Strategies for Protecting Your Retirement Assets

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

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Strategies for Protecting Your Retirement Assets
Jim Lange, CPA/Attorney
Guest: Bob Keebler, CPA, MST, AEP/Author of The Big IRA Book
Episode 6

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. Introduction of Guest: Bob Keebler, CPA, MST, AEP
  2. The Art and Science of Tax Loss Harvesting
  3. Listener Q&A: Roth IRA Versus Roth 401(k): Tax Bracket is Key Factor
  4. Strategies for Converting Nondeductible IRA to Roth IRA
  5. Listener Q&A: Why (And When) Is A Roth IRA Conversion Appropriate?
  6. Listener Q&A: Tax Loss Harvesting Example
  7. Strategies for Asset Protection
  8. The Big IRA Book
  9. Last-Minute Thoughts on Asset Protection

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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 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 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 tonight. Thank you for joining us. I am Beth Bershok with Jim Lange, CPA/Attorney, best-selling author of the book, Retire Secure! Pay Taxes Later, and we have a very special guest joining us tonight too, Bob Keebler. Bob, are you on the line?

Bob Keebler: Yes, good evening, Beth.


1. Introduction of Guest: Bob Keebler, CPA, MST, AEP

Beth Bershok: Hi, Bob. Thank you so much for taking the time to join us. Bob, this is the way that Jim Lange describes you: Bob is practically a legend in the CPA community.

Bob Keebler: That is very gracious on his part though maybe a little overstated.

Jim Lange: I don’t think it is. I have been following Bob Keebler’s materials for years and years, and he just keeps coming out with wonderful information for CPAs and clients alike.

Beth Bershok: Actually Bob Keebler is an author and co-author of several books including The Professionals Guide to the Roth IRA, and I have to point this out, too, because this is a huge honor, Bob, CPA Magazine named you one of the top 100 most influential CPAs in America four years out of the past six years. Congratulations!

Bob Keebler: Well, thank you.

Beth Bershok: Alright, we have a lot of ground to cover today. We are going to be talking about, and I know both of you are very big supporters of, Roth IRAs and Roth IRA conversions. We are going to be getting to talking about how to protect your assets. I also want to give a phone number here because we are taking questions live. We’ve had a couple of questions by e-mail that I am going to get to later. The studio line is 412-333-9385 if sometime during the next hour you have a question for Bob Keebler and Jim Lange. We want to start with something called tax loss harvesting. Jim, if you could first explain exactly what that term means.


2. The Art and Science of Tax Loss Harvesting

Jim Lange: Well, I’ll take the first part, and then I am going to let Bob Keebler do what is very current. Tax loss harvesting traditionally is something that either CPA firms do or sometimes investment advisory firms do which is basically a system of offsetting gains and losses. So, let’s say for discussion’s sake that you have sold a stock that you have a substantial capital gain on, and if you don’t do anything, you are going to end up paying a capital gain on it. But you also have some stock that lost money in the market and now, of course, we have a lot of losers that will strategically sell that stock for a loss to offset that gain. This is typically done at year end, and frankly there is a little bit of an art and a little bit of a science to it. I think that the good CPA firms that are engaging in tax planning for their clients and good investment advisory firms that are also doing tax loss harvesting for their clients are very common. So, just for example, my wife sold her interest in a building, and there was a very substantial capital gain, but she also had some investment losses. We sold the investment losses that offset the capital gain in the building, and we didn’t pay any capital gains tax. Now, when I was talking with Bob Keebler about what we were going to talk about today, he actually mentioned a strategy that we are just starting to use that I think is a great strategy which is not tax loss harvesting at year end but actually tax loss harvesting now, and I thought maybe I would turn that over to Bob Keebler to let him explain what he is doing because actually we are doing the same thing. This has happened a number of times, by the way, where Bob and I, independently, have both either come up with on our own or read the same sources and are doing some of the same things in our practices, but Bob stole my thunder on
this one, and I thought I would let him tell our audience what he is doing with tax loss harvesting in the middle or even before the middle of the year.

Bob Keebler: The key is really to take these losses at their deepest point without getting out of the market. So, for example simplistically, if a person owned shares of Coke that were at a loss, they might sell the Coke knowing that they can get back into it 31 days later, but in the meantime, they might buy Pepsi. And they’re trying to protect, Jim, their market position while harvesting the gain because the worst thing that could happen is to sell out. Like if somebody sold Bank of America 30-40 days ago thinking they would get back in, they would’ve missed a great run in the stock. You don’t want to miss the runs in the stock. What we like to see people do is very wisely get out. For example, if they are in mutual fund one, and the mutual fund company has 20 funds, you might have them buy fund two, the closest thing to the risk profile and home that for 31 days, and then go back. So, we are pretty aggressive on that right now because I think what happens is with any luck, the market is at a lower point today than it will be in December, and the problem with harvesting all your loss in December is you run the risk of being out of the market. You never want to do that. So, we want to very slowly and methodically throughout the year harvest our losses. Sometimes people will double up. If they have 1,000 shares of a stock, they might jump up to 1,500 shares for a short period of time and then sell 500 of those after 30 days. So, these are strategies people should review with their stockbrokers and with their CPAs, but you definitely don’t want to be caught at the end of the year with capital gains on your tax return and capital losses on your brokerage statements.

Jim Lange: Now, Bob, what if you end up doing some of these strategies, and you accumulate a lot of losses, and it turns out that there aren’t a lot of gains. Is there any tax law change that might make this a beneficial thing to do now as opposed to year end?

Bob Keebler: Right now we are not expecting the Obama Administration or Congress to bring forth any change in the area of limitations. Right now, I can only use $3,000 a year of my losses. So, if somebody has $500,000 of losses, it is going to take them 167 years to burn up those losses.

Beth Bershok: It could happen, Bob.

Bob Keebler: It could happen, but you know in reality what you would look for, and that is somebody who has losses that they will never utilize. There are very sophisticated transactions they could work on that would allow them to change ordinary income into capital gain, but most of that is really very up market transactions at some point in time. We could talk about those, Jim Lange.

Jim Lange: I actually wasn’t fishing for anything that deep. I was actually fishing for the capital loss carryforward laws. In other words, if you have extra losses, you could carry them forward into the future.

Bob Keebler: Right now, we have a lot of real estate clients with losses. They are selling properties to their children because their losses will offset the gain on the sales to their children, and their children will begin to depreciate the property again and again. There are some really tough rules there under the code. The point is if you have any type of loss, sit down with your CPA and try to figure out how to officially utilize that loss.

Beth Bershok: Bob and Jim, is this unusual just because the market is down? Have you always been doing this during the course of the year or is this really a new strategy?

Bob Keebler: To some extent, the strategy has always been there, but we’ve never had to utilize it as much because most people (if they have $50,000 of losses and they’re patient) will eventually burn that up or $25,000 of losses, they will eventually burn that up, but when somebody suffers a loss of 50% of their portfolio, it just requires a little bit more aggressive positioning. We went through the fall with people denying that their portfolios had fallen, and then people were angry. The angry stage was when you saw all the activity with AIG and now we are into that stage when people are beginning to cope with the problem of; okay, what do I do? I have to make my money last and now I have these big losses. Is there any way I can utilize these losses?

Beth Bershok: And so you really need to see a professional too—a financial professional. This isn’t something that you want to try. Because of the way you were describing it a few minutes ago, Bob, where you were saying take a look, get out for 30 days, and then come back -- it sounds intense to try to do that on your own.

Bob Keebler: Of course, it depends on the amount, but if you are a 28-year-old, and you are right out of college, and your losses are $10,000, you can probably depend on casual advice, but if you are a 68-year-old and your losses are $400,009 or $500,000, you want to sit down with somebody like Jim Lange or like your CPA and figure out how this is actually going to work because the tax codes are complicated, nothing that anyone doesn’t know. For example, the losses on my securities, I can not use those to offset my income from my job except to the tune of $3,000. Or if I have other ordinary income, oil and gas income, I can’t use that to offset.

Jim Lange: I think one of the points of doing it mid-year is to lock in the loss. So let’s say for example, you do nothing, and you wait till later on in the year. Maybe the stock price goes back up and if you sell at that point, the amount of loss that you have to carry forward in the future would be a smaller amount and in the future, if you do make some sales for some gains, you won’t have those losses to offset those gains. One of the beauties of Bob Keebler’s strategy of doing this while the market is at the low point is you will have capital loss carry forwards that you can use in the future to offset future gains which hopefully are going to come back again at some point.

Beth Bershok: And the strategy that we are talking about is tax loss harvesting. We are with Bob Keebler today who is our guest tonight on The Lange Money Hour. We are going to take a quick break, but we will be back with more from Bob Keebler and Jim Lange on The Lange Money Hour: Where Smart Money Talks.

‏Beth Bershok: We’re talking more smart money, and thank you for joining us tonight on The Lange Money Hour: Where Smart Money Talks. I am Beth Bershok with Jim Lange and our special guest tonight, Bob Keebler. Bob, you are checking in from Wisconsin right?

Bob Keebler: Correct.

Beth Bershok: Okay, 412-333-9385 is the studio line if you have a question for Bob Keebler or Jim Lange. Now, I know that one of the strategies that you both use in your practice is Roth IRAs and Roth IRA conversions. I think we need to start from square one on this one and just explain, first of all, the difference between a Roth IRA and a traditional IRA, and I will let you handle that one, Jim.

Jim Lange: Well, I would say that the best way to think about Roth IRAs and Roth IRA conversions is with a Roth IRA conversion, you pay tax on the seed. In other words, you are taking a chunk of money in your IRA. You are paying tax on it up front. It goes against everything that CPAs and financial advisors have done for years. In other words, we’ve always wanted to defer taxes, but you pay tax upfront so you are paying tax on the seed, and then the Roth IRA grows income tax-free for you, for your spouse, and for your kids. If you die with a Roth IRA and leave it to your kids or even your grandkids, all those distributions--including the growth on all that money--will grow tax-free for literally generations. So it is the basis of a tax-free dynasty.


3. Listener Q&A: Roth IRA Versus Roth 401(k): Tax Bracket is Key Factor

Beth Bershok: Before we get back, we have a question actually. This is Bob from Bethel Park who has a question on Roth IRAs versus Roth 401(k)s. Is that your question, Bob?

Bob [CALLER]: That’s right, Beth. Good evening, gentlemen.

Jim Lange: Hello there, Bob.

Bob [CALLER]: I recently have been told by our employer-- I am sure I am not the only here in the Pittsburgh area--that they will not be matching our 401(k) contributions this year. I was talking to a friend--actually I’ve been listening to your show, it’s a very good show, and I want to comment too, but I have been meaning to ask this question to you guys--I have been told by my friend that I might want to reconsider my priorities as far as funding first my Roth contributions before moving into 401(k). I‘ll be honest with you, the economy being what it is, I am in sales, and it has affected my income so I don’t know if I could fully grasp both this year. I just wanted to know what your opinions were about whether my priority--now that I know it’s not matching the 401(k) contributions--should I consider maybe doing my Roth investment this year and then do the 401(k) once I have fulfilled my max on that?

Beth Bershok: Ok, let’s see, what do both of you think? Bob, why don’t you go first?

Bob Keebler: Well, there is going to be no match so you are looking at a down income year, and in the future, your income will be higher. You may as well look at utilizing the Roth 401(k) element to your plan. That may be the most effective way to go. Now some people will very carefully put some in the Roth, and some in the regular IRA depending where your tax bracket falls. Let’s say that $10,000 was in the 33% bracket, and the rest was in the 28% bracket. You might put $10,000 into your regular IRA to reduce your taxable income, and put the rest into your Roth IRA where the value isn’t so great. You may want to at least look at that strategy because a lot of clients will split between the two. I personally am putting 100% of what I make in the Roth 401(k), because I know that going forward, that is going to be the better place for my money.

Beth Bershok: Jim, do you have anything to add? Shifting over to Jim on this one, can you answer Bob, Bethel Park, is there anything else you can add?

Jim Lange: Well, first of all, I love Bob Keebler’s answer because he hit the nail on the head when he said the key is tax brackets, and I also think that his idea of potentially doing some in the Roth 401(k) and some in the traditional 401(k) is very good. I’ll take it a step further, and I will give two different examples because we didn’t ask how old you are Bob.

Beth Bershok: Let’s ask Bob.

Bob [CALLER]: I have a timeline of about 15 years that I would say to retire, I am hoping, God willing.

Jim Lange: Alright, well with a 15-year time horizon, I would probably, everything else being equal, lean in favor of the Roth 401(k). Now, let’s say for example that you said hey, I am 65-years-old, and I’m at the top of my earning capacity, and I’m going to be retiring in two or three years. In that case, I’d probably prefer that you do the traditional 401(k). Get a full income tax deduction for it now and then maybe make a Roth IRA conversion after you retire when you are in a lower tax bracket, but frankly Bob hit it right on the head when he said that the key is tax bracket. Now, he was concentrating on your tax bracket right now, and let’s say one other way to consider it is, what is your tax bracket now compared to what it will be when you eventually take the money out? The longer your time horizon, the more I am happy with it in the Roth 401(k).

Bob [CALLER]: Very good, very good. Well, thank you, gentlemen. I think that is great advice, and I will keep listening. Thank you.

Beth Bershok: Okay, thank you, Bob from Bethel Park. We appreciate it. If you do have a call, it’s 412-333-9385. Jim and Bob, you both mention the Roth 401(k) but not every employer offers a Roth 401(k) in which case, what would you have done there?

Jim Lange: Well, in that case, I would probably have maxed out his Roth IRA. We don’t know how old he is, but if he is 50 or older, he could put $6,000 in. If he is 49 or younger, he could put $5,000 in his Roth IRA. If he has additional money that he can afford to contribute to his retirement plan, then he could go into the traditional 401(k) even if it isn’t matched.

Beth Bershok: Okay, Bob, same advice?

Bob Keebler: Well, exactly the same. If your income is too high, then you do nondeductible IRA this year and depending on the size of your overall IRA portfolio, you’ll flip them into the Roth in the future.

Jim Lange: Bringing up one of my favorite topics.

Beth Bershok: Oh, you just did it, Bob, you just opened the door on that one. It is one of Jim’s favorite topics: Roth IRA conversions and the big change that is coming in 2010.

Bob Keebler: Well, no actually, we literally have one of the country’s leading experts on a particular area that very few advisors or CPAs or IRA experts talk about much which is the nondeductible portion of the IRA.

Beth Bershok: Oh.


4. Strategies For Converting Nondeductible IRA to Roth IRA

Jim Lange: Now, a lot of our older listeners for many years put $2,000 into an IRA even though they weren’t allowed to deduct it, and then, for some reason, a lot of people kind of forgot that strategy. With a nondeductible IRA, you don’t get a current income tax deduction, but the money grows tax deferred. Conceptually, that is the same thing as after-tax dollars inside a 401(k). So let’s say for discussion sake that Bob, our caller, was in a different situation. He was a high-income tax earner, there was a match on his retirement plan, and the amount that he was allowed to contribute to the plan exceeded $22,000, and he wanted to contribute $22,000, but he would only be allowed to deduct $22,000. In that case, he still could, if the plan allowed it, put more money in but not get a tax deduction. So a lot of people, a lot of mid-level managers, a lot of executives have after-tax dollars inside their 401(k), conceptually the same as a nondeductible IRA. Bob has done some very interesting work on converting a nondeductible IRA and after-tax dollars inside a 401(k) to a Roth IRA without having to pay the tax, and there are new laws on this particular issue. So I think with that buildup, maybe I will ask Bob to tell us some of his strategies, which I think are terrific by the way. I have read them both. Bob and I have written on this topic, and then also what is the impact of the new laws in area. If that’s okay with you, Bob?

Bob Keebler: Sure, let’s take the simple case. You have a young person who is doing very well financially. They are earning too much to put money into the Roth IRA, but they have no other IRAs yet so they put their $5,000 a year in this year, and they will do the same thing again next year. Now they have $10,000 in nondeductible IRAs. Let’s just say that it doesn’t grow. It’s at $10,000 next June when they decide to do a conversion. They can turn that into a Roth IRA and not pay a penny of tax because they have what is called basis. Their basis is the $10,000 they already invested. Then going forward all the growth, 100% of the growth from here until the day their grandchildren take it out of the Roth IRA is tax exempt. So if they took it all out--let’s say they are 30 years old--if they take it all out 40 years from now when they are 70, they pay no tax on the growth. So it might have doubled or tripled in value in the meantime. It just all depends, but you really have to look at these strategies. Now you also have to recognize these strategies can vary from husband to wife even though they are filing a joint return. Maybe you have a couple in their 40s, and the wife has switched jobs, and she has $200,000 in an IRA that has no basis but her husband has never switched jobs and all of his money is still in a 401(k). He can do this strategy and doesn’t have to worry about it. His wife does the strategy, Jim, we get into a very complex role where you have to take into account all the IRAs, and then this transaction doesn’t work.

Jim Lange: Right, right. What are some of the strategies of converting a nondeductible IRA to a Roth IRA? By the way, I have run a few numbers on that, and Bob Keebler’s example of $10,000 at 8% for 40 years--the family is better off by $100,000. So it’s a substantial difference. Let’s take the more complicated case. What are some of the ways that people can do a Roth IRA conversion with some of the after-tax dollars inside their 401k or IRA? What are some of the strategies that you have been using rather than just saying it can’t work? I will even give you a little license and say that we could potentially have some self-employment income, and I will give you the added flexibility of someone who could setup their own one-person retirement plan.

Bob Keebler: Sure. What happens is if a person is self-employed, they can obviously set up their own retirement plans and put away money in those plans. They are then allowed to convert what’s in those plans. If the plan is drafted correctly into the Roth IRA or if it’s not drafted correctly they could always take it from the plan, roll it into an IRA then convert it to a Roth. What we like to do is try to get a basis in the transaction to reduce the overall effect of tax rate. Now the other thing that happens is, let’s say that I had $200,000 from my previous job. If I could roll that back into a pension plan, then that goes away for purposes of the Roth conversion test, if you will, Jim Lange. If I convert after-tax dollars at that point in time, I am in awesome shape because I am not paying any tax on that conversion. I don’t know if that answers your question or if it came close.

Jim Lange: Yeah, it does. It is such a beautiful thing, and so few advisors and so few people are aware of it. So, let’s just say--and I will give you some numbers that I get that are somewhat typical. One of the big companies around Pittsburgh--I am not sure which ones would be the equivalent in Wisconsin--and by the way, I think Pittsburghers have a natural affinity towards Green Bay because you guys play hard nosed cold weather football just like we do.

Beth Bershok: It’s tough. It is tough football.

Bob Keebler: We live about a mile from the stadium from Lambeau Field--just to rile your viewers up, there is no doubt in our mind that Green Bay is the center of the football universe.

Beth Bershok: Bob Keebler, that’s crazy talk. You do realize who won the Super Bowl this year?

Bob Keebler: I do realize.

Beth Bershok: Ok.

Jim Lange: I will grant Bob Keebler something. Green Bay used to have a good football team.

Beth Bershok: That was a long time ago. Hey, we need to take a quick break. We will be back. It is The Lange Money Hour: Where Smart Money Talks, Jim Lange, Bob Keebler, the Lange Money Hour.

Beth Bershok: Thank you for joining us tonight. I am Beth Bershok with Jim Lange, CPA, attorney, and best-selling author of the book Retire Secure! Pay Taxes Later, and Bob Keebler is with us as well. We are going to be getting back to some more strategies. I do want to mention we’ve been doing a seminar, Jim Lange, that has been so successful. We just had one on Saturday. It’s called Two New Tax Laws Create Shocking Opportunities for Wealth Preservation, and you two were just touching on Roth IRAs and Roth IRA conversions. That’s what this workshop is all about, and we have another one coming up in June. I’m about to give you a phone number so you can RSVP. We already have some RSVPs, and I have to tell you that these workshops have been filling to capacity. It’s free. We are doing this on Saturday, June 20th at Crown Plaza, Pittsburgh South, which is right across from South Hills Village. We will have two sessions: 9:30 to 11:30 am and 1:00 to 3:00 pm, and you can register at 1-800-748-1571--that’s 1-800-748-1571--and by the way, if you come you get Jim Lange’s book. We had Larry King who did the forward, and Ed Slott did the introduction--great testimonials from Charles Schwab and Jane Bryant Quinn. So, you get that book if you come to the seminar, and it is coming up on Saturday, June 20th. Now, getting back to what you were talking about, and it was a strategy that you both claim a lot of advisors don’t know about.

Jim Lange: Well, I was going to give Bob Keebler the example of one of our Westinghouse employees--and by the way, it could actually be any company. Let’s say, for discussion’s sake, the entire 401k is $1,000,000. Let’s say that $50,000 is after-tax dollars. So, Bob Keebler, what would you do if somebody came to you with a million-dollar 401k--$50,000 or even by now it has been rolled into an IRA--but have $950,000 traditional IRA and $50,000 after-tax IRA, and they’re interested in getting into the Roth IRA world. You had alluded to, there’s something that you could do to create basis. What would be one of your strategies for somebody like that?

Bob Keebler: Let’s start right now. If you converted everything to the Roth IRA right now you would pay tax on $950,000 and $50,000 would be tax-free basis. Let’s say you did a 10% conversion, then $95,000 would be taxable and $5,000 would be basis, pretty straight forward. Now what you could do, you could try to roll the $950,000 back into some type of pension plan-- maybe it is a plan you set up for a consulting business you have--but then once you did that the $50,000 is sitting there, and it’s all basis, Jim Lange, and you would try to convert that over to the Roth IRA, and that creates a situation where you pay no tax at all on the conversion. In reality, I’d probably tell someone to maybe convert $100,000 where your tax rates going to fall to such a low rate that the Roth IRA just becomes extremely powerful.

Jim Lange: I think that that strategy we have done numerous times. In fact actually, Kiplinger’s Retirement Reports just interviewed me on that exact strategy. It’s so powerful because the downside, of course, with the Roth IRA conversion is nobody likes writing a check upfront to the government. Even though I think that both Bob Keebler and I could prove to people that in many, many, if not most cases, it’s a very good strategy, but the idea of getting a Roth IRA conversion without having to pay the taxes is wonderful. I believe there are some new laws that make it a little easier in terms of direct 401(k) to Roth IRA as opposed to the old rules that said you had to go from 401(k) to IRA and Roth IRA.

Bob Keebler: Right. The law was changed several years ago, and what we can do is actually go right from our pension plan into a Roth IRA account. So that is something that is a powerful thing. They have to have somebody like you help them sort through that, but it can actually work very well for most people.

Jim Lange: Because what you are doing when you do that is you are actually avoiding those proration rules when Bob Keebler was talking about, “Well then 10% of it’s going to be tax free and the rest is going to be taxable or 5%,” but now we’re getting into a situation where the entire after-tax portion can go right to a Roth IRA without paying tax which is just a wonderful thing. Interestingly, Bob Keebler, I know that you, like I, go around the country giving talks to train different advisors and what my experience with that particular issue is that I get more questions about that issue not the day of my talk but a week, a month, a year, even several years later when the advisors actually try to put that strategy to work. I love those calls because I know that that’s a good advisor, because he is going through the trouble of doing the right thing when his client is retiring--in other words taking care of the after-tax dollars inside the 401(k) plan.


5. Listener Q&A: Why (and When) Is a Roth IRA Conversion Appropriate?

Beth Bershok: Jim Lange and Bob Keebler, I have an e-mail question because Jim Lange just mentioned this a minute ago. You said that you could prove that the Roth conversion in most cases would make sense. Well knowing that you were going to be on the show, Bob Keebler, I had some e-mails coming in, and many people were asking the same question. So I wanted to toss this out to both of you. I got the same question from Florida, the same question from Maryland, and this is what they said. They said both Jim Lange and Bob Keebler are top advisors on Roth IRAs, we know that, but they read material from other advisors around the country who say that in most cases, a Roth conversion doesn’t make sense so they wanted to know what your thoughts are or explain why both of you normally advise Roth conversions.

Jim Lange: Why don’t you take that first, Bob Keebler?

Bob Keebler: Well, first of all, a Roth conversion is not appropriate for everyone, and you need someone to analyze whether it is appropriate for you. Let me give you an example of someone where it’s not appropriate. I look at a client, a lady I help. I charge her hardly anything, but she makes just enough so that a little bit of her social security benefits are taxable, and she’s in this very low tax bracket. A Roth conversion would simply push her into a higher tax bracket, and there’s no need for that. When she takes money out of the IRA, she’s always going to be paying tax at 10 or 15%, so there it’s not appropriate. Now on the other hand, you go to the other extreme--and a lot of times we are working with people with very large net worths--and they know that under the new administration’s income tax plan, tax rates are going to go up. So when you look at that you say to yourself, wow, I really should be converting to the Roth IRA today. So it’s not appropriate for everyone, let’s start there. Secondly, you have to use some of the advantages in the code to make this work. One is you pay attention to these basis rules which Jim Lange was just going through with us. Secondly, you look at a rule, which Jim Lange is going to have to clarify for us because I’ll never explain it correctly, called a recharacterization rule. That simply means that if I convert $25,000 today I have up until October 15th 2010--so over a year--to determine whether I want to keep that money in the Roth IRA. So if I converted $25,000 today and that grew to $35,000, I would be very, very happy, Beth Bershok, with that because I would have won the game. Now on the other hand, to flip that around a little bit--if it goes the other way and it goes from $25,000 down to $15,000, then of course I would erase that--I would recharacterize it-- and not pay tax on that Roth conversion. So I think you have to be very diligent with understanding these rules. Look for every possible advantage that’s going to help you make this work.

Beth Bershok: Right, I think what they are saying is that I think as a consumer, these aren’t financial advisors, these are just people who are trying to figure out their own retirement. They hear conflicting information from people that they consider to be top advisors, and they’re just wondering how that could even be possible. I have to say in Jim Lange’s book, Retire Secure! Pay Taxes Later, if you have a copy of that book, we have done the calculations, and the charts and graphs are in the book so you can actually see in black and white what kind of advantage you would have.

Jim Lange: I will say a couple of things. One, I think that you have to be careful about who you read and who you listen to. One of the nice things about listening to or reading Bob Keebler, who is literally a nationally-recognized expert in IRAs and Roth IRAs, and reading some of my materials that has been peer reviewed by the American Institute of Certified Public Accountants, and both of us offer nuts and bolts calculations showing that people are better off. What I would do is go to those advisors who don’t advise it and say, “Let’s see your nuts and bolts calculations, please,” and “Have you had this information peer reviewed?” The other thing is I tend to be a little bit more partial to CPAs preparing this kind of analysis even over and above attorneys and financial advisors.

Couple other points that I wanted to expand on. Bob Keebler’s analysis of the lady who would, by making a Roth IRA conversion, increase the percentage that is taxable for her social security, so even though she might be in the 10 or 15% bracket, the Roth IRA conversion could cost her 25 or 28%, and I would agree with Bob Keebler completely, it would not be appropriate for her. The other thing for some of the lower income people--and by the way, you could still be a “lower income person” even if you had a million dollars if most of your money was in a retirement plan--is that right now in 2009 and 2010, there are very favorable rules for qualified dividends and capital gains and sometimes--and this is for people who are in the 15% bracket--you are basically paying 0% on your qualifying dividends and capital gains. If you do a Roth IRA conversion that might bump your income tax bracket up not just for the conversion, but also now you might end up paying tax on your capital gains and your qualified dividends. So, I think you have to be careful.

I would also agree with Bob Keebler, it’s not appropriate for everybody. My big thing is, “What is your income tax bracket now when you make the conversion, what will it be after, are you converting so much that you are going to throw yourself into a higher tax bracket?” I am not a great fan of taking a 15% taxpayer and throwing them into a 25 or 28% tax rate with doing a Roth IRA conversion. I think that the length of the investment--do you plan to hold this for five years, 10 years or 50 years--the longer the better. I would say if you are leaving your money to charity, it’s probably not a good one.

I would take also the recharacterization rules that I thought Bob Keebler did a good job in explaining. There is one way I like to explain it, though, that I think that some people might resonate with. Rather then using the technical word “recharacterize”, I prefer to use the word “undo”. So let’s say that instead of 2009 when you are listening to this show, let’s say it is 2008 and you were listening, and we had the same discussion. Yeah, Roth IRA conversions are wonderful, go out and make a Roth IRA conversion. Let’s even say you see the appropriate advisor, you make $100,000 conversion, and now you’re sitting here in 2009 and the Roth IRA is only worth $60,000 or $70,000. What Bob Keebler is saying is you might want to--in fact you do want to—“recharacterize” or I am going to use the word “undo” that Roth IRA conversion by October 15th 2009 for a 2008 conversion or if you do the conversion in 2009, you have until October 15th 2010 to recharacterize or undo the Roth IRA conversion.

Beth Bershok: If you miss the deadline, it’s too late. 412-333-9385--that is the studio line if you have a question for Jim Lange or Bob Keebler. We will be back after a quick break. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking smart money. I am Beth Bershok with Jim Lange and our guest tonight is Bob Keebler. You just heard mention of the next seminar, and I want to give you the registration number again, because we already have quite a few people signed up for this one on Saturday June 20th ; two sessions, 9:30 to 11:30 in the morning, 1:00 to 3:00 in the afternoon. That’s the one at Crown Plaza South which is right across from South Hills Village. We do get filled up so if you would like to RSVP, I would do that as soon as possible, and that’s a toll free number--1-800-748-1571. By the way, that answers 24 hours a day so if you want to call sometime tonight, you go ahead and do that--1-800-748-1571. Jim Lange and Bob Keebler, it’s at a point where people have been panicking for the past few months--actually longer than the past few months--and they are looking now, they want to be able to retire comfortably and protect their assets. So I know that you two both have a lot of strategies involved in protecting assets.

Jim Lange: I am going to let Bob Keebler do the asset protection. I am going to do one more quick example with the recharacterization, because there is a clever strategy that I like to use. So let’s say for discussion’s sake that you make a Roth IRA conversion a month from now, and let’s say that we all hope that the market’s going to go up. You are going to be very happy because you made a $100,000 conversion, and the market will go up to $125,000 or $150,000. But let’s say that it goes the other way. You make a $100,000 conversion, and the asset goes down to $75,000 or $50,000, and now it’s getting towards the end of the year, and you are not feeling too good about this, because if you just do nothing other than just sit on your $100,000 Roth IRA conversion, now worth $50,000 or $75,000, you are not going to be very happy, because you still have to pay tax on $100,000 because you pay tax on the value of the IRA when you converted it. What we are doing for people in that situation is recharacterizing that IRA, but then we are taking a different IRA, and we are making a Roth IRA conversion of that different IRA. So let’s say you take a different IRA that’s worth $100,000, what we are doing here is a little bit tricky but, let’s say the first one we do for $100,000, then if it goes way down the same year, we will recharacterize that and then make a Roth IRA conversion of a different investment.

Beth Bershok: It has to be different, right?

Jim Lange: It does have to be different for $100,000 and that way you have a Roth IRA that’s worth $100,000 instead of a Roth IRA that’s worth $50,000 or $70,000.

Beth Bershok: He just wanted to throw that in.

Jim Lange: I wanted to throw that in.


6. Listener Q&A: Tax Loss Harvesting Example

Beth Bershok: I have to throw in something because we have another caller on the line. This is Gary from East McKeesport. I think this is going back to something we covered in the first part of the hour, tax loss harvesting. Is that what you wanted to ask about Gary?

Gary: Right.

Beth Bershok: Ok, what is your question?

Gary: I just wanted to know if this would be the circumstance for your topic earlier. The mutual fund I had I held for over 10 years at its peak last year. I bought it for $250, and at its peak last year it was up to $1,000. It dropped this year, and I liquidated when it got down to about $600-$700. I wonder if this would be a circumstance for the harvesting.

Beth Bershok: Bob Keebler, can you take that one?

Bob Keebler: So you have accrued a very large gain?

Gary: Right.

Bob Keebler: And if there are losses in other accounts.

Gary: When I liquidated the large gain of last year when it was at its peak of $1,000 I liquidated this year when it dropped to 650.

Bob Keebler: So the difference between what you paid, roughly $250, and the $650 is a very large gain, hopefully long-term capital gain. Now what you need to look at is are there other losses in your portfolio that you can use to offset that.

Gary: No.

Bob Keebler: So, if there’s no other loss in your portfolio, then you know basically you are going to pay income tax on that difference. If there are losses in your portfolio at the end of this year, you could look at harvesting those and using those to offset that gain.

Gary: Ok, thanks.

Bob Keebler: You’re welcome.

Beth Bershok: Alright. Thank you Gary from East McKeesport, and if you do have a question, it is 412-333-9385. Ok, we are done with recharacterization, right?

Jim Lange: Right.

Bob Keebler: Right.

Beth Bershok: Ok, I am just checking.


7. Strategies for Asset Protection

Jim Lange: I am done with recharacterization, but Bob Keebler also has some very good information on asset protection, so I thought maybe we could turn the mic back over to him and let him answer some of your concerns about people wanting to protect their money moving forward.

Beth Bershok: Right. Bob Keebler, do you get people into your office that just go, “Oh Bob Keebler, I don’t even know what to do, I just want to make sure I have money left.”

Bob Keebler: Well, there are two issues there. One is to have the right balance in their portfolio--and that’s something that a financial advisor will help them look at--the right mix of stocks and bonds. Then on the asset protection side, there’s the other thing of what if something goes wrong in my life, I am sued. So whenever anyone retires out of a pension plan, we want them to work with their lawyer just to make sure that when that money rolls into an IRA that they are not losing any bankruptcy protection or asset protection that they truly need. For example, when physicians retire, this is a big one. You want to make sure that they’re not moving the money, depending on what state they are in--like if you are in a tri-state area so the law in Ohio, the law in West Virginia, and the law in Pennsylvania are all different. You want to make sure that when money rolls from that ERISA plan. So the money in my pension plan can not be taken away no matter what I have done. Great examples of this would be OJ Simpson or Bernard Madoff.

Beth Bershok: Right. Yeah, OJ still has that money coming in.

Bob Keebler: Correct, so when you look at that you have to say to yourself, “How do I restructure this so that when I move my money from my ERISA plan, I continue to get the asset protection I need.” Now some people, if you are a retired teacher, odds of litigation from your job are very, very low in a retired professor. So then you just want to make sure you have enough insurance coverage. For someone like a physician or a lawyer or architect, that could go on for a long time. So you want to be very careful with where you are moving your money. So there is merit for certain professionals to leave the money in the pension plan until they are sure that any chance of losses associated with their profession is well behind them.

Beth Bershok: How far away from retirement do you need to start really strategizing about that?

Bob Keebler: Jim Lange, what would you say—two to three years?

Jim Lange: I would say that that’s a good period. I very much agree with you. In fact, let’s say that I have that example where I have a retiring physician or retiring attorney or retiring CPA who gives advice on the radio, and I am worried that somebody is going to sue them. Let’s assume for discussion’s sake that they are done with their main job, but they do a little thing, they do some consulting, maybe they do a little work for the company that they used to work for or they have some type of earned income. I like to set up a one-person 401(k) plan which is by law an ERISA plan that does have the asset protection features that you have mentioned. Rather than their IRA being their main asset that holds IRA or qualified or pre-tax dollars, I actually have their own one person 401(k)--that is still under their control, not under the old employer’s control--be the main asset rather than the IRA. One of the reasons I like to do that is the exact reason Bob Keebler is pointing out--ERISA protection.

Beth Bershok: Ok, Bob Keebler, he did say you could tell him he was crazy if you didn’t like that.

Bob Keebler: No, no. I think that’s fine.

Beth Bershok: Ok.

Jim Lange: Then there’s another reason why I like that, which is a new reason, and that’s based on a new tax law. So let’s say for discussion’s sake that I have a million dollars in a retirement plan. I roll it into my own one-person 401(k) plan, and then I die and let’s say that I leave it to my kids. So my kids have an inherited 401(k) plan whereas if I did the normal thing which was to roll it into an IRA, they would have an inherited IRA. Under the new rules the kids, the beneficiaries of the 401(k), are actually allowed to make a Roth IRA conversion of the inherited 401(k) but they are not allowed to make a Roth IRA conversion of the inherited IRA.

Beth Bershok: That’s one of those weird, quirky tax codes.

Jim Lange: It is. In my opinion it’s a mistake where somebody wasn’t thinking, but it’s something we can take advantage of. So to me having a one-person 401(k) as your main pretax money has two advantages--one is asset protection against creditors, and two is the ability for your kids to roll the money into an inherited Roth 401(k).

Beth Bershok: Jim Lange and Bob Keebler, we are down to a few minutes here, so we need to take one more quick break. It is The Lange Money Hour: Where Smart Money Talks.


8. The Big IRA Book

Beth Bershok: Thank you for joining us this evening. I am Beth Bershok with Jim Lange and special guest Bob Keebler. The hour has flown by, and we are down to our last few minutes. You guys are just, wow; there have been so many strategies on this show tonight. This is my recommendation, this audio is going to be up on our website next week, it’s www.retiresecure.com. So if you want to revisit some of the strategies that Jim Lange and Bob Keebler have laid out today, that would be the way to go. Go to the website, check it out, you can listen to the whole show in its entirety. Hey, Bob Keebler, I know you have something new up your sleeve, and I wanted to give you a chance to mention it. Its something called The Big IRA Book.

Bob Keebler: That’s a book that Attorney Cecil Smith worked with me on. Cecil is a lawyer down in Tennessee, and Cecil is a very good graphic artist. He put together this book that walks everyone through all these complicated IRA rules. If people go out to www.bigirabook.com they’ll see a little bit of the book. I would say the book is mostly for lawyers, CPAs and financial advisors where it’s going to have the most utility, but certainly anyone with a very large IRA may get some benefit out of it.

Beth Bershok: It literally is a big book, it’s something like 17x11 ½ or something like that.

Bob Keebler: That’s the beauty of it.

Beth Bershok: Literally.

Bob Keebler: We have taken what other people put into words, and we put it into mathematics and graphics where it’s hopefully easier to grab on to.


9. Last Thoughts on Asset Protection

Beth Bershok: Jim Lange, Bob Keebler, we have about a minute left. Any last thoughts on asset protection that you wanted to share with our listeners, Bob Keebler?

Bob Keebler: Well, I think the big thing is you seriously have to look at two things. One is you want to make sure the capital you have is well protected--meaning that it doesn’t fall apart in a bad market. So that’s something you work with your financial advisor on. Now the second thing you need to do is what you work with your lawyer on, and that’s making sure that the wealth that you have is in places where your creditors simply can not take it if the worst conceivable thing happens--the $10 million car accident. You also want to make sure that you have adequate insurance. For example, if a person carries a $5 million umbrella policy, and they get into a bad traffic accident, they’re going to get the 55-year-old lawyer who has been litigating for 30 years and not the 25-year-old lawyer who graduated from law school last week. So the beauty of that is, that’s why you want to make sure that when you have wealth you are worried about protecting, go ahead and make sure you have adequate insurance coverage. Look at when you start moving money from a pension plan into an IRA, depending on what state you are in, you may lose some of that asset protection, so very carefully look into that.

Beth Bershok: Hey Bob Keebler, thank you so much. You have been so generous with your time tonight. We really appreciate it. Guest Bob Keebler and again his new book is The Big IRA Book. Check it out at www.thebigirabook.com. Jim Lange wants to make a special offer, too. We did this last show, and they went fast so I am going to give you a phone number here. What are we doing, Jim Lange, six books, Retire Secure! Pay Taxes Later?

Jim Lange: Yeah, I think the first six people who either call in or e-mail you.

Beth Bershok: Ok, and the e-mail address is admin@paytaxeslater.com or you can call 412-521-2732 if you even just go right to extension 219. In fact, you can do that tonight if you just punch in extension 219, it will go right to my extension and request Retire Secure! Pay Taxes Later. First six people that do that will get one of these books, and again the introduction was written by America’s IRA expert, Ed Slott, Larry King of CNN wrote the forward. We have all kinds of glowing testimonials from Charles Schwab and Jane Bryant Quinn. So this is free for the first six people, admin@paytaxeslater.com or 412-521-2732 extension 219. Next show is coming up in two weeks which will be June if you can believe it. We are going to be talking about trusts and all sorts of angles including--I think this is fascinating--myths about trusts. So we will be doing that the first week in June. Check out our website too, it’s www.retiresecure.com. Thank you for joining us tonight, it’s 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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