’t mean that new contributions to their converted Roth IRA are allowed. If you’re over the IRA contribution phase out limits, you won’t be able to make new contributions to your Roth IRA.

How To Convert To A Roth IRA

Converting your IRA to a Roth IRA is going to be very similar to rolling over an account from an old 401k to a rollover IRA. If you’re not changing brokers or investment houses it may be as simple as filling out a form. The key is to contact a financial professional who can give you advice for your specific situation.

Are you going to be rolling over a Traditional IRA into a Roth IRA this year? If so, do you plan on deferring the taxable income into 2011 and 2012? If not, why are you decided not to convert? Tell us your story in the comments.

Source: biblemoneymatters.com

Apache is functioning normally

June 1, 2023 by Brett Tams

By Peter Anderson 3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 11, 2017.

At the end of October the IRS released their 2011 IRA contribution limits. If you have a Roth IRA (and you should), you’ll want to keep a close eye on the amount you’re allowed to contribute each year, because from time to time the amount does go up. When it does, you want to make sure to take advantage.

As we thought, the allowed contribution amounts have not changed this year, although the income phaseout limits have seen some small changes.

Contribution Limits For 2011 For Roth And Traditional IRAs

The contribution limit for the 2011 tax year is $5,000 for both Roth and Traditional IRAs, for people under the age of 50. If you’re older than 50 you can make a catch up contribution to your account of $1000, which brings your limit to $6,000.

You can contribute to a Roth IRA and a Traditional IRA in the same year, however, you need to remember that the $5000 limit is a combined total for both account types. You can’t contribute $5000 to each type, just a total of $5000 (or $6000 if you’re over 50.)

So if you contribute $3000 to your Roth IRA, you can only contribute $2000 to your Traditional IRA

Here’s a table showing the 2011 Traditional and Roth IRA contribution limits, along with the limits in years past.

Year	Age 49 and Below	Age 50 and Above
2002-2004	$3,000	$3,500
2005	$4,000	$4,500
2006-2007	$4,000	$5,000
2008-2012	$5,000	$6,000
2013-2018	$5,500	$6,500
2019-2022	$6,000	$7,000
2023	$6,500	$7,500

AGI Based Income Phaseouts For Traditional And Roth IRAs For 2011

Once you reach a certain income level, the amount you can contribute to a Roth IRA or Traditional IRA starts getting phased out, and at a certain point your ability to contribute is taken away altogether.

For Roth IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $107,000 begin to see their contribution limit drop until at $122,000 it goes away completely. The limits for Married Filing Jointly investors are $169,000-$179,000.

For Traditional IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $56,000 begin to see their contribution limit drop until at $66,000 it goes away completely. The limits for Married Filing Jointly investors are $90,000-$110,000.

IRA Type	Single	Married Filing Jointly
Roth IRA	$125,000 – $140,000	$198,000 – $208,000
Traditional IRA	$66,000 – $76,000	$104,000 – $124,000

Contributions To Your IRA Can Happen Until April 15th The Following Year

One important thing to keep in mind with IRAs is that if you haven’t already contributed the full amount to your Traditional IRA or Roth IRA for the 2010 tax year, you can still open a Roth IRA and contribute to the accounts up until tax day, April 15th, 2011.

If you do make a contribution in 2011 before tax day, make sure you specify which tax year the contribution is being made for.

Roth IRA And Traditional IRA: How Are They Different

The main difference between Traditional IRA and Roth IRA accounts is when you’ll pay taxes on the money. Traditional IRA accounts have money that is put in pre-tax. Because no taxes have been taken out yet, your distributions will be taxed in retirement.

Roth IRA contributions are made with dollars that have already been taxed. Because the money has already been taxed, it will grow tax free and not be taxed at withdrawal. I like that.

For a complete look at where to open a Roth IRA before the year is out, check out this article: Where Is The Best Place To Open A Roth IRA?

Do you currently have a Traditional IRA or Roth IRA? Are you contributing to the limit? Which account type do you prefer? Tell us your thoughts in the comments.

Source: biblemoneymatters.com

Apache is functioning normally

June 1, 2023 by Brett Tams

By Jason Topp 4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited June 27, 2010.

Everyone should be saving into a Roth IRA for retirement!

Have you heard those words before?

I’ve seen them strewn about the web here ‘n there on various blogs or in comments on other personal finance sites.

Is that true? – Should everyone be saving into a Roth IRA?

Not exactly.

Although Roth IRA’s have become a very popular retirement account over the last 10 years, and have contributed greatly to the whole “Tax Diversification” conversation, there are still some scenarios where they don’t make sense.

Let’s take a look at three reasons why you should NOT use a Roth IRA for retirement savings.

You Make Too Much Money

We all wish we had this problem right? Uncle Sam doesn’t want you to put money away that will be completely tax free if you are a high-income earner. They will actually phase you out of your contributions beginning at a certain income.

What exactly is a high-income earner?

Well, here is the breakdown for Roth retirement savings:

If you are a single filer and you earn between $105,000 and $120,000 you start getting phased out. Anything above $120,000 you cannot contribute to a Roth IRA.

If you are married filing jointly and make between $167,000 and $177,000 you get phased out. Anything above $177,000 you cannot contribute to a Roth!

So, here’s how this would apply – let’s say you are married and you’re knocking down$165,000 and you think your income is going up – do you really want to open a Roth IRA for possibly one year and then get phased out? Probably not, but at the very least you want to double check your figures and do what’s best for you.

So, if you make too much money – a Roth IRA may not make sense for you – or may not even be allowed.

Your Tax Bracket Will Be Lower in Retirement

Tax rates are at an all time low! What are the odds they’ll be going up soon? I’d say good to very good!

That being said, we generally don’t know for sure what tax rates will be when we retire.

Most folks do assume their brackets will be lower – and for good reason. If you’re making decent money through your peak earning years and expect your income to decrease drastically in retirement then there is a good chance you’ll have a lower bracket.

The reason you may not want to contribute to a Roth IRA in this case is because Roth IRAs use after-tax money for contributions. That means you’ve already paid the tax on it (in a higher bracket mind you) and will be pulling it out in a lower tax bracket.

The tax savings would not be legitimized if you are in a higher bracket now and a lower one later.

The difficult part is that we don’t know for sure what our brackets will be and also most folks want to maintain standard of living and might need the same amount of income in retirement, which means you need to carefully consider some numbers and figure out what the best route would be for you.

You Are Already Maxing Out a Traditional IRA for Retirement Savings

Let’s say that for whatever reason (you don’t have a 401k through work or you are using a Non-deductible IRA and then converting to a Roth) you are contributing to a Traditional IRA and are thinking about starting a Roth IRA – you need to be aware of the IRA contributions limits.

In other words, Uncle Sam only allows you to contribute a certain amount to all IRA’s no matter what kind.

So, if you are under 50 years of age, you can contribute up to $5,000 per year into an IRA. If you are over 50 – you can contribute up to $6,000.

If you are contributing the full $5,000 to a Traditional IRA, you cannot contribute another $5,000 to a Roth. It’s only $5,000 total!

So, where a Roth IRA would not make sense is if you really need the Traditional IRA to help lower your taxable income now rather than caring so much about tax-free down the road.

In that case you may want to max fund your Traditional IRA to reap tax benefits now.

If you are not max funding your Traditional IRA, you could split the difference (i.e. $2,500 to a Traditional and $2,500 to a Roth), but only if it makes sense for you from a tax standpoint after running some numbers.

What Are Your Thoughts?

Source: biblemoneymatters.com

Apache is functioning normally

June 1, 2023 by Brett Tams

Financial success can be due to making good decisions or avoiding big mistakes. In many cases, the biggest mistakes happen after good decisions, because the stakes have become higher.

As an example, let’s consider the dilemma of Motley Fool reader Jim, who emailed us this question: “Did I make a substantial error when taking money out of my IRA?”

To help answer that question, Jim sent along some details:

He’s retired.
His IRA was worth $325,000.
He couldn’t get a mortgage.
He used $150,000 of his IRA to buy a house.
He receives $24,000 annually from Social Security.

Now, that’s not all the information we’d need to determine whether he treated his IRA with TLC. But from what he told us, I’m going to make an initial diagnosis: He made a few mistakes.

As a cautionary tale for all us retiree wannabes, let’s take a look at some important lessons from Jim.

Lesson #1: Crunch your numbers before you retire

The good thing that Jim did was save for retirement. In fact, he had a bigger nest egg than most retirees, according to the Employee Benefit Research Institute’s 2012 Retirement Confidence Survey. Only 15 percent of the participating retirees reported having more than $250,000 saved up.

Unfortunately, being significantly above average still may not be good enough, especially since it’s my opinion — based on studies and anecdotal evidence — that too many people retire too early. (NPR’s series about Americans working longer mentioned a woman in her 90s who had to go back to work.) Having more than most retirees may be like being one of the best players on the practice squad.

Determining whether you have enough to retire can be a complicated analysis, perhaps best done by paying a fee-only financial planner who charges by the hour or by the project — such as many of the folks in the Garrett Planning Network — to help with the ‘rithmetic. However, for the purposes of this article, we’ll use the 4 percent withdrawal rate rule: a rule of thumb that says retirees should withdraw no more than 4 percent of their portfolio in the first year of retirement, and then adjust that amount every subsequent year for inflation. (There’s plenty of debate about whether 4 percent is actually best number, but it’s good enough for this discussion.) So, 4 percent of Jim’s $325,000 IRA is $13,000. Add it to Social Security, and he has income of $37,000.

But wait! He no longer has $325,000. That’s because he didn’t know about Lesson #2, which is…

Lesson #2: Get a mortgage before you retire

Ideally, you kill your mortgage (after all, “mort” is “death” in Latin, and the “gage” part means “pledge”) before you quit your job. However, if you’re in the position of needing a mortgage in your 60s, you’ll be more likely to get one while you’re still working because you’re still earning a paycheck and likely have a higher income. Also, it’s against IRS rules to use an IRA as collateral for a loan.

Lesson #3: Avoid large traditional IRA distributions

Unfortunately for Jim, he didn’t get a mortgage, so he made a $150,000 withdrawal from his IRA. Assuming this is a traditional tax-deferred IRA, that withdrawal was taxed as ordinary income — likely vaulting him from the 15 percent tax bracket to the 28 percent tax bracket. Thus, to have $150,000 to spend on a house, he likely would have withdrawn something closer to $180,000 to cover both the price tag and tax tag.

All still may not be lost

Assuming Jim has $145,000 left in his IRA (i.e., he withdrew $180,000 from the $325,000 he had), applying the 4 percent rule of thumb to that amount (resulting in $5,800), and adding that to his Social Security ($24,000) gives Jim an estimated annual income of approximately $29,800. According to the Department of Labor’s 2010 Consumer Expenditure Survey, the average household led by someone age 65 or older has annual expenditures of $36,802. Jim might be OK if he keeps his retirement modest; he doesn’t have a mortgage, so he just needs to worry about maintenance as well as food, utilities, transportation, taxes (which will be low for him going forward), and health care (not so low, and growing). Also, if he needs extra funds, he can get a reverse mortgage, which could add another few thousand dollars of annual income, depending on his age. However, this doesn’t leave much room for unexpected big-ticket home repairs or health repairs.

Even though he’s retired, it’s not too late for Jim to crunch his numbers to determine whether he can be reasonably sure that his portfolio will last the rest of his life. If it looks like that isn’t likely, then he has to change one of the key variables – income (i.e., go back to work), expenses (lower them further), or life (shorten it — the least-attractive option). Even working for a few more years, even part-time, can have a powerful impact on your retirement security. And it’s better to do it now rather than wait until your 90s.

Source: getrichslowly.org

Apache is functioning normally

May 31, 2023 by Brett Tams

The Traditional IRA and its offshoots (SEP, SIMPLE, rollover and Roth IRAs) play a leading role in helping millions of U.S. taxpayers invest for retirement. However, many IRA owners are unaware of the opportunity they have to consolidate their multiple IRAs by using a “Super IRA” strategy (most common is a rollover 401k).

An IRA consolidation strategy can lead to reduced fees and increased buying power. I’ve had several instances where an individual has had several old retirement plans from previous employers. That has included defined benefit plans, 401k’s, TSP’s, 403b’s and Keough plans. The paperwork alone was cumbersome, and consolidating has made tremendous sense.

If you like this article, please be sure to also check out 401k Tips: What Not To Do, Rollover IRAs Offer a Wide Range of Benefits, 7 Things To Know About The 2010 Roth IRA Conversion

IRA Consolidation Case Study

The following is a common scenario involving a worker (Patrick) who has changed jobs several times throughout his career. He has been diligent about saving for retirement, but his assets are scattered. An IRA consolidation strategy is suggested, and the section concludes with a three-step action plan for investors like Patrick.

Patrick’s Profile:

Frequent job changer, age 62, is approaching retirement.
He has lost track of his numerous retirement savings arrangements.
He turns to his advisor for help with simplifying his financial affairs.

During his career, Patrick has accumulated various retirement accounts but has lost track of the status of each. He is 62 years old and is thinking of retiring from his current job. He has three retirement plans with former employers [a profit sharing plan, a target benefit plan and a 403(b) plan], four Traditional IRAs, a SIMPLE IRA, two Roth IRAs, an Individual(k) plan he established when he owned his own business, and a Thrift Savings Plan he now has as an employee of the federal government.

He is also the beneficiary of his deceased wife’s nonqualified deferred compensation plan and her Traditional IRA. In an effort to simplify his life, he turns to his financial planner for help. This is a strong case for implementing the “Super IRA” consolidation strategy.

How to implement the Super IRA Consolidation strategy

Step 1: Understand the Rules

A person who owns multiple SEP IRAs and Traditional IRAs can combine them into one “Super IRA” at any time.
If the person also owns a SIMPLE IRA, he or she can transfer or roll it to a “Super IRA” after participating in the SIMPLE IRA plan for at least two years. The two-year period begins when the first SIMPLE IRA plan contribution is made to the individual’s SIMPLE IRA.
A “Super IRA” can receive ongoing SEP plan contributions and annual Traditional IRA contributions.
Ongoing SIMPLE IRA plan contributions must first be contributed to the participant’s SIMPLE IRA. If the individual has participated in the SIMPLE IRA plan for at least two years, he or she can transfer or roll over the SIMPLE IRA into one “Super IRA.” (Note: special rollover rules may apply.)
A “Super IRA” can receive rollovers of eligible assets from all types of qualified retirement plans [e.g., 401(k) plans, profit sharing plans, defined benefit plans, etc.], 403(b) plans, 403(a) plans and governmental 457(b) plans.
A Roth IRA cannot be transferred or rolled over into a “Super IRA.” Multiple Roth IRAs can be combined to create a “Super Roth IRA.” Under the Pension Protection Act of 2006, effective in 2008, participants in qualified plans, 403(b) plans and governmental 457(b) plans can directly roll over eligible plan assets to Roth IRAs if conversion rules are satisfied.
Spouse beneficiaries of qualified plans and SEP, Traditional and SIMPLE IRAs generally can consolidate their inherited accounts into their own “Super IRA.”

Step 2: Consider the Potential Benefits of a “Super IRA” Strategy

Increased buying power, which allows for more sophisticated investment strategies
One fee vs. multiple fees
Simplified investment tracking
Beneficiary organization and consolidation
Consistent service
Streamlined paperwork
Simplified retirement income planning

Step 3: Work With Your Advisor

Investors should work with their advisors to determine whether a “Super IRA” asset consolidation strategy makes sense for them.

In our scenario, Patrick’s planner asks him the following key questions:

Do you have the most recent statements from each of your retirement accounts?
What type of investments do the plans hold?
Are any of your retirement plans invested in employer securities?
Is your goal to consolidate your accounts as much as possible?
How long has it been since you first participated in the SIMPLE IRA plan?

Patrick’s goal is to consolidate as many of his retirement accounts as he can into one “Super IRA.” He obtains copies of his most recent retirement account statements to review with his advisor. He first participated in the SIMPLE IRA plan a year and a half ago. He does not hold employer securities as a plan investment.

After reviewing the statements, Patrick and his planner determine he could combine the following retirement accounts into a “Super IRA”:

Profit sharing plan
Target benefit plan
403(b) plan
Five Traditional IRAs (the four he owns outright and his inherited IRA)
Individual(k) plan

In another six months (two years after first participating in the SIMPLE IRA plan), he could transfer or rollover that balance to his “Super IRA” as well. Patrick cannot combine his two Roth IRAs into his “Super IRA,” although he could consolidate them into one “Super Roth IRA.” And he cannot roll over the nonqualified deferred compensation plan. Although he could combine the plans as outlined above into one “Super IRA,” it would be best for Patrick and his planner to carefully examine the types of investments currently held by the various plans to see if a rollover is the wisest course of action from a taxation standpoint.

For example, special tax rules apply to distributions of employer securities from qualified retirement plans. This would be case of NUA or Net Unrealized Appreciation. Keep in mind, a consolidation strategy may not always be suitable. An advisor, or a tax or legal professional, can help identify the best course of action to incorporate the best investment services.

Source: goodfinancialcents.com

Save Taxes on Down The Road With The Roth IRA

Will Tax Rates Get Cheaper?

More Roth IRA Details

Related Posts

What is a Traditional Non-Deductible IRA

What are the Income Limitations for Deductible IRAs

If you’re making more than this then your entire contribution to the Traditional IRA is non-deductible!

What are the Tax Implications of a Non-Deductible IRA to Roth IRA Conversion

The Uh-Oh

Whether you convert the entire $30,000 or just a slice of it, 50% is considered taxable income.

What You Need to Do

Related Posts

Taking Note of Your Retirement Accounts

401(k)

IRA

Pension Plan

How Are Retirement Accounts Split in a Divorce?

Legal Requirements for Dividing Assets

Protecting Your 401(k) in a Divorce

Protecting Your IRA in a Divorce

Divorce and Pensions

Protecting Your Pension in a Divorce

Opening a New Retirement Account

FAQ

How long do you have to be married to get part of your spouse’s retirement?

Is it better to divorce before or after retirement?

Who pays taxes on a 401(k) in a divorce?

You Can Access Your Principal At Any Time

There Are Income Limits

You Do Not Get A Tax Benefit Up Front

Related Posts

Is It A Good Idea To Convert My Traditional IRA To A Roth IRA?

Benefits Of The 2010 Roth IRA Converson

Contribution Income Limitations Still Exist For New Roth IRA Contributions

How To Convert To A Roth IRA

Related Posts

Contribution Limits For 2011 For Roth And Traditional IRAs

AGI Based Income Phaseouts For Traditional And Roth IRAs For 2011

Contributions To Your IRA Can Happen Until April 15th The Following Year

Roth IRA And Traditional IRA: How Are They Different

Related Posts

You Make Too Much Money

Your Tax Bracket Will Be Lower in Retirement

You Are Already Maxing Out a Traditional IRA for Retirement Savings

Related Posts

IRA Consolidation Case Study

How to implement the Super IRA Consolidation strategy

Step 1: Understand the Rules

Step 2: Consider the Potential Benefits of a “Super IRA” Strategy

Step 3: Work With Your Advisor