There is a new tax law which is scheduled to expire at the end of this year, which allows you to donate directly to a qualified non-profit organization, from your IRA, without having to pay any income taxes on it. If, for example, you want to contribute money to your religious organization, you notify your IRA holder and ask them to make out a check from your IRA and payable to the religious group. The IRA holder will mail you the check without any taxes being deducted. You then give it to the organization. There is a reasonable time limit to when the check is cashed. I haven’t found out, yet, how it is reported and whether is can be part of your required minimum distribution but I’ll find out'
LewBohn
lewbohn@optonline.net
August 2006
-
Over a year ago, I noted (but didn’t recommend) the Wall Street canard, “Sell in May and go away”. As it turns out, the summer of’05 started a good second half after a rather lackluster first half year. This year the first half had violent ups and downs but didn’t go anywhere. The increasing worldwide anxiety over turbulent world events has depressed stocks which are waiting to find out which way the world will turn. Overlaid on all of that is the confusion caused by the new Fed Chief, Ben Bernanke. The S&P 500 typically rises 16% in the 12 months after the Fed stops raising rates, but has the Fed stopped? Who knows? Bernanke hinted at it, but raises continue and as long as inflation increases, the Fed will continue to increase rates. Speaking of inflation, the Consumer Price Index (CPI) rose 2.3% in 2003, 3.4% in 2005 and was rising at the annualized rate of 5.1% during the first four months of 2006. Even at 3% inflation, the buying power of today’s dollar loses more than half its value in 25 years.
- For several years I have done well with foreign stock funds; Canada, Europe and International. Funds that I don’t own, Latin America and Emerging Markets, did spectacularly. This year, however, the bloom may be off the rose. With foreign funds I broke even the first half and most gurus are warning investors that the long run-up is over and to bail out and return to domestic funds. The exception is Japanese funds which have done poorly but are beginning to show strength. One guru, Roger Lowenstein, of “Smart Money”, believes, however, that despite the recent three month drop, foreign investments are poised to rise again. One of the many reasons I don’t do better in the market is that I am reluctant to sell winners until they become losers. What do you think I should do with my foreign holdings?
- The FDIC has increased the deposit insurance protection for IRA’s and self-directed Keogh, 457(k) and 401 (k) accounts to $ 250,000. Married couples can double up on the $ 250,000 by splitting the accounts between them. This is the first increase in over 25 years. Coverage for individual or joint checking and savings account remains at the current $ 100,000.
- Here’s one I wish I knew about when, upon retirement, I rolled my 401 (k) over into an IRA. Maybe it wasn’t available then, but it is now. As you roll over your 401 (k), you may withdraw only your company stock. At that time, you pay full income tax on only your cost basis, but all your past and future gains are taxed at the much lower capital gains tax rate when you ultimately sell it. It will cost you more at the beginning, but could save much more later on.
- RediClinic operates small clinics in retail stores and plans to open in many Wal-Mart stores. They can stitch you up or give you a prescription without the hassle of getting appointments or going through the ER at you local hospital. I went to an ER once to inquire about a friend and before I could open my mouth I had an IV in my arm (not really).
- The Social Security trust fund is expected to run out of money in 2040. It doesn’t worry me as I won’t be around then, but I can’t imagine any politician wanting to get re-elected allowing that to happen. They won’t have to reduce benefits and raise taxes because they will eliminate “waste and fraud in the government”. (If you believe that, contact me as I have a bridge to sell.)
LewBohn
lewbohn@optonline.net
June 2006
The Roth IRA
The Roth IRA was discussed in MONEY MATTERS,ETC. in the 06/20/06 issue of the H/AREA NewsLetter by contributor Lew Bohn.
This is an expanded version on that same topic. It provides answers to several related questions that arose when the subject was first broached and could not be totally answer due to NewsLetter space limitations. These questions are listed below.
- What are restrictions on whether I can do that?
- How much money am I allowed to switch?
- What are limits (both time and amount) on when I can make withdrawals?
- What do you think Congress will do with the 15% tax when it expires in 2010?
1. What are restrictions on whether I can do that?
Let us begin by providing an abbreviated chart that compares the Traditional IRA with the Roth IRA.
The full chart can be gotten by going to the AARP website. Here’s the URL path that you take.
AARP
Click on Topic Money and Work.
On the L-H side, click on Topic Financial Retirement & Planning.
In session 7, Retirement Planning , Click on Individual Retirement Accounts (IRA’s).
ALA: This chart appears in greater detail.
You may wish to pursue the two (2) Session 7 topics which are underneath later:
Traditional IRAs
Roth IRAs
The AARP Roth IRA offers websites for Conversion (Traditional IRA to Roth IRA) Calculators.
You may wish to try these sites using your particular financial inputs.
Comparison of Traditional IRA to Roth IRA
| Topics |
Traditional IRA |
Roth IRA |
| Eligibility |
All worker under the age of 70 ½ at
the end of the calendar year. |
No age restrictions to open. Fully
eligible if income is below $95k
(single) or $150k (joint). |
| Contributions |
Made with Pre-Tax income. This
reduces the gross taxable income for
that year by the amount contributed. |
Made with After-Tax Income. |
| Tax Benefits of Contributions |
Fully deductible if you don’t have
an employer retirement plan. |
Not deductible. If converting from
Traditional IRA to Roth IRA,
the taxable portion of the IRA is
taxed in the year of the conversion. |
| Rollovers |
No annual limit on the amount
rolled over from another qualified plan. |
Same |
| Conversion |
NA |
May convert from IRA to Roth
IRA if income is less than $100k. |
| Earnings |
Untaxed until withdrawn. |
All qualified distributions after
59 ½ are untaxed. Could be a
penalty if not in the account for
at least 5 yrs. |
| Distributions |
Must begin distributions by April 1
in the year after turning 70 ½.
If the distribution is less than the
minimum annual reqm’t, a penalty
of 50% of amount that should have
been distributed. |
No distribution reqm’t except
possibly in the case of Death. |
2. How much money am I allowed to switch?
Ref: IRAs : Deptment of Treasury Publication 590.
Section: Can You Move Retirement Plan Assets?
Topic:Converting From Any Traditional IRA into a Roth IRA.
Note: You can view the 2005 Edition of this Pub. by going to the URL.
IRS
Click on More Forms and Publications.
UnderView Online, click on Tax publications. Scroll down to Pub. 590. You can view it in two (2) formats: HTML or PDF (Requires Adobe Reader).This Pub is over 100 pages so print selected sheets or order a full copy as a handy Income Tax reference from the IRS.
You can convert amounts from the Traditional IRA into the Roth IRA if for the tax year you meet the following requirements.
- Your Modified AGI for the Roth IRA purposes is not more than $100k.(Note: To determine this,
there is within the 590 Pub, Worksheet 2-1; Modified Adjusted Gross Income for Roth IRA Purposes.)
- You are not a married individual filing a separate return.
There are three (3) basic Conversion Methods.
- Rollover: You can withdraw all or part of the assets from the Traditional IRA and invest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (Convert) to the Roth IRA is called a Conversion Contribution.The 10% additional tax on early distributions will not apply if you do this rollover properly and timely.
Note: This type of Rollover is not a Rollover Contribution which is used to denote a Tax-Free distribution of cash and other assets from one retirement plan that you contribute to another retirement plan.
You must rollover into the Roth IRA the same property you received from the Traditional IRA. You can roll over part of the withdrawl into the Roth IRA and keep the rest of it. The amount you keep will be taxed (except for the part that is a return of Nondeductible Contributions to the Traditional IRA) and maybe subjected to the 10% additional tax on Early Distributions.
- Trustee-to Trustee Transfer: You can direct the trustee of the Traditional IRA to transfer an amount from that IRA to the trustee of the Roth IRA.
- Same Trustee Transfer: If the trustee of the Traditional IRA also maintains the Roth IRA, you can direct that trustee to make this transfer.
Whatever the conversion method is used, the trustee of the Traditional IRA will prepare a Form 1099/R to report the distribution and the trustee of the Roth IRA will prepare a 5498 to report the conversion contribution.
- Required Distributions: You cannot convert amounts that must be distributed from the Traditional IRA for a particular year ( including the calendar year in which you reach 70 ½) under the distribution rules.
- Inherited IRAs.If you inherited a Traditional IRA from someone other than your spouse, you cannot convert it into a Roth IRA.
- Income: Unlike other IRA rollovers, a conversion or rollover from a traditional IRA to a Roth IRA is taxable. All of the income is treated as ordinary income, even if some or all of the income received by your IRA was capital gain.
If you've made nondeductible contributions to your IRA, then part of the rollover distribution will be nontaxable
How do you report all of this to the IRS? Treasury Form 8606 Non Deductible IRAs should be place. You can go to the aforementioned IRS website and view/get this form.
- 8060 - Part 1 deals with Nondeductible Contributions to Traditional IRAs.
- 8060 - Part 11 200[ ] is Conversions From Traditional IRAs to Roth IRAs.
- 8060 - Part 111 is Distributions from Roth IRAs.
3. What are limits (both time and amount) on when I can make withdrawals?
What Are Qualified Distributions (Withdrawls)?
It is made after a 5 yr period beginning with the 1st taxable year for which the contribution was made to the Roth IRA set up for your benefit. The payment or distribution is:
- Made on or after the date you reach 59 1/2.
- Made because you are disabled.
- Made to a beneficiary or to your estate after death.
- One that meets the reqm’t listed under First Home.
One of the major question you will have to answer is:
Where Will the Money Come from to pay tax on converting a traditional IRA to a Roth IRA to reap the benefits of conversion?
And How Will It Effect those 15% Gains that you were wanted to realize ?
And what about the above 5yr Wait Period?
Is a Roth Conversion Worth All This Effort ?
To allow as much money as possible to grow federal tax-free, you should pay any applicable taxes on your IRA distribution out of
your non-retirement savings. As long as you can pay the taxes - Federal and State - from another source, you may benefit from this conversion.
Should a onetime conversion place you in a high tax bracket which would be DISCOURAGING, the strategy might be a series of
partial yearly conversions so that your income is taxed in lower brackets each year. If you proceed down this path, I would strongly
suggested opening separate Roth Accounts due to the 5 year waiting period before making a tax free withdrawal. It might become an
accounting nightmare to track partial conversions made over several years in one account. The IRS could audit this.
If you must use some of your IRA assets to pay the taxes, you may be subject to an early withdrawal penalty on those assets.This is
dependent on the above Item 1). The resulting "cost" of converting could outweigh the benefit of federal tax-free growth.
You are about to embark on a Journey into the Land called called Information Overload.Here are two (2) websites that are excellent
sources for explaining the complexities of converting a Traditional IRA to a Roth IRA.
It should be immediately recognized that this IRA/Roth Conversion is a Complexity Unto Itself.
And That’s Why We Have A Growth Industry in Tax Accountants !
Website #1:
Fairmark
This website will take you through a host of topics. (Note: This will make interesting Night-Time Reading !)
- Conversion Preliminaries – A Starting Point
- Conversion Eligibility
- Partial Conversion
- Advantages of Conversion
- Disadvantages of Conversion
- Conversion Consequences of converting a traditional IRA to a Roth IRA.
- How Much Conversion Tax ? Determining how much tax you'll pay if you convert a traditional IRA to a Roth IRA.
- Source of Funds for Conversion.( An Answer to Question of How You Pay the Taxes)
- Timeline for Using Your IRA
- Periodic Payments and Conversion
- The Future of Roth IRAs.
You might be quite satisfied if you have digested all the info above. HOWEVER, there is one more excellent source you
might want to visit; The Motley Fool.
Website #2:
Fool
Under Personal Finance, click on IRA’s.
New Screen: Click on Step 3: Roth vs Traditional.
Next Screen: At the very bottom, Click on: ‘we have an entire IRA Area at your disposal.
There are over 10 Topics in this area covering this subject including an IRA Glossary and Top 10 Roth Q’s.
These Topics have various examples in them which maybe applicable to particular situation.
4. What do you think Congress will do with the 15% tax when it expires in 2010?
Pardon My Extensive Dissertation on this Subject !
Harry Potter had use of the Pensieve at Hogwarts. In Lord of the Rings, the wizard Saruman the White had the rare seeing stone Palantir.
I have no crystal bowl in my house but I am willing to offer some opinions on the question you posed based on what I hear and read ala Yr 2006.
The USG has no fiscal restraint when it comes to printing money. (Can U image Us trying to run our homes like that!
(The new Bankruptcy Laws changed that landscape.)
We- As A Country -
- Still have huge outlay for Iraq for their new army and for rebuilding their infrastructure.
( Saddam looted the country and was more interested in building palaces for himself.)
- Still have a huge outlay for Hurricane Katrina and who knows what disasters lie ahead.
They could be Bird Flu; Earthquakes on Pacific Coast –Adios LA & SF; Another Al Queda Attack; More Gulf Hurricanes; etc.
- Have not answered the question of how to fund our Entitlements ( SS, Medicare, MediCad) and the Pension Benefits Guaranty Corporation ( PBGC).
The Airlines and Others simply walk away from their pension obligations and hand it over to ‘Uncle’ to assume.
The theory is that Uncle has REAL BIG DEEP POCKETS!
- Will have to fund the COST of the Immigration/ Border Security Problems brought on by 20 yrs of
‘Looking the Other Way’.(Mexico never had it so good!They get rid of their ‘People’ Problem by sending their labor ‘problems’ to us.)
Does anybody in the U.S. save any money? We seem to live on CC’s. My mail is loaded with CC applications – especially from First Capital.
(They do run funny commercials on TV.)
Will the Chinese cash in those TN’s that they hold someday and make a run on our Treasury?
( Remember when the Japanese were in their Buy USA mode. We’ll now have Chinese landlords. Can you image the language barrier?)
When the Housing Boom goes Bust and the present owners surrender their house keys, Will the Banks will expect a ‘bailout’?
(Remember the S&L Crisis in the early ‘90’s)
What’s our sources for dependable oil? We thumb our noses at ANWR in AK and the reserves in the Gulf of Mexico.
Its always NIMBY time in the US when it comes to building oil refineries (It takes 8-10 yrs to get one up and running if the environmental
permits allow it to happen.)
Do we have an Alternative Fuel Program (Ethanol, Hydrogen, etc) in our Future that we are willing to finance
like we did when we went to the moon in the 60’s/70’s?
OR
Do We Forever Live on Fossil Fuel Alone (Which Generates More Global Warming) and Pay the Arabs Their Price.
(They in turn can use that money to fund their Jihad thru terrorist groups like Hamas and Hezbollah !)
Extend the 15% Tax? This tax is based on a ‘trickle down’ economic idea that the ‘Rich’ gets most of the benefits
and will spent/invest that money in new economic ventures that will somehow ‘Benefit’ us.
McMansions.
The TAXBILL for Our Sins is Coming Due! Our Debt has to be PAID down or Inflation will be the death toll of us all.
Who knows which political party will have as its President ' We need One with Strong Leadership -
That Realizes What Political Capital Is & Who Knows How To Spend It on the Most Pressing Agenda Items.
GWB wasted Yr 2005 trying to sell America a tax plan - Take Money from SS and setup Personal Savings Accounts - for younger people.
This fell on deaf ears with our mounting budget.)
Who knows the make-up of Congress in 2010! Will THEIR Interests ever be for the Good of the Country
(Not Vested in the Corporations or Special Interest Groups Waving Bags of Campaign Money.)?
Extend the 15% Tax? At this time (Yr. 2006), it’s a Crap Shoot; Seven or Snake Eyes! Take your Pick !
Good Luck on your Quest for an Answer to this question! I hope I have pointed you in the right direction.
'Roth IRa Conversion' Reply by Email to Lew Bobn 05/30/06: Email Text Coverted to HTML 07/21/06:
by James Himich, Jr,
April 2006
- What a year this has been, so far! (It’s still winter while I’m writing this.) January started off with a bang and then on Jan. 20 the Dow took the biggest hit in the last 3 years. February schlepped along and then, in March, the Dow hit a 5 year high as it showed signs of awakening again. I have reported to you again and again during the past four years that the financial forecasters have been predicting the growth stocks will take off imminently. Maybe it’s now or maybe it’s not.
- I am the type who never forwards email no matter what dire things are threatened to happen to me if I don’t; or whatever wonderful things will happen if I do. I figure my contacts have better things to do with their time. Having said that, I will now forward two of them to you, here on the printed page. I can’t vouch for their accuracy.
- That telemarketing call you get on your cell phone is costing you money! To prevent this, call 1-888-382-1222 from your cell phone and ask to be placed on the National Do Not Call list. It blocks your phone for five years. (I hope that’s not a scam to get your cell phone number.)
- To get free directory assistance (i.e. 411) just dial 800-free-411 and you don’t pay for it; that’s 800-373-3411.
- If you have a significant amount in CD’s, improving your interest rate from 4.0% to 5.0% is a 25% increase in your income. To find the highest rate go to Bank Rate.
- This year your federal estate tax exemption is $2 million and the top tax rate is 46%. This exemption increases to $3.5 million in 2009 at a max tax rate of 45%. Surprisingly, there is no federal estate tax in 2010. If you’re unfortunate enough to live until 2011, your exemption plummets to $1 million and your max tax rate jumps to 55%; but don’t buy that cemetery lot for 2010 yet. That tax law is so crazy that I am sure that our wonderful inside-the-beltway politicians will come up with changes before the 2010 congressional elections.
- Speaking of estates – there are three essentials you should attend to now:
- Have an up-to-date will
- Prepare a letter of instruction to your survivors listing all financial info (bank account numbers, brokers, insurance policies, etc.) as well as valuable personal things like, for instance, who gets your complete collection of the H/AREA NEWSETTER’s.
- Make sure all your beneficiary designations are current.
- If your estate is sizeable (and, as a result of the value of your homes going up, many of you have sizeable estates) look into “disclaimers” and “by-pass trusts” to skip paying taxes for a generation so your kids don’t get nailed. I’m asking Anna Nicole Smith to help me with my will.
- Here’s a sure way to stop those annoying credit card applications from coming in the mail. Call 1-888-5OPTOUT (1-888-567-8688).
- How would you like an annuity that promises stock market returns with little or no risk? This is called an Equity-Indexed annuity (EIA) and right now they’re selling like hotcakes. Don’t forget my oft-repeated dictum: There’s no such thing as a free lunch”. For certain situations EIA’s may be OK, but they are very complex. The salesman you buy it from gets a high commission, up to 8%. A typical EIA is tied to an index such as the S&P 500 or Dow-Jones Industrial, or any of many more indices. EIAs have a participation rate which is the percent of the underlying index that is credited to your account. Most EIAs use a simple price index that doesn’t credit dividends. Example - over the past 40 years the S&P 500 has risen an average of 10.4% each year, but it’s only 6.8% if you don’t count dividends. Using a typical participation rate of 70%, then, your EIA return on the S&P 500 index would be only 4.76 % ( 70% of 6.8%). Other concerns: many EIAs have return caps, i.e. a maximum interest you can earn no matter how well the market does. EIAs have margin, spread and administrative fees. The guaranteed interest is typically between 1.5 and 3.0%. There are hefty surrender fees. Be sure you read and understand all of the fine print before getting an EIA.
- I am getting more and more reports from H/AREA members about different scams and “phishing” expeditions. Here are three:
- The “We are having a problem with your account” scam. Emails, allegedly from Chase Bank (or other reputable bank) ask for your account number and social security number. I am sure all H/AREA members are astute enough not to respond to these requests.
- You get a call from someone identifying himself as an AT&T service technician conducting a test on a telephone line. He asks you to touch 90# and then hang up. That person now has full access to your telephone line and can now place long distance calls billed to your home phone. Do not press 90# for anyone.
- You get a phone call saying you failed to report for jury duty and a warrant has been issued for your arrest. To straighten things out you are asked to give your Social Security number, birth date and other personal info. If you are a real patsy, they will ask for credit card numbers. Never give information to some one who has called you. If you feel you must, ask for their number and call them back, after checking validity of the phone number.
- If you are thinking of selling an investment property and buying another one, make sure you look into a 1031 exchange. It defers all capital gains until you sell your last investment property when you may be in a lower tax bracket. You must buy the second property within 45 days of the sale of the first one and close within another 135 days. It’s similar to rolling over a 401(k). There are strict provisions and you should have an experienced pro handle it for you.
LewBohn
lewbohn@optonline.net
January 2006
- All my readers will be delighted to know – I did it! I hit the big time! A piece I had written and for which I was paid, appeared on the front page of the Business Section of The Star-Ledger on Dec. 30., together with my byline. I guess that makes me a professional financial writer, so, henceforth, I will be billing your NEWSLETTER for my Money Matters, Etc. column. It may require an increase in your annual dues from $5 year to $20 –but, still, what a value! (Editor’s note: Lew may send as many bills as he wants, but rest assured, he won’t be paid and your dues will remain at $5 a year. In the interest of full disclosure, The Star Ledger ran a week long contest for alternate names for the Alternative Minimum Tax (AMT). Lew submitted a winning entry, viz. “Abominably Misguided Tax”, for which he won a Tee shirt.)
- Speaking of the Alternative Minimum Tax (AMT), it’s creeping up on us. Originally created decades ago to ensure the super-rich wouldn’t evade taxes, this income tax doesn’t allow many of the deductions that our normal tax does. It also isn’t indexed for inflation. So, for example, as our real estate taxes soar, the AMT does not allow that deduction. New Jersey is number two among the states when it comes to the percentage of filers who are hit by the AMT. For many of you, your taxes must be computed two ways: the conventional way and the AMT way, to determine which one you pay (the greater, of course). For an easy way to find out if it hits you, have your last year’s tax form and a copy of the 2005 tax form by your side and go to apps.irs.gov/app/amt/ . The line numbers in the form this year are slightly different which is why you need the new form for reference. It only takes a few minutes.
- A significant new law came into effect on Jan. 1 in New Jersey. It is the nation’s strongest deterrent to identity theft. You can “freeze” access to your credit report thereby denying anyone, including you, from obtaining a new credit card, a loan (mortgage, car, home equity, etc.) or anything else which requires someone to access your credit report. There is no charge. Later, you can “unfreeze” it for $5 to each of the three credit reporting agencies. To install a security freeze, consumers must first write to each credit agency by certified or overnight mail. The agencies will send instructions, including a PIN code, on how to “thaw” the reports should you wish to make a major purchase or take out a loan at a later date. The addresses and information required by the three major credit reporting agencies.
- Equifax
Equifax Security Freeze
P.O. Box 105788
Atlanta, GA 30358
Include full name, your current and previous mailing address, Social Security number and date of birth.
- TransUnion
TransUnion Security Freeze
P.O. Box 6790
Fullerton, CA 92834-6790
Include your name, address and Social Security number
- Experian
Experian Security Freeze
P.O. Box 9554
Allen, TX 75013
Include full name including middle initial; current address; previous addresses for the past five years; Social Security number, birth date, and two proofs of residence, such as copies of your drivers license, utility bill, or insurance statement.
- 2005 was a flat year in the stock market. I agree with the current forecasts which say the market will be up, down or sideways. The up gurus cite good corporate profits, P/E’s lowered to reasonable levels, inflation still under control and the consumer buying index is holding up. The down gurus cite terrible balance of payments (what if China decided to cash in their Treasuries?), the national debt is skyrocketing, the US is the only major country where consumers had a negative savings rate in 2005 and the housing starts are dropping which will drop furniture, appliance and commodities sales. Overlaid on this is the inverted yield curve which has preceded every recession we have ever had, though we have had a number of inverse yield curves which were not followed by a recession. Since 1965 interest rate inversions have occurred seven times and recessions have followed in five. Inverse yield is when short term interest rates (e.g. three month Treasury bills) exceed long term rates (e.g., 10 year Treasury Bonds). One day I think I’ll cash out and put my money in the money market, which is close to 4% and the next day I look at risky General Motors Bonds yielding 12% . (GM has lots of cash and Bond Holders get the first shot at it after they’ve paid their bills.)
- Though the index funds didn’t do well in 2005, there were many individual stocks that did. If you’re interested in managing your own portfolio and have the time and energy required I would recommend joining the American Association of Individual Investors (AAII). It’s a nonprofit corporation, costs $29/year when on sale, otherwise $49.
- Small mutual funds can invest in small companies whereas large mutual funds can’t. This gives the small funds greater flexibility and a much broader universe in which to invest. The larger the fund, the more closely it mirrors the indices. The small funds have greater volatility but, also, greater potential if you’re astute enough to pick the better funds.
Have a prosperous New Year,
LewBohn
lewbohn@optonline.net