Jim Lange's Top Lessons for Planning a Secure Retirement

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Jim Lange's Top Lessons for Planning a Secure Retirement
Jim Lange, CPA/Attorney
Episode 1

Please note: Some of the events referenced in our audio archives have already passed. Please check www.retiresecure.com for an updated event schedule.  

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TOPICS COVERED:

  1. Six Tips on How to Proactively Insure Your Retirement
  2. Lange’s Cascading Beneficiary Plan
  3. Understanding the Benefits of a Roth IRA Conversion
  4. The Big News in 2010 – ALL Taxpayers can Make a Roth IRA Conversion
  5. Taking RMD’s – Required Minimum Distributions for Those Over 70 1/2
  6. Question from Live Caller

Welcome to The Lange Money Hour: Where Smart Money Talks. Hosted by Beth Bershok with expert advice from Jim Lange Pittsburgh based CPA, attorney, and retirement and estate planning expert. Jim Lange is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim Lange as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

Beth Bershok: We are talking smart money and we are going to have some great information for the next hour. Listen, I have to say I’m excited to be helping to bring you this information because it is coming from an incredible source. Jim, frankly, I do want to do some of your credentials, but the list is so long that we could be here for the next hour if we just talked about your credentials. So let’s do the cliffs notes version. You are a CPA, you are an attorney and how long have you been practicing in Squirrel Hill?

Jim Lange: For 30 years.

Beth Bershok: 30 years and you have a national niche. A lot of people have been coming to you for Roth IRA information and Roth IRA conversion information around the country and we’re going to be getting to that. You are also an author and this has been a really exciting week at this office because the second edition of your book Retire Secure! Pay Taxes Later is about to come out. It really is going to be in local book stores on February 9th, that’s when you can find it at the area book stores. But, it’s getting great reviews already. Your first one was a bestseller on Amazon.com and number one in many categories. The second edition, you have to tell everybody about some of the testimonials that have come from the second edition because it’s amazing.

Jim Lange: Well we have been fortunate. Charles Schwab, Larry King, Ed Slott and Jane Bryant Quinn and about 60 other financial advisors.

Beth Bershok: Yeah just about 60 others. You also have something and explain this. You just founded this, the Roth IRA Institute and explain what that is.

Jim Lange: I think Roth IRA conversions are going to be extremely beneficial and particularly for years 2009 and 2010 is going to be the huge year for high income earners. I thought the information was so critical that I actually set up a separate company to educate both consumers and advisors on some of the best Roth IRA conversion strategies.

Beth Bershok: So 2009 is a busy year for you. You have the book, you have all this national speaking and we’re launching the national radio show through 2009. I do want to say before I get to what we’re going to cover in the next hour. We will be taking questions this hour so if you have a question feel free to call in. The studio line is 412-333-9385. I do want to mention too, we have a very big seminar that’s going to be coming up in a couple of weeks all about Roth’s, and keep in mind that during in the next hour we’re going to give you some information on how you can be a part of that. So I’ll be giving you a number and we can be getting people registered for that, but that’s coming up in a couple of weeks. Now, what we’re going to cover tonight, the past couple of months frankly financially have just been brutal and recently everybody got their year-end statements. I’m sure that was not a happy day in most households and I think what’s happening is a lot of people are taking the attitude that, there really just isn’t anything they can do. It’s out of their control but in fact that’s not true and you have put together Jim Lange an entire list of strategies – things that you can do now to protect your retirement. Explain to everybody who this whole list got started.

Jim Lange: Well, first of all I think there’s certain things you can’t control. But there are things you can control and Jason Zweig from the Wall Street Journal gave me a call and he said he wanted to do an article on what people who are approaching, or people who are already retired should do proactively to ensure their retirement. I put together a list and he actually did an article based on a couple of the items from the list. But what I thought that what we could do as a start is go through some of the things that I think are very critical, and then hone in one or two of those that I think might be the most interesting for the audience.


1. Six Tips on How to Proactively Insure your Retirement

Beth Bershok: Ok, so let’s go through the whole list first. These are things that you actually can do, proactive steps that you can take now.

Jim Lange: Right, one of the most important things that I don’t hear a lot of people talking about but I would say it is a cornerstone of sound financial planning is the Safe Withdrawal Rate. Now what the Safe Withdrawal Rate means is how much money as a percentage of your portfolio you can spend every year, and within a reasonable amount of certainty, never run out of money. So let’s say for discussions sake to pick a nice round number - You have a $500,000 portfolio and depending on your age and depending on your life-expectancy. Let’s even take a very, very Conservative Safe Withdrawal Rate of 4% and we can talk about the details of how you get to Safe Withdrawal Rates. But basically you could take 4% times the $500,000 and you only get $20,000 a year so you’re really not getting a whole lot of income from that. So there are a lot of people who perhaps had a much higher portfolio, lost say 30% or 35% or even more in the recent downturn and for some of them, they have to actually rethink what is an appropriate amount to spend. Now of course you can add Social Security if you have a pension, sometimes you can even consider using some of your real estate. But that’s one thing that I like people to hone in on is, are they spending an appropriate amount of money for their portfolio. Before the downturn I actually had a lot of clients, in fact I’d say the majority of my clients were spending less than the Safe Withdrawal Rate and would actually encourage them to spend more.

Beth Bershok: Really? That had to be tough! Please spend more! We have a lot of other things on the list too though. We spend the right monies first which is one of your strategies for something you can do now to secure you retirement, and spend the right monies first – frankly it’s critical.

Jim Lange: Well what that is, let’s assume for discussions sake you are retired. I’m going to simplify it – you have two pots of money to spend. Money that you have already paid tax on and money you have not. So, the money that you have paid tax on, it might be investments, it might be savings. The money that you haven’t paid tax on would be IRA’s, retirement plans, 401 (k)’s, 403 (b)’s. In general subject to exceptions, it is better to spend the money that you have already paid tax on. So that’s important to spend the right money first. The other thing that some people should consider is annuitizing and I’m not talking about a tax deferred annuity, but rather an immediate annuity which is similar to a pension plan in that you give the insurance company a chunk of money, and they give you a stream of income for the rest of your life in return. Of course one of the things that’s a little bit more questionable now is the security of the insurance company. Something that we more a less used to take for granted but now that we can’t. The other thing that is probably my favorite area of proactive action that people can take are Roth IRA conversions.

Beth Bershok: And we’re going to get back to that because there’s so much information to cover in the Roth IRA conversion - there’s just a ton of information on that one. So let’s come back to that one because we have so much to explain with the Roth IRA conversion. Let’s go through the rest of the strategies that you were talking about when you were talking to Jason from the Wall Street Journal.

Jim Lange: One of the other things that I always like to think about is the safety of your money and even though, I’m actually not only talking about for investment purposes, but actually for creditor protection, and IRA and retirement plan money is safer than money outside retirement plans, but there’s even different degrees of safety within retirement plans. An ERISA plan such as a 401 (k) plan is actually safer than an IRA. Many people have IRA’s and what I am suggesting to some of my clients, who actually perhaps have some self-employment income even in retirement, is to start their own one person 401 (k) plan and then have a trustee-to-trustee transfer of money coming from an IRA to their one person 401 (k), and that has several benefits, but one of the most important is creditor protection.

Beth Bershok: And this is a new strategy?

Jim Lange: This is a brand new strategy. This is actually one I came up with and the benefits of having a one person 401 (k) over an IRA are actually two-fold. One is the safety in terms of creditors; the idea is you get the ERISA protection. As an example OJ Simpson, his money is protected because it is in an ERISA plan. That’s why when they had multi-million dollar judgments against him they couldn’t get his money because it was in an ERISA plan. Now, I’m suggesting that a lot of listeners if they have some type of self-employment income and sometimes you can even create self-employment income. Maybe you do some work for your kids if they’re working, maybe you help out at the golf course, maybe you do something where you have a little bit of earned income. You create your own person 401 (k) then you can roll your IRA into that one person 401 (k) that has the advantage of better creditor protection. The other thing is, if you die your heirs can make a Roth IRA conversion of an inherited 401 (k).

Beth Bershok: Which we will get to because that’s a very cool strategy.

Jim Lange: Very cool.

Beth Bershok: I do want to say too this one person 401 (k) which is your new strategy is in the book. It’s in the second edition of Retire Secure! which will be in local bookstores on February 9th but that is totally covered in a chapter in the book. OK after one person 401 (k) you have something called rebalancing.

Jim Lange: Right, rebalancing is probably an important strategy and it’s counter-intuitive because let’s say you just lost money in the stock market. Rebalancing would actually, depending on the portfolio allocation, would actually have you put more money in the stock market now. It’s completely counter-intuitive, but the idea is that you want to buy low and sell high which is what rebalancing does achieve.

Beth Bershok: Would you say rebalancing is sort of like the old adage, don’t put all your eggs in one basket, is that sort of a similar thing?

Jim Lange: That’s part of it but, also let’s just also say for discussions sake that you’re a believer in 50% stocks and 50% bonds and that’s what you had lets say at the beginning of the year. Well now your bonds are going to be much higher in terms of percentage than your stocks. So, rebalancing them would be taking some of the money you have in bonds and putting it into the stock market which really goes right against what most people likely to feel comfortable with.

Beth Bershok: Now we do have a few more items on this list that we’re going to get to in just a minute. But we want to take a break, it’s The Lange Money Hour: Where Smart Money Talks. And by the way if you want to check in live studio line is 412-333-9385.

Beth Bershok: Before we get back to The Lange Money Hour: Where Smart Money Talks I did want to say Jim Lange you have a personal experience with that group too. So if you want to quickly touch on that because it’s been going well.

Jim Lange: Well I have some responsibility for taking care of my mother and when I learned about the group I frankly love the idea for my own mom and Pearl did go out to her, and my mother isn’t exactly the easiest person for this type of service. But they got on splendidly and she’s a real professional, her experience is very obvious and they’re taking is one step at a time. We’re starting with a couple of adjustment in her apartments and she’s now going to get a ride to the JCC so she can exercise a couple of times a week.

Beth Bershok: Oh that’s excellent. So their number is 412-422-0400. The Lange Money Hour: Where Smart Money Talks. I’m going to just recap this, this was a list that Jim Lange started. Jim Lange Lange from Lange Financial Group in Squirrel Hill. Did I point out that you were in the Wall Street Journal 30 times? Did I mention that because that’s pretty impressive. His 30th time was in December and he was talking to Jason Zweig, the reporter. He came up with this list of proactive things you can do now to protect your retirement and this is what we’ve covered so far: safe withdrawal rate, spend the right monies first, annuitize, Roth IRA conversion which we’re going to get back to because that’s a huge topic, one person 401 (k), rebalancing and that brings us to increased FDIC limits for bank accounts.

Jim Lange: Right, one of the ideas for a lot of people who are interested in safety of principal and they want money in CD’s, and they want guarantees. Even though the accounts are now insured for $250,000 that number will go back down to $100,000 in January 1st 2010. So, what I think a lot of people should do if they want additional safety is actually change the name. So, consider In-trust for account to maximize the FDIC guarantee which I think is a very sound thing for a lot of conservative investors.

Beth Bershok: Ok and we’re onto continuing contributions to retirement plans. How exactly would this work? You’re talking about people who are retired. How do you keep contributing?

Jim Lange: Well, technically if you are retired you actually can’t do it. I always refer back to the example where some people are quote retired from their main job might have some type of self-employment income and they can make retirement plan contributions. But even if you are working and this is really critical, a lot of people think oh man and the market’s down, I don’t want to keep contributing to my retirement plan. And I would say the exact opposite. Now is a great time to contribute to your retirement plan and again we’re going to talk about the Roth 401 (k) and the Roth 403 (b) but in general the idea, of all my clients and all through the years the most solid ones and the ones who (except for the entrepreneurs), the ones who have really done the best are people who have regularly put money into their retirement plans on good years and bad years, and I cannot stress how important that is. To consistently put that money, preferably the maximum into your retirement plan.

Beth Bershok: Now the last piece before we get back to Roth IRA conversions. We’ll trust an IRA beneficiary designation review. How often should you do that?

Jim Lange: It might depend on what type of plan you have. With the Lange’s Cascading Beneficiary Plan…

Beth Bershok: Oh we haven’t even touched on that! That’s a big one too! Ok.


2. Lange’s Cascading Beneficiary Plan

Jim Lange: That is a big one. That is I would say the most flexible estate plan and if that is already installed, the need for reviewing and changing your wills is not that often. With the traditional plan where you have decided in advance who gets what and it can really work out badly. So those types of plans should be reviewed quite frequently.

Beth Bershok: So how would you know if you have one of those plans. How would you know?

Jim Lange: One of the problems is a lot of people don’t know what they have, they literally don’t. Now hopefully the attorney actually sent a letter with the will explaining in English what is in the will.

Beth Bershok: Which is kind of important.

Jim Lange: Well it actually is. One of the things that we do in our law office is we actually write a letter in English telling people what their will says.

Beth Bershok: Which I’m going to guess knowing the staff that it’s pretty explanatory.

Jim Lange: Our letters are good, but I can’t tell you how many news client I get. They do not know what is in their will and a lot of them have and I call it the cruelest trap at all – which is money going into a B Trust before it goes to the surviving spouse. So, the client comes in says the most important thing that you need to do Jim Lange, or this is actually to another attorney as I don’t use the traditional wills, is I want you to take care of my spouse. But what does the attorney do? They set up all these trusts that are meant to save estate taxes and what happens very often and with the exemption not going up is you can have a situation very commonly where the surviving spouse instead of having unrestricted access to their money, they will have the money in trusts where they can only get the income and the right to invade principal for health, maintenance, and support. So the flexible plan is much better and that is something that should be reviewed. What typically, the clients that we have who we have already done this Lange’s Cascading Beneficiary Plan is, the reviews tend to be a strategy review, not a we have to redo your will review. If on the other hand, people come from other law firms or other situations and they have the traditional plan, a lot of times it’s not well-suited for them then we will institute Lange’s Cascading Beneficiary Plan for them.

Beth Bershok: But if they don’t know what they have they should probably take a look at that at some point. And you know what I’m going to toss out the office number for that 412-521-2732, the plan in the long run gives your survivors all of the flexibility which is extremely important.

Jim Lange: Yeah. If you see language in your will which is basically incomprehensible and it talks about amount needed to maximize the marital deduction and a bunch of things you really don’t understand. What ultimately that means is that the first $3,500,000 of your estate is going to go into a trust that is going to have limited access for your surviving spouse. So that’s a terrible thing, just think about it. When the husband and wife are alive together, together they have access to all of their money. If one of them dies and the estate is less than $3,500,000 with one of these traditional wills, you can actually restrict the surviving spouse to health, maintenance, and support and income.

Beth Bershok: And at that point there’s nothing you can do about it?

Jim Lange: Well you can do something that isn’t 100% kosher but yeah that’s right. The trustee is legally obligated to meet the terms of the trust.

Beth Bershok: This whole plan, Lange’s Cascading Beneficiary Plan™ is also part of the book, it’s also in Retire Secure and it explains it pretty comprehensibly in Retire Secure!. So really if you want to take a look at that plan too I would suggest getting a hold of the book. The new edition is going to be out on February 9th. We are going to take a quick break. When we come back we’re going to get into the Roth IRA’s and Roth IRA conversion. It’s The Lange Money Hour: Where Smart Money Talks.


3. Understanding the Benefits of a Roth IRA Conversion

Beth Bershok: The Lange Money Hour: Where Smart Money Talks. We’re with Jim Lange who has been practicing in Squirrel Hill for 30 years. Literally though nationally renowned and he’s been speaking nationally for years. He’s a CPA and an attorney and author of Retire Secure – second edition don’t forgot is coming out on February 9th. We went through this list Jim Lange, of strategies you put together, proactive steps you can take because really everyone has been nervous for the past few months. These are proactive steps you can take to make sure that your retirement will be secure. The big one, is it your favorite? The Roth IRA conversion I’m guessing. The Roth IRA and Roth IRA conversion, we have to take these in steps here. So the first thing is explain what a Roth IRA is. A lot of people have traditional IRA but there is something called the Roth IRA. What is the difference?

Jim Lange: The difference is with a Roth IRA you have income tax-free growth where as opposed to with a traditional IRA you have tax-deferred growth. With a traditional IRA, 401 (k), 403 (b) – all of these types of retirement plans work basically the same where you and/or your employer make a contribution to the retirement plan. You get a tax-deduction for that or look that at another way – you don’t pay the income tax. The money grows tax-deferred that is you don’t have to pay taxes as the money continues to grow and accumulate. But when you or possibly even your family take withdrawals from that then you are going to have to pay tax, or even your heirs are going to have to pay tax on the withdrawals. With a Roth IRA you don’t get the income tax deduction upfront but the money grows income tax-free. The best way I like to think about it is, with the Roth IRA you actually get the seed if you will tax-free and you get to the reap the harvest tax-free, where with the traditional IRA you get a deduction for the seed but you reap the harvest and have to pay tax.

Beth Bershok: Now there is as we speak an income limit. There has been up until now and we’re going to get to that but some people currently don’t qualify.

Jim Lange: Well that’s right. If we’re going to oversimplify, for married people if they are earning over $166,000 they make too much money to make a contribution to a Roth IRA. If you make less than that there are depending upon your age also, you can either put $5,000 or $6,000 that is if you’re 50 or older, you can put $6,000 for yourself and your spouse so this is money going into a retirement plan. Now the one requirement is you must have earned income of at least that much to put it in. So retirees can’t put money into a Roth IRA in terms of fresh new money, but of the course, the really exciting thing is going to be Roth IRA conversions.

Beth Bershok: Oh I know you love it! You love Roth IRA conversions! We’re going to get to that in a second but I just want to back up on just the Roth IRA for a second, because you actually when this started a decade ago, you were at the forefront really of Roth IRA’s. I should tell people that your expertise goes back a decade because you wrote the first major peer reviewed article for Roth IRA’s, it was in a publication called the The Tax Advisor and the reason why that’s so special is because all of these really, really picky CPA’s from all over the country are looking at it, and they read it and said Yeah that’s right, that’s a good analysis.

Jim Lange: In 1997, I usually pretty much ignore proposed regulations because I get them mixed up with what’s actually passed. But 1997 when they had the proposed changes that allowed Roth IRA’s even more importantly for my purposes Roth IRA conversions, I knew that was going to be huge and I went to the AICPA and I said I’d like to write the peer review article on Roth IRA conversions and frankly they didn’t understand how powerful this was and how many IRA owners could be tens of thousands and heirs hundreds of thousands even millions of dollars better off. So we ran the numbers and I’m sometimes accused of being a real Roth fan – I’m really into Roth IRAs! and I would actually say what’s more accurate is that I am a numbers runner and I like to do objective analysis, and when you compare the benefits of the Roth IRA conversions which I did in this article and have since subsequently updated, it’s just a tremendous value to the family. So that’s what I’m into, the most purchasing power for family members and this why the Roth IRA and Roth IRA conversions work so well because of the income tax-free growth.

Beth Bershok: But can we touch on that for a second because, how long can this actually grow income-tax free? How many generations can you go?

Jim Lange: Well it can actually go for your life and the life of the heir that you name. So I’ll just give you a personal example from my life. In 1988 our office suffered a fire, we were actually above a pizza shop, never have an office above a restaurant! So on February 16th I was out on the street and I will tell you we made a lot less than $100,000 that year because the insurance didn’t come through till the next year. So, we were under $100,000 which is a normal limitation on how much on whether allowed to convert. So now we were allowed to convert. So my wife and I together at the time had $250,000 in traditional retirement plans. She’s a smart lady, she has a Masters in Electrical Engineering and even though she’s a little bit conservative went through the numbers and I showed her and she agreed, Yes we’re going to make a Roth IRA conversion. The original purpose of the Roth IRA conversion was for us to be able to have income tax-free growth on that $250,000 that we would presumably tap into later after we were retired. Well it turns out, hopefully if things go very well there might be enough money for us to live comfortably without having to go into that money. If that is the case, it is possible that rather than us taking the money out and remember with Roth IRA’s and Roth IRA conversions there’s no minimum required distributions. That money might go to our daughter. Now our daughter was 3 years old at the time, we were I guess 42.

Beth Bershok: So now everybody just chalked that up – they just did the math real quick.

Jim Lange: Anyway, our daughter might end up getting that money so we could end up having tax-free growth for our daughter’s life and if she lives till in her 80s or 90s we can have that money years. Now, in the event that she has children and she doesn’t want or need a portion of that money and that money goes to her children, we could end up with 120 years of income tax-free growth.

Beth Bershok: That is incredible.

Jim Lange: Now not everybody might get that many years because we’re a little bit of an older parent and we have a young child but even if you’re just one generation older you can still often get 50 years.

Beth Bershok: And the heirs don’t have to pay taxes, they’re paid up front?

Jim Lange: No, it’s literally an income-tax free dynasty. Not that many people really understand how powerful this is and in a few minutes I hope to get into the…

Beth Bershok: Oh don’t worry we’ll get to the conversions.

Jim Lange: …to the Roth IRA conversions.

Beth Bershok: Yeah. It’s The Lange Money Hour: Where Smart Money Talks. This is Jim Lange, CPA, attorney and author of Retire Secure!, practice in Squirrel Hill. I do want to give a studio line to you because if you have questions we are happy to take those 412-333-9385 if you have a question tonight we’re going to be here until 8 o clock so you can call 412-333-9385. Ok, I know your dying to do this. So let’s go to the Roth IRA conversion and the big news is 2010.


4. The Big News in 2010 – ALL Taxpayers Can Make a Roth IRA Conversion

Jim Lange: The big news is 2010 and the reason for that is because a whole slew of people, specifically people who have modified adjusted gross income of more than $100,000. So basically high income earners have never been allowed to make Roth IRA conversions up to now. So I have friends for example who work with very high income clients and Roth IRA conversions aren’t even on their radar, they’re not even thinking about it, it’s just not even something that is in their paradigm and if they don’t wake up their going to really miss out what could be a fabulous opportunity because in the year 2010 all the income limitations go away. So, regardless of your income you can make a Roth IRA conversion and the issue of when to convert and how much to convert is still something that people have to face but the fact that they will have the opportunity to make a Roth IRA conversion – the numbers are staggering. For example, even taking a relatively small amount to convert say $100,000, the client themselves in 20 years will be over $40,000 better off using a bunch of assumptions that I’m not going to get into. Their children can be better off by maybe even $1,000,000 and the grand-children could be several million dollars better off.

Beth Bershok: Are those in today’s dollars?

Jim Lange: In today’s dollars it’s not quite so much. On the other hand, the grand-child can be better off by $450,000 in today’s dollars if grandma or grandpa make a $100,000 Roth IRA conversion, and for some people who have significantly more than $100,000 the numbers can be that much more. The other thing that’s really powerful about Roth IRA conversions, unlike life insurance, life insurance might be great for your heirs but in the meantime you’re the one paying the premiums. Roth IRA conversions are actually good for the people making them. Now, of course there’s limitations and it’s not going to work for everybody and you have to take into consider tax brackets, and I’m not saying that Roth IRA conversions are a panacea and that everybody should do Roth IRA conversions. But I think that virtually every IRA and retirement plan owner should consider it and see if they are a good candidate for the Roth IRA conversion.

Beth Bershok: But let’s just back up on the conversions for a second. We talked about this a minute ago, with the Roth you have to pay the taxes up front . So, what if you don’t have the taxes to pay up front. I mean lets say that you’ve always wanted to do a Roth conversion, you never qualified before, 2010 comes along you want to do the conversion, but you just don’t have the available cash to pay the taxes. Then what would you say?

Jim Lange: Well that’s actually relatively common. In certain professions and actually I have a lot of clients like that. The example would be, lets say you have a couple who gets married you know maybe back in the 40s or something like that and they’re hard working people, and they have a mortgage and they have car payments, they pay for their kids braces and they pay for their kids college and its really hard for them to save money. But they’re kind of prudent fellows and ladies and they put the maximum into the retirement plan and the employer puts in. So now today maybe they’re 60, 70 or 80 years old. They have sometimes a lot of money in their retirement plans, but not very much money outside their retirement plans. They are not as good as candidate to make a Roth IRA conversion as people who have money both money inside and outside their retirement plan. It still might make sense to do maybe perhaps a smaller amount if you don’t have the money to pay the tax. It might actually end up that there is no advantage at all

Beth Bershok: So really at some point what you need to do is run the numbers. You need to see how much is makes sense for you to convert, when you should do it. That’s all part of the plan with the Roth IRA conversion.

Jim Lange: I actually think that virtually every IRA and retirement plan owner should have a long-term IRA plan even if you’re working. We haven’t even got into the contribution mode where you are putting money and now you can have a Roth 401 (k). But I actually believe most people should have a long-term Roth IRA and Roth IRA conversion plan.

Beth Bershok: I want to give a number here because this is important. There’s so much information about Roth IRA’s and Roth IRA conversions and we’re going to be doing a seminar coming up on February 14th. We are currently taking reservations for that so let me toss out the number. This number answers 24/7 so you can actually call tonight and get signed up for the seminar. It’s two seminars, February 14th – it’s the same topic so you can attend either one. 9:30 to 11:30 in the morning or 1:00 to 3:00 in the afternoon. These are both are Crown Plaza South which is the hotel right across from South Hills Village. So if you call this number you can sign up – it’s free. Jim Lange is going to give you all of this information. At this point we’re really just touching the surface, I’m serious because Jim Lange does 2 hours of Roth information in this seminar and that number to register, it’s toll-free is 1-800-748-1571. Again this is coming up on February 14th, you’ll need to tell us whether you want to go to the 9:30 one or the 13:00 one. But at any rate you’re going to get all this information with Jim Lange in person on that date. So sign up for the seminar 1-800-748-1571. We do want to talk some more about Roth conversions and we will do that in just a minute. The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: The Lange Money Hour: Where Smart Money Talks and Jim Lange will all kinds of advice tonight on how you can keep your retirement secure. One of those strategies involves Roth IRA conversions and we do have a lot of other things that we want to cover. But I want to touch Jim Lange, just for a minute or so on Roth IRA conversions; we’re talking about wow how great they is, This is a great strategy, tax-free growth for generations. But there’s got to be some sort of risk and we should touch on that. What could go wrong potentially with a Roth conversion?

Jim Lange: Well actually there are a couple of things that could go wrong. In fact, this actually happened last year. You can make a Roth IRA conversion and then the underlying investment goes down. So let’s say for discussion’s sake in 2008 early in the year you made a $100,000 Roth IRA conversion and now that Roth IRA let’s say $70,000 and you’re not feeling too good about it because you paid tax on $100,000 or planning to pay tax on a $100,000 and now it is only worth $70,000 or perhaps even less – that isn’t a wonderful feeling. The answer to that is you can re-characterize or undo a Roth IRA conversion. So what we are doing, we actually went through all the tax returns of all our clients who made a Roth IRA conversion in 2008 and were notifying them and saying Hey, you might consider undoing or re-characterizing that conversion and you have until October 15th of that year after you convert to make that conversion. So let’s say for discussions sake you’re making a conversion in the year 2009 you would have until October 15th 2010 to undo it. So that’s one thing that could happen that would go wrong, that is the investment tanks. The other things that could potentially happen is that there could be a change in the tax laws. What change would really be terribly, make it a bad decision would be the elimination of the income tax.

Beth Bershok: Not really counting on that happening anytime soon.

Jim Lange: Probably not but if we end up switching to a Value Added or Sales Tax then making a Roth IRA conversion would probably be in retrospect make a mistake. Let me tell you something that I don’t fear that a lot of other people fear. A lot of people fear that they’re going to change the law and they’re going say Well, we’ve decided that we’re going to tax Roth IRA’s after all, and a lot of people say Those rascals in Washington – I remember Social Security, we never supposed to pay tax and we’re paying tax on our social security and how do we know that they’re not going to do the same with the Roth IRA’s?

Beth Bershok: I’ve heard that actually I have

Jim Lange: That’s a very legitimate objection and the answer to that is that is was never part of the Internal Revenue Code that you would never pay tax on Social Security. The legal word is dicta which means Not Legally Enforceable Language that politicians used. On the other hand, with the Roth IRA’s and the Roth IRA conversions is actually part of the Internal Revenue Code that this money is going to grow income tax-free so I’m not really worried about something like that. Now, what do I think is a more likely change in the tax laws? Do we think that in the next 5, 10, 20, 50 years tax rates are going to go up or come down? If they go up, which is frankly what I would expect then the benefits of the conversion are going to be even greater than some of the numbers I have been talking about.

Beth Bershok: I want to ask about 2010 because we talk about how 2010, the income limits are disappearing and this is a huge opportunity for wealthy taxpayers to make a conversion. How long is that going to last? Is that 2010 and ’11 and ’12 and on and on and on? Is there a time limit on this?

Jim Lange: There isn’t a time limit but 2010 is a good year for a couple of reasons. First you actually get to recognize the income in 2011 and 2012 if you choose. So let’s say you make a $100,000 conversion in the year 2010. If you want to you can make an election to recognize $50,000 in 2011 and $50,000 in 2012. It is not part of the law that this ability to make a Roth IRA conversion will stop. On the other hand, I think if the government starts to pick up and realize how wonderful this can be …

Beth Bershok: Hasn’t anybody noticed that yet?

Jim Lange: People are saying oh well maybe Barack is going to change it when he recognizes that people can create income tax-free dynasties. The reason why I don’t think it’s going to change between now and 2010 is because here billions of dollars are going to be coming into the IRS and congress is going to have access to it, and it’s already on the books. So he would actually have to reverse that and I can’t see either Barack or Congress today saying no, we don’t want all that money that we’re planning to get in taxes. We’re going to change it so we don’t get the money. So I think its going to be available for us.

Beth Bershok: Can you actually foresee a time later down the road. Say 2012, 2013 where they re-think the Roth IRA’s with the income limit?

Jim Lange: I think it’s very possible that we’re going to have changes in the future but here’s the thing. If you get in the system now then I think that the money that you get in the system, whether it’s a Roth IRA or a Roth IRA conversion or (we haven’t talked about it yet) the Roth 401 (k) that money will be grandfathered.

Beth Bershok: So really 2010 is an exceptionally good year to make a conversion, but you’re going to definitely get in on it.

Jim Lange: It is and that’s particularly for people who have incomes of more than $100,000. The other thing that we didn’t touch on.

Beth Bershok: Uh-oh! What did we not cover?


5. Taking RMD’s – Required Minimum Distributions

Jim Lange: It might not be on your list, but I know that there are people in our audience who are 70 and older.

Beth Bershok: We should touch on this, no we really should. This is brand new and this really just happened. So explain this, this is a great strategy.

Jim Lange: A lot of our viewers know that the minimum required distributions that people who are 70 and a half and older have to take from their IRA’s and retirement plans are suspended for 2009 which is a great thing. So, let’s say for discussions sake that you’ve been in the position where you have to take money from IRA. You don’t even particularly need the money, but you have to take the money and pay taxes on it. Well, very good news you don’t have to take the money this year for 2009, you don’t have to pay taxes. I suspect the majority of people say thank you very much, I’ll have a low tax year goodbye. What I’m saying is for a lot of retirees in that situation, if you think about it you’re going to be in the lowest tax bracket that you have ever been or that will ever be in your life because today the rates are relatively low, and next year and in future years you’re going to have your minimum required distribution that’s going to be added to your income. With 2009 being a 1 year opportunity of the lowest tax rates that you’re ever likely to be in, that to me spells great time to make a Roth IRA conversion.

Beth Bershok: But surely that’s not what they anticipating when they suspected the RMD’s.

Jim Lange: No, I actually think that that was an unintended advantage to people who proactively take advantage of it. I have not seen it in the literature or anywhere, except from reporters and news sources that have quoted me.

Beth Bershok: Actually reports have been calling you about that.

Jim Lange: Oh yeah, now it’s all over the place it’s been in a lot of the magazines.

Beth Bershok: Last week you had an interview with Money Magazine. Did you cover that RMD suspension Roth IRA conversion?

Jim Lange: Yeah, we did it with Money Magazine, we did it with Business Week, we did it with The Wall Street Journal. It’s all over the place now.

Beth Bershok: Well actually we should say watch for the March edition of Money Magazine because that’s, you cover that, that was the interview you had last week and it’s supposed to be in the March issue so look for that. Unintended but a huge bonus for 2009.

Jim Lange: But it does require you proactively doing something. If you just sit there and do nothing, yes you’ll have a lower tax bill, but you wont have the opportunity to make a Roth IRA conversion at a very low income tax rate.

Beth Bershok: And all of these things we are talking about Jim, Jim Lange with The Lange Money Hour. This is not something I don’t think you should attempt to do on your own – you need to see an advisor. You can say ooh this sounds like a great idea, but I think you need to have somebody take a look at it.

Jim Lange: I think you do and unfortunately even sometimes after people go to my seminars if they don’t come in and see either myself or somebody in the office they sometimes do something, or they misinterpret something and do something that really isn’t optimal. The advantage literally measured in hundreds of thousands, millions of dollars is so enormous compared to the amount of time and the amount of money you would have to pay to get this expertise. It usually does make sense to get somebody who knows what they are doing in the IRA and the Roth IRA world.

Beth Bershok: I know you want to talk about Roth 401 (k)’s too and we’re going to do that in just a second. But I want to give you the phone number to register for the Roth seminar again because this is the kind of information that Jim Lange is going to be covering in the Roth seminar. We’re going to be doing that on February 14th Crown Plaza which is directly across from South Hills Village. Two choices, you have two choices on times. It’s going to be the same seminar 9:30 to 11:30. Second one in the afternoon is 1:00 to 3:00 and we’re inviting everyone to attend for free. You can sign up tonight actually, this number will answer 24/7 it’s 1-800-748-1571, call and get registered just make sure you tell us what time you would like to attend. 1-800-748-1571. When we come back we are going to touch on Roth 401 (k)’s which is something relatively new. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: The Lange Money Hour: Where Smart Money Talks. Expert advice coming from Jim Lange and this hour is flying by isn’t it? We’re down to 9 minutes, that’s all we have left! We do want to cover Roth 401 (k)’s. I want to give you number because this is the studio line and we literally just have 9 minutes left. So if you want to squeeze in a question here in the end we’ll be happy to take it. 412-333-9385. But another strategy, we talk all of the time about Roth IRA’s, Roth IRA conversions. But there is something called the Roth 401 (k) which works in a similar fashion. Explain that and it’s relatively new.

Jim Lange: It is relatively new and the Roth 401 (k) you actually need two things. You need to have earned income and you need to be working for somebody that has a Roth 401 (k) component to their 401 (k). So let’s just say for discussion’s sake that you’re working for a company and you’ve been in the 401 (k) plan for many years. You’re interested in the Roth IRA’s, you’d love to have some money grow income tax-free. The limitations on 401 (k)’s are now, you can put $16,500 if you or even $22,000 if your 50 years or older. Sometimes wouldn’t it be nice to have $22,000 going into a Roth 401 (k). A) You obviously need to be able to afford the contribution which would be withheld from your paycheck. But B) You’re employer must offer the plan. And that’s going to be the biggest downturn or the reason why some people can’t do it because their employer’s don’t offer it. In our firm we actually have 10 people who are participating in our retirement plan. They have the choice whether their money goes into a tradition 401 (k) or a Roth 401 (k). The other thing is that they can mix and match – they can do a bit of each. The employer’s share is always the traditional 401 (k) but the employee’s share will have a choice of traditional or Roth. Now what also applies to the 403 (b) world. If you are a university faculty member or perhaps a hospital worker, or you work for some other type of non-profit entity, you have likely had access to a 403 (b) plan you might want to check if your university or employer offers a Roth 403 (b) plan. I know the University of Pittsburgh have just added a Roth 403 (b) component.

Beth Bershok: And how long has the Roth 401 (k) and Roth 403 (b) been available?

Jim Lange: It has been available for a number of years, but when it first came out it was temporary so a lot of people thought well, we better not do it because they might undo it, and now it has become permanent.

Beth Bershok: My main question on the Roth 403 (k), Roth 403 (b). We know that there are income limitations for the Roth IRA are there the same limitations in place for the Roth 401 (k).

Jim Lange: No there’s actually no limitations for the Roth 401 (k) or the Roth 403 (b) so you could be making a $1,000,000.

Beth Bershok: Are you serious?

Jim Lange: Yeah. So a lot of wealthy people, that will be one of their entries into the Roth world.


6. Question from Live Caller

Beth Bershok: So the main component is that. You’re not going to believe this we have a call from Detroit.

Jim Lange: From Detroit?

Beth Bershok: And it’s a question about a conversion. Hi from Detroit, how are you?

Jim [CALLER]: I’m doing well thank you.

Beth Bershok: And what is your name?

Jim [CALLER]: Jim also.

Beth Bershok: Ok Jim also. What is your question about a conversion?

Jim [CALLER]: I’m in a fortunate position where we have plenty of cash to pay for the taxes in a conversion.

Jim Lange: That’s very unusual in Detroit.

Jim [CALLER]: Yeah. We would be looking to convert in 2010 approximately $400,000 and I know as you convert you push yourself into higher and higher tax brackets. Is there a bracket that you would say is probably worth not doing or maybe just having second thoughts about.

Jim Lange: Well one of the things that you could do without knowing more about your situation is, you don’t necessarily have to convert the whole thing in 2010. One of the things I don’t like is for an income tax payer to just considerably in terms of income tax bracket. For example, if you were a 15% tax bracket tax payer you probably don’t want to make a Roth IRA conversion where you’re paying at the 25%. And the other thing is it’s good to do long-term projections to get an idea of where you are likely to be. On the other hand, if you did it in 2010 you could spread a $400,000 conversion. $200,000 recognized in 2011 and 2012. It might be more prudent to make a smaller conversion and plan on doing it every year for a number of years depending on your tax bracket and your future tax bracket, and also by the way, it sounds like you were a long-term player, the tax brackets of your children might have a bearing on how much you convert.

Jim [CALLER]: Ok, we’re 43 and we we’re basically in the 33% bracket to start with and so it would be between that and the next bracket or two up and doing a conversion. Would you still say even at the 33% bracket it’s worth doing?

Jim Lange: Well at the 33% bracket then it becomes extremely attractive and at the 33% bracket for a 43 year old – I love doing a Roth IRA conversion. So everything I just said probably not apply to you because if the top bracket is 35% and you’re already a 33% tax payer and depending on what you think is going to happen in your financial future, if you’re going to likely stay at 33% tax payer then it might make sense to do the conversion of the whole thing all in 2010, because boy I love the idea of a $400,000 conversion for a 43 year old. You’re just going to get enormous amounts of tax free growth and to be in that position which frankly isn’t all that different than the position that I mentioned for myself earlier. I think it’s a terrific thing, you’re actually in a wonderful situation in that you’re already in a high tax bracket so it would be a much tougher situation if you were say in the 15% or 25% tax bracket then I might want to do smaller gradual conversions, but if you’re already in the 33% the right way to do it of course is to run numbers, but off the top of my head I like the idea of doing a very significant conversion.

Beth Bershok: Hey Jim, I’m going to toss the office number to you. You’re obviously listening online KQV.com

Jim [CALLER]: Yes I got the email from Jim Lange and I have considered coming to that seminar.

Beth Bershok: Oh wow! From Detroit?

Jim [CALLER]: Yeah

Beth Bershok: Oh, that’s excellent we would love to have you. Hey, we’re going to have to wrap it up because suddenly our hour is gone! I’m going to give you the office line too so if you have questions about anything, if you have questions about the book or that seminar our office is 412-521-2732. We mentioned earlier that Jim’s office is in Squirrel Hill, he’s been there for almost 30 years. 412-521-2732 and the seminar that Jim was mentioning there was coming up on February 14th. So thank you for joining us – it’s The Lange Money Hour: Where Smart Money Talks. Thanks for all the great info, Jim, and we’ll keep you posted on everything. The Lange Money Hour: Where Smart Money Talks.

 

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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