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Posts Tagged ‘Roth IRA’

Q: I Have Never Qualified for a Tax Deductible IRA Due to High Income and 401(k) Access Through Employers. Neither Have I Qualified for the Roth. I Understand Beginning This Year There is No Income Limit on a Roth Conversion. Am I Correct in Thinking I Can Open a Couple of Non-Deductible IRAs (One For ’09 and One For ’10) and Then Convert All the Money to a Roth? No Restrictions on Income, No Taxes Due Since the IRA Would Be Non-Deductible to Begin With, No Penalties? It Sounds Too Good to Be True. Am I Missing Something?

A: You are correct in your assumptions. Yes, you can open two IRAs (one for 2009 and one for 2010), and safely convert them into a Roth this year because of the removal of the income limits on Roth conversions. I double-checked with an expert on this, David Mendels, who is a Certified Financial Planner and the President-Elect of the New York Chapter of the Financial Planning Association. David is also an adjust faculty member at New York University, as well as the head of the fee-based financial planning firm, Creative Financial Concepts, LLC. So he is very well-credentialed and I’m confident in his knowledge ane expertise. He told me to offer you two caveats, just to make sure your efforts go smoothly.

First, if you have any existing IRAs that are traditional IRAs or IRAs other than the new ones you plan to open, be aware that your basis will be calculated over the combined IRAs that you have, not just the ones you are opening now. Second, to make sure you don’t experience any future issues if any questions ever arise, keep very clean records about this for the future. Here’s how: wait a brief period after you open the non-deductible IRA before you do the conversion. David suggested that you wait a week or so – or as long as it takes until the IRA custodian has a record that your original contribution was a non-deductible IRA. After that’s done and you have written confirmation, then go ahead and do the conversion.

A final tip: you can open two IRAs if you want, but you certainly don’t have to. If you prefer to keep things simpler (again, from a paperwork and record-keeping standpoint), you can just open a single non-deductible IRA. Put in your contribution for 2009 — you have to do it by April 15, 2010 — and make sure that the contribution is specifically designated for 2009. Then you can make another, separate contribution that is specifically earmarked as a 2010 contribution. Either way (one or two IRAs) accomplishes your goal and allows you to ultimately convert two years’ worth of IRA contributions into a Roth. Good luck!

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Q: Should I Roll Over $30,000 in My Traditional IRA Account into a ROTH IRA? I am 50 Years Old.

A: Although the earnings in both types of retirement accounts grow tax-deferred, for longer-term financial planning, I like the benefits of the ROTH IRA over the Traditional IRA. Additionally, recent changes governing IRAs make it more financially advantageous to do a rollover in 2010. Lastly, since you are 50 years old and mentioned having other types of investments (bonds, CDs, retirement accounts, etc), I would seriously explore converting your Traditional IRA into a ROTH IRA. Read on for more details about why a ROTH is likely your better option.

Two major advantages of the ROTH are more control over your withdrawals and a potentially bigger nest egg at retirement. As you know, with a Traditional IRA, your contributions may be tax deductible up front (depending on your income and marital status), but you must later pay taxes on distributions.

With a ROTH IRA, you get no upfront deduction for contributions. However, your stand to get a bigger payoff on the backend – since distributions made from your ROTH IRA won’t be subjected to income taxes in retirement. This combination of tax-free growth and tax free distributions makes the ROTH IRA an especially powerful retirement account. Plus, with the ROTH IRA, you get to make contributions at any age and there’s no mandatory withdrawal age. By comparison, if you have earned income, you can only put money into a traditional IRA up until the year you turn 70 ½, and you must begin taking distributions from Traditional IRAs beginning at age 70 ½.

In 2010, IRA contribution limits for both traditional and ROTH IRAs are $5,000, plus an additional $1,000 for those 50 an older. Starting in 2010, to be eligible to contribute to a ROTH IRA, your modified adjusted gross income must be less than $177,000 for married taxpayers filing joint returns, and less than $120,000 for single taxpayers.

Also noteworthy is that as of 2010, several important changes have occurred impacting Individual Retirement Accounts. First, you no longer have to worry about whether you’re eligible to convert a Traditional IRA to a ROTH IRA due to your income level or your tax-filing status. That’s because previous rules that restricted conversions/rollovers based on income limits and filing status requirements were eliminated effective 2010.

More importantly, the financial sting of doing a rollover has been greatly reduced. In years past, a rollover was considered taxable income in the year you did the rollover. However, for any 2010 rollover from a Traditional IRA to a ROTH IRA, any amounts that would be included as income can be spaced out over two years: in equal parts in 2011 and 2012. This would effectively knock in half any tax bill generated by doing a rollover. The law also still gives you the option of including the entire amount in income in 2010. But most people doing rollovers will want the benefit of spreading that conversion income over two years and deferring taxes in the process.

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Q: I am Almost 63 Years of Age and Thinking of Retirement. What Should I Do at the Present Time to Make this a Reality in 2 or 3 Years? I am a Registered Nurse Working Full Time in a Hospital.

A: Retiring in two to three short years from now means you’ve got to ensure that your financial affairs are in good shape, and that you will have enough money on hand to last you another two or three decades. Many financial planners create plans for their clients on the assumption that the client will live until 90 or 100 years old. So you have to consider whether, if you retired at age 65 or 66, you would have enough money to last for potentially another 30 years.

Max Out that Retirement Plan at Work

Start by looking at what you’ve saved in your retirement plan at work. If you haven’t been aggressively saving in a 401(k) or 403(b) plan, by all means start doing so. Perhaps your employer offers a match to boost your retirement plan. Under federal law, most employees can put up to $16,500 into a qualified retirement plan in 2010. However, since you are over 50 years of age, you can also put into another $5,500 in “catch up” payments if you’ve been a late starter, in terms of saving. You can also sock money away into an IRA, or Individual Retirement Account. The 2010 limit for regular IRAs and Roth IRAs is $5,000, plus another $1,000 in allowable contributions for those 50 and above. Assess also any pension income or retirement benefits that will be provided directly by your employer. Then find out how much money you will be entitled to from Social Security. You can find out your expected Social Security payments by visiting the Social Security Administration’s website (http://www.ssa.gov).

Two Steps To Assessing Your Retirement Readiness

In summary, to make sure you are on track to retire when you want, you should follow these two steps:

Step 1: Calculate Your Retirement Needs
Think about what how much money you’ll need in retirement, on a monthly and annual basis. Take into account your projected monthly expenses, any debts you’ll have, along with the possibility of healthcare or medical costs, travel, as well as inflation. A good tool to use is the “Ballpark Estimate” retirement calculator from the American Savings Education Council at: http://www.icief.org/retirement/illustrations/ill_ballpark.html

Step 2: Estimate Future Benefits
After consulting your Human Resources Department or taking a look at any employer-provided pension income you may be expecting, go get an estimate of your Social Security benefits at http://www.ssa.gov./estimator.

If you don’t like what you see in the results, all is not lost. You have the option of working a bit longer, perhaps investing slightly more aggressively if you are comfortable doing so, or even using products like annuities that can offer you a steady income stream or make up for any financial shortfalls you may face.

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• Making the Most of Your Social Security Benefits (askamoneyexpert.com)

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Q: I am a 27-Year-old Speech-Language Pathologist and I Currently Do Contract Work for a School System. Even Though I Am Not Sure If I Will Be With My Company Next year, Should I take Advantage of Their 401(k) or Open an IRA or Roth IRA?

A: By all means, start contributing to your company’s 401(k) plan immediately. Even if you leave the company or take another job elsewhere, you will have access to your 401(k) funds and can transfer them later – if you decide to – into an IRA. There are six big benefits to taking advantage of your 401(k) plan right now.

Lower Your Tax Bill
First, you will immediately lower your taxable income and start paying fewer income taxes to Uncle Sam. This is because you contribute to a 401(k) plan right out of your paycheck, on a pre-tax basis. By contrast, you fund an IRA with after-tax dollars. Your ability to take an IRA tax deduction is based on several factors, including your income.

Matching Contributions
Additionally, you may get additional retirement dollars from your employer, if your company offers any kind of matching program. Some companies match dollar-for-dollar, up to a certain percentage of your salary. Others offer 50 cents on the dollar. No matter how much or how little your company match might be, it’s still a great benefit, because it’s free money.

Flexibility
Thirdly, since you are a contract worker, you may be better off initially using a 401(k) plan, instead of an IRA, because the 401(k) generally offers you more flexibility and options to access monies without penalty. For example, you can take a loan from your 401(k) if necessary. But you generally can’t take loans from IRAs. You can take distributions from IRAs, but if they aren’t paid back within 60 days, the IRS imposes a 10% penalty, and you pay ordinary income taxes on the money too.

Higher Contribution Limits
401(k) plans have higher contribution limits than do Individual Retirement Accounts. Under federal law, the maximum amount you can put into a 401(k) in 2010 is $16,500; individuals age 50 and older can stash away an extra $5,500 in a 401(k). The limit is subject to cost-of living increase after 2010. The maximum you can put into an IRA in 2010 (either a regular IRA or a Roth IRA) is $5,000; those 50 and older can contribute an additional $1,000 into an IRA. The ability to sock away substantially more money is a 401(k) is a huge benefit that should be taken advantage of whenever possible.

Disciplined Investing
Making investments through your 401(k) plan is a great way to make you consistent and dedicated to the process of investing. Because the money is taken automatically out of your paycheck, you might not think about it as much and you won’t be as tempted to just stop investing when the markets get volatile. All too often, when people put their money into Individual Retirement Accounts, at the first sign of trouble on Wall Street, they simply stop investing. That’s not a good way to invest.

Ease of Implementation
As a final note, there’s also the speed of execution factor, which shouldn’t be ignored. You can literally go enroll in that 401(k) plan today. Just pop over into your Human Resources office and fill out some brief paperwork. You’d have to do quite a bit more homework and paperwork to open an IRA. Sometimes, when things take too long and seem like to much work, we tend to procrastinate and not get them done. That won’t be the case with your 401(k).

You stated that you’ve already been working at your company for more than a year. So now is a great time to get into the habit of saving early and often for retirement. The 401(k) plan offered by your employer will help you do just that.

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