Roth IRA Conversions Early in 2016 Present Potential Advantages

Let’s face it. The stock market has declined a lot in the past few months.

Many people wonder if they should move to cash and do nothing with their investments. While we do not recommend trying to time the future moves in the stock market, the reality is that it is better to buy low and let it grow more in the future. This is especially true for Roth IRA conversions which result in long-term advantages when the account grows after the conversion. So maybe the time to convert is now.

Lange Roth IRA Money Nest Egg

But, what if the market continues to decline after you convert? One good thing about the current tax law is that you can undo a 2016 conversion as late as April 15, 2017 and perhaps even to October 15, 2017. This gives you a long time, over a year, to see if it grows. If it really dives after you convert, you can even do another conversion at a lower price and undo the first conversion later. The technical term for the undoing of a conversion is a recharacterization, because the Roth IRA is recharacterized as a traditional IRA by moving it back to the original or a different traditional IRA account. Converting early in the year is often recommended as it gives the account more time to grow before a decision must be made on a potential recharacterization.

We have written many articles about Roth IRAs and Roth conversions and included discussions of the extensive advantages they provide. We discuss conversions in our book Retire Secure! and we have written an entire book on Roth IRAs called The Roth Revolution. Both of these books can be purchased on Amazon, but we would be happy to send you a copy for free. To receive a free copy, call us at 412-521-2732, or email admin@paytaxeslater.com and ask for one. Just reference this newsletter offer! These articles and discussions go into much deeper detail on the many strategic ways to do Roth conversions to your advantage, depending on your current situation.

The Roth conversion amount will add to your taxable income, so there are many tax traps to consider when deciding how much to convert, such as …

  • Higher tax rates and related tax surcharges and phaseouts of deductions first implemented for 2013 could result in extra tax if you convert too much.
  • For people who are covered by Medicare parts B and/or D, and pay Medicare premiums, converting too much in 2016 can raise the Medicare premiums in 2018.
  • Also, for medium- or lower-income people who get Social Security income, a conversion can make more of the Social Security subject to tax and also can turn tax-free long-term capital gains and qualified dividends into taxable amounts.

However, paying extra tax can sometimes be worth it in the long run if the Roth IRA account grows a lot after the conversion. These are just some of the things that should be considered in determining the best conversion amount.

Other considerations include the current and future financial and income tax situations of you and your beneficiaries. As we move further into an election year, the possibility of tax law changes looms ahead. Since future tax laws can affect the long-term success of a conversion early in 2016, they should also be considered.

Due to all these considerations and more, we stress the importance of “running the numbers” to be certain that the decisions you are making about Roth IRA conversions are absolutely right for your situation. In general, we like Roth IRA conversions for taxpayers who can make a conversion and stay in the same tax bracket they are currently in, and have the funds to pay for the Roth conversion from outside of the IRA. It is best to run the numbers to determine the most appropriate time and amount for your situation. This is a service that we have provided for hundreds of clients and currently offer free for our assets under management clients. We like to do these number running sessions with the clients in the room. This allows them the opportunity to bring up questions, adjust the scenarios, and feel extremely comfortable with the final decisions.

We usually find many people hesitant to make any changes in their investments when they decline in value. However, you should not pass up the opportunity to do a Roth conversion in a troubled market, as it could provide you and your family more financial security in the long run. Because of the many things to be considered when doing a Roth conversion, we suggest you discuss how much to convert in 2016 with your qualified advisor.

If you are interested about learning about whether a Roth IRA conversion is right for you, please click here and fill out our pre-qualification form. If you qualify, we will contact you to schedule an appointment with either James Lange or one of his tax experts.

Unfortunately, this Free Second Opinion is for qualified Western Pennsylvania residents only.

4 Reasons Why We’re Excited that Retire Secure! is Interactive on the Web!

If you haven’t made your way to www.langeretirementbook.com yet, now is the time!

Here at the Lange Financial Group, LLC, we are very excited to bring you an interactive version of Retire Secure! A Guide to Getting the Most Out of What You’ve Got. 

Reason #1 – The entire book is on this website. Yes, all 420 pages of the book, including the front and back covers, all about the best strategies for retirement and estate planning. 
James Lange, Retire Secure, Lange Retirement Book, Interactive
Reason #2 – The book is divided into chapters for ease of reading. Meaning, you don’t have to flip through 400-some pages to get to Chapter 11 – The Best Ways to Transfer Wealth and Cut Taxes for the Next Generation.
James Lange, Retire Secure, Lange Retirement Book, Interactive
Reason #3 – We honestly haven’t seen anything like this before. Granted, I’ve read magazines on viewers where you can flip the pages as you read. But not a website for a book that includes a viewer, as well as a forum where readers can engage with each other.
The comments are moderated by the Lange Financial Group, LLC staff and myself. One of us will reply to your comment as soon as we can. To leave a comment, all you need to do is connect with your Amazon, Facebook, or LinkedIn account. This measure is for your protection, as well as ours. We don’t want spammers posting comments or incorrect information about such an important topic. 
James Lange, Retire Secure, Lange Retirement Book, Interactive
 
Reason #4 – We are hoping this interactive website encourages you to purchase the book! Retire Secure! is available from Amazon and JamesLange.com. Once you’ve read the book, feel free to return to LangeRetirementBook.com to ask questions, as well as Amazon and Goodreads to review the book for the benefit of others.

 

Is It a Good Idea to Roll Over Your 401K to a Traditional or Roth IRA?

Roth IRA, James Lange, Retire Secure A Guide to Getting the Most Out of What You've GotEarlier this year, President Obama announced that he wants to create new rules that give financial advisors a “fiduciary” status under the law. I welcome this wholeheartedly because a fiduciary is required to always put his clients’ interests ahead of his own. This means that a financial advisor cannot make investment recommendations based on the commission they would receive from the investment, and that they must first consider the benefits that would be received by their client. As a fee-based advisor I have always served as a fiduciary to my clients and believe that it is an immensely important role.

I find it sad that we have to pass laws to make sure that the client’s interests are protected, but think that the President is on the right track with this one. More often than not, I hear of financial advisors who are only looking for a commission telling retirees that there’s no reason to not roll their old retirement plans to an IRA. That is simply not true and, in fact, there are circumstances where a retiree will be well served by keeping all or part of his or her retirement money in the original work plan.

These scenariosare discussed in detail in Chapter 6 of the new edition of Retire Secure! If you’ve wondered if rollingyour old 401(k) to an IRA is a good idea, you may very well find that you could save yourself from making a terrible financial decision by weighing all the potential advantages and disadvantages.

Many work plans give employees the opportunity to contribute to both pre-tax and after-tax accounts. If you ultimately decide that rolling your 401(k) to an IRA is the best course of action, you should make sure that you read Chapter 6 to educate yourself about the brand new IRS ruling that applies to your after-tax contributions. This ruling gives retirees an unprecedented opportunity to roll part of your 401(k) to a Roth IRA and, if done properly, the transaction will be completely tax free.

Check back soon for the latest information on Roth conversions!

Thanks for Reading!

Jim

Jim Lange A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

More on Retire Secure! Third Edition… Coming Soon!

Retire Secure! Third Edition, A Guide To Making The Most Out Of What You've Got, James LangeThe third edition of Retire Secure!, Retire Secure! A Guide to Making the Most Out of What You’ve Got is set to be released in the coming months, (stay tuned for exact date). This revised Third Edition of Retire Secure! covers how to develop an estate plan that, among other goals, seeks to continue the tax-favored status of your retirement plans or IRAs long after your death using the stretch or inherited IRA—a strategy that has been, and continues to be, threatened by congress. Lange has a history of staying ahead of the curve, seeing trends and changes in the tax laws and developing strategies for his clients in advance to keep them on the right path toward their financial goals. He was among the first to predict the coming changes to the tax law on Roth IRAs and wrote a peer-reviewed article for The Tax Advisor (official journal of the AICPA) that would go on to win article of the year in 1998. He is continuing this trend in this Third Edition by laying out the possibility of the death of the stretch or inherited IRA as we know it, and providing avenues to reach the same or better outcomes for your family including the use of charitable remainder unitrusts, or CRUTS and life insurance.

Lange offers up plenty of new content in this Third Edition including cutting edge analysis on the unique synergy between Roth IRA conversions and Social Security Maximization that his office has been developing. Using Social Security maximization techniques including spousal benefits like “Apply & Suspend,” and timing small appropriate Roth IRA conversions to take advantage of lower tax brackets in retirement can make hundreds of thousands of dollars of difference in your retirement portfolio… and he’s got the study to prove it.

Virtually every chapter of Retire Secure! contains recommendations, analysis, and case studies that have come from a deep understanding of tax law, estate planning, investing, and “running the numbers” and are proven to work.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

Jim LangeA nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train ad educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

Please complete the form below to receive reminders about the upcoming release of Retire Secure! Third Edition

Retire Secure Third Edition Coming Soon!

Retire Secure! Third Edition, A Guide To Making The Most Out Of What You've Got, James LangeNow more than ever, one question plagues millions of Americans approaching or already in retirement, “Will my money last as long as I do?”

While no one can answer these questions with complete certainty, you can do three things to significantly improve your odds—develop an appropriate portfolio, cut your taxes, and take advantage of strategies that will improve your retirement income like Social Security benefit maximization combined with timely Roth IRA conversions.

Retire Secure Third Edition

Due for release in a couple of short months this edition explains how you can use IRAs, retirement plans, Roth IRAs and Roth 401(k)s, Roth IRA conversions, and Social Security techniques like “Apply & Suspend” as well as other tax-favored strategies to let Uncle Sam subsidize your retirement and your family’s lifestyle for the remainder of you and your spouse’s life, and perhaps beyond.
The information and examples in this Third Edition of Retire Secure! draws from the more than thirty years’ experience James Lange has as a practicing CPA. Lange provides critical advice for all stages of IRA and retirement plan savings and distribution, covering the best strategies to accumulate wealth while you are still working as well as the best strategies to spend your IRAs and retirement plans once you are retired and doing your legacy planning. Lange explains how to maximize tax-deferred savings during the accumulation phase and reveals the most tax-efficient ways to withdrawal money from your account during retirement.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

Jim LangeA nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train ad educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

More information to come on the next blog post.  Stay tuned!

One Key to Financial Planning… a Roth IRA Conversion

Roth IRA Conversion, James Lange, Lange Financial Group, LLCIf you’re approaching retirement, you might want to consider a Roth IRA conversion. A recent change to tax laws allows for the conversion to Roth IRAs, 401(k)s, and 403(b)s to gain enhanced benefits. For one, the changes made in 2010 have no income cap for Roth IRA accounts. Previously, only incomes of $100,000 were eligible for conversion.

If you’re still not sure, consider these factors that can help lead your family to financial stability.

For the most part, Roth IRAs grow incometax free. Additionally, owners are not required to take distributions at age 70 ½. Roth IRAs grow continuously as long as you or your grandchildren own it; whereas, regular IRAs are tax-deferred. The growth and investment are both taxed when money is withdrawn.

With the income cap of $100,000 gone, the Roth IRA becomes all the more appealing for retirees. At least a partial conversion is recommended, though the converted amount will require tax payment. However, as long as the conversion is strategic, your family can reap the long-term benefits. For example, converting $100,000 today can put you over $51,000 ahead in the next
20 years.

If tax rates increase, the conversion to Roth IRA sees the benefits, because conversion at a lower tax can help cut back taxable income as rates increase. While you’re planning a financial future for your loved ones, keep in mind that your living will and trust don’t necessarily establish who will inherit your IRAs, Roth IRAs, and retirement plans. Specify your IRA and retirement plan beneficiaries. For those still unconvinced, Lange Financial Group makes a limited number of free consultations available to Western PA residents. Because each case is different, it’s important to run the numbers on a case-by-case basis to find a solution that best fits you. If you want to further discuss the benefits of Roth IRA conversions, call Alice Davis, our Client Services Coordinator, at 412-521-2732 to schedule an appointment.

Back Door IRA, The Conclusion

Roth-IRA-conversions,James-LangeRecharacterizations

Converting to a Roth IRA also comes with another very unique advantage. The IRS allows you a one-time opportunity to recharacterize or “undo” this conversion by October 15th of the following tax year. IRS publication 590 states that, “a recharacterization allows you to ‘undo’ or ‘reverse’ a rollover or conversion to a Roth IRA. To recharacterize, you generally instruct the trustee of the financial institution holding your Roth IRA to transfer the amount back to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution)”. In the case of a Backdoor Roth IRA, you probably won’t think about recharacterizing. However, if you want to explore this option, we are here to help assist you, because like many of the other rules involved this can be complicated.

Conclusion

While Backdoor Roth IRAs can be beneficial to many investors, they aren’t for everyone. They come with their limitations and complications. There are precautions that need to be taken to reap the full benefits of any financial decision. This is an area where a highly informed financial advisor can help you make an educated and calculated decision. You should always consult with your financial advisor and tax professional to help avoid tax ramifications.

As always, we are here to help and can look at your specific financial situation and chart the right path for you. If you are interested in learning more about whether or not a Backdoor Roth would be right for you and your specific situation, please call us and we would be happy to discuss this with you. As always, we enjoy the opportunity to assist you in addressing your financial matters.

Financial Check-Up

 

Complimentary Financial Check-up

If you are currently not a client of The Lange Financial Group, we would like to offer you a complimentary, one-hour, private consultation with one of our professionals at absolutely no cost or obligation to you.

To schedule your financial check-up, please call 412-521-2732 or fill out our Pre-Qualification Form here.

Thank you,
James Lange

 

 

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Roth IRA account owners should consider the potential tax ramifications, age and contribution deductibility limits in regard to executing a re-characterization of a Roth IRA to a Traditional IRA.

The views stated in this letter are not necessarily the opinion of The Lange Financial Group, LLC, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. © Academy of Preferred Financial Advisors, 2014

 

Benefits of a Roth IRA

Back Door IRA, James Lange, Pittsburgh, Retirement Planning

There are numerous benefits to converting to a Roth IRA. Please remember, it is important to review all of your retirement accounts before converting to a Roth IRA. Some benefits of a Roth IRA include;

• Required minimum distributions are not obligatory until the participant’s death.

• Withdrawals are tax free.

• They pass onto your heirs income tax-free.

• You can compound your investments in a tax-free fashion.

 

Am I a Candidate for a Backdoor Roth IRA?

Backdoor Roth IRAs can be appropriate for investors who:

  • Only have retirement account through their jobs (i.e. 401k’s) and want to increase their retirement savings in tax-advantaged accounts, but whose income is too high to qualify for standard Roth IRA contributions; and
  • Have the time and ability to wait for five years or until they are 59 ½ to avoid the 10% penalty on early withdrawals. (If you open and make contributions to a Roth IRA in the standard manner, i.e. not through conversion, you are not subject to this rule).

A Backdoor Roth IRA is probably not recommended if you:

  • Are over the age of 70½ and can no longer contribute to a traditional IRA.
  • Don’t want to contribute more than the maximum retirement limit through your workplace retirement account.
  • Already have money in a traditional IRA and because of the Pro Rata rule may end up in a non-tax advantageous position when converting to a Backdoor Roth IRA.
  • Plan or expect to withdraw the funds in the Roth IRA within the first five years of opening it. A Backdoor Roth is considered a conversion and not a contribution. Therefore, the funds will incur a 10% penalty if withdrawn within five years unless you are age 59 ½ or older.
  • Are in a high tax bracket now and expect to be in a lower tax bracket in the future.
  • Plan to relocate to a lower- or no- income tax state.

 

Stay tuned for my next blog post, Recharacterizations and the Conclusion!

Want to learn more? Give us a call at 412-521-2732.

– James Lange

 

Beware of the Pro Rata Rule for Roth Conversions

What is the Pro Rata rule for Roth conversions?

The Pro Rata rule for Roth conversions states that if you have any other deductible IRAs (i.e. a previous 401k that you’ve rolled over), the conversion of any contributions becomes a taxable event that you’ll need to pay taxes on upfront.

The Pro Rata rule for Roth conversions determines whether or not your conversion will be taxable! For taxation purposes, the IRS will look at your entire IRA holdings (even if they are in different accounts), not just the traditional IRA you are converting to a Roth IRA, and will determine what your tax bill will be based upon a ratio of IRA assets that have already been taxed to those IRA assets in total.

The IRS determines the tax on this conversion based on the value of all of your IRA assets. For example Jane, a high income earner, already has $94,500 in an IRA account, all of which has never been taxed.  She decides on January 2nd to put $5,500 into a new traditional IRA. The next day she converts the new traditional non-deductible IRA to a Roth IRA.  Jane’s income is too high for her to make a direct contribution into a Roth IRA, but there’s no income limit on conversions.  Unlike Bill she has $94,500 in other IRAs (previously non-taxed), so her total IRA assets are now $100,000. When she converts $5,500 to a Roth IRA, the IRS pro-rates her tax basis on the previous taxation of her total IRA assets, therefore making this conversion 94.5% taxable ($94,500/100,000 = 94.5%).

So if you plan on using this backdoor IRA strategy, you want to be clear as to whether or not you have any other IRAs. As you can see, this can be a confusing area and this is where we can help.  If you are a high income earner we would be happy to review your situation to determine if this strategy is in your best interest.

Also, please remember that your spouse’s IRA is separate from yours.

Stay tuned for my next blog post, Benefits of a Roth IRA!

Want to learn more? Give us a call at 412-521-2732.

– James Lange

Backdoor Roth IRAs: How Does the Backdoor Roth IRA Conversion Work?

The backdoor Roth conversion consists of two simple steps:

1)      You make a nondeductible contribution to your traditional IRA.

2)      Within a couple of days you convert this IRA into a Roth IRA (potentially paying little to no taxes on the conversion).

There’s one big caveat: This strategy works best tax-wise for people who don’t already have money in traditional IRAs. That’s because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren’t converting.

For an investor who doesn’t already hold any traditional IRAs, creating one and then quickly converting it into a Roth IRA will incur little or no tax, because after a short holding period there’s likely to be little or no appreciation or interest earned in the account.  However, if you already have money in traditional deductible IRAs, you could face a far higher tax bill on the conversion.

If you choose to, you can contribute to a non-deductible IRA for 2014 (the maximum is $5,500 or $6,500 for those age 50 or older). Remember, you must contribute to your IRAs prior to the April 15 2015 tax deadline. This non-deductible IRA can then be used for your backdoor Roth IRA conversion (please call us prior to doing so because the rules for Roth conversions can be complicated).

Want to learn more? Give us a call at 412-521-2732.

Examples of a Backdoor Roth IRA coming soon.

– James Lange