Article Library

Current Articles | RSS Feed RSS Feed

Being Financially Savvy is A Family Business


Like it or not, we’re all involved in running the “family business.” We worry that our parents might outlive their retirement savings. We’re comforted by the thought that family members would probably bail us out if we got into money trouble. We strive to help our children financially, and we’d like to bequeath them at least part of our nest egg. 

In short, our family is our asset, liability, and legacy. Now here’s the contention: It’s time to build this notion into the way we manage our money. 

Here are just some of the reasons why: 

Raising Children: If your children grow up to be financial deadbeats, you may likely rise to the rescue. Indeed, your children could turn out to be your greatest financial liability. 

Don’t want your adult children swimming in credit card debt, missing mortgage payments, and constantly asking you for money? Your best bet is to make sure problems never arise by raising money-savvy children. 

That’s trickier than it seems. Children grow up spending their parent’s money, so it’s almost inevitable that they will have a skewed financial outlook. After all, for children, all purchases are free, so why should they fret about the price tag or control their desires? 

Make your children feel like they’re spending their own money. Give them a candy allowance when they are younger and a clothing allowance when they are teenagers, and insist they live within this budget. This way, instead of you constantly saying “no” to your children, they will learn to say “no” to themselves. 

Launching Adults: Once your children get into the work force, you want them to get into the “virtuous financial cycle” where they are steadily building wealth. 

They will become able to own their home rather than renting, buy their cars rather than leasing, fully fund their 401(k) plan and their individual retirement accounts each year, and never carry a credit card balance. 

The sooner your 20-something children get into this virtuous cycle, the easier it will be for them to meet their goals and less of a financial drain on you. To that end, encourage your children with your words and with your fine example. 

A few financial incentives may also help. Tell your adult children if they scrounge together a house payment, you will lock in some additional dollars, or offer to subsidize their 401k contribution at 50 cents on the dollar. 

This doesn’t mean you intend to fund their retirement instead of your own, but getting them started as investors sure seems like a smart idea.

Do You Know the Best Way to Save?


Financial professionals often follow two rules of thumb when providing clients with financial advice. First, they suggest clients save as much as possible in qualified retirement plan accounts, such as 401(k) plans and Individual Retirement Accounts (IRAs). Contributions to these plans generally are made with pre-tax dollars, and they have the opportunity to grow tax-deferred. Second, they advise that retirees delay taking distributions from qualified accounts for as long as possible because no taxes are owed on qualified accounts until distributions are taken. 

As with many rules of thumb, these principles are not accurate or reliable in every situation. Consequently, it is important to work with an advisor to evaluate your specific circumstances and determine the best course of action. Here are some of the issues that should be considered: 

  • Should I save for retirement in taxable or tax-deferred accounts? From a financial planning perspective, it is beneficial to have a blend of qualified and non-qualified assets. This provides more opportunity to balance and potentially minimize income tax liability over time.
  • Do you receive company matching contributions? If your company’s 401(k) plan offers matching contributions, it is providing an automatic return on your investment. A company match of 50 cents on the dollar represents a 50 percent return on investment from day one, assuming you are 100 percent vested in the plan. When a matching contribution is available, it may be a good idea to contribute enough to the plan to receive the maximum match every year.
  • Should more qualified plan savings be set aside by an older spouse or a younger spouse? The answer to this question depends on the couples’ goals and expectations. In general, an older spouse will be able to access qualified plan savings sooner than a younger spouse; however, a younger spouse will have more years to invest tax-deferred, which may mean that he or she accumulates more savings. If the younger spouse saves and accumulates more, his or her Required Minimum Distributions (RMDs) may be greater at age 70½. Since RMDs are taxed at ordinary tax rates, the long-term tax consequences should be considered. 
  • Should I draw assets from a taxable or tax-deferred account first? Many people assume it is best to let qualified plan accounts grow tax-deferred for as long as possible; however, when you take a distribution from a qualified account, it will be taxed at your ordinary income tax rate. It may be advantageous to use a combination of non-qualified and qualified account assets to moderate taxable income over time. In addition, higher qualified plan distributions may affect the taxability of your Social Security benefits. 

There are many considerations when structuring retirement savings and retirement income plans. When combined, Federal and State income tax rates often total 30 to 45 percent. It is essential to plan carefully and understand the tax implications of your decisions.

Tags: , ,

Indexed Annuities: The Latest Sales Pitch in Investing


Would you be interested if I told you about an investment product that promises never to lose money while at the same time allowing you to participate in stock market gains when they occur?  The products are called indexed annuities, and judging by recent sales figures a lot of people are interested.  According to, indexed annuities attracted a record $8.7 billion from U.S. investors in the third quarter of 2010, an increase of 16% from a year earlier. 

            Investors turned off by bank CD rates and perceived risks in the stock market may be led to view indexed annuities as an attractive alternative.  Insurance companies are aggressively marketing these products and some insurance agents here on the Central Coast are offering “free lunch” seminars in hopes of earning up-front commissions as high as 8% to 12% for each indexed annuity sale.   

Unfortunately, what marketers of these products frequently fail to thoroughly explain or disclose at all is the multitude of drawbacks that are tucked away in often lengthy contracts.  My guess is that if all investors were aware of all the drawbacks of indexed annuities prior to purchase only a small fraction of the sales occurring today would come to fruition.

Here’s how indexed annuities work:  an individual invests a large sum of money with an insurance company in a contractual arrangement and as part of the insurer’s obligations they promise the investor will never lose money on their balance from year to year no matter how poorly the stock market might perform, while at the same time offering a percentage of the stock market’s gains as a return.  Here’s an example:  An insurer may offer 100% of the stock market’s gains up to a maximum return of 8% per year as measured by a reading of the S&P 500 Index on January 1 of every year.  If the stock market returns 8% from January 1, 2011 to January 1, 2012, investors receive a gross return of 8% in 2012; if the S&P 500 returns 25%, then investors still only receive 8% because of the aforementioned cap; if the S&P 500 posts a negative return, then investors are guaranteed not to lose any of what the market lost.

While this may sound great on the surface, consider two major drawbacks.  First, most contracts permit insurance companies to reduce the stock market participation cap in future years.  In other words, the potentially attractive 8% gross return cap you’re offered could be reduced substantially at the sole discretion of the insurer.  Additionally, most indexed annuities have lock-in clauses that impose a penalty for withdrawing money in the first 5 to 15 years of the contract period.  This means investors who are unhappy with their investment returns could pay penalties of up to 15% of their account balance just to cancel the contract.  It doesn’t seem fair that consumers should be locked into these contracts while the insurance company has free reign to change the terms, but this is in fact how these products typically work.

The truth is that indexed annuities are extremely complex investments, and the majority of investors are not aware of many of the nuances at the time of sale.  Beyond the aforementioned flaws, these products present a litany of other potential drawbacks, such as potentially unfavorable tax consequences, a lack of FDIC protection and other prohibitive contractual provisions.  While these types of investments may be appropriate in limited situations, they are often inappropriately sold to seniors and other investors who don’t understand the many drawbacks.  While indexed annuities make for a terrific sales pitch, they generally offer much less substance than advertised.


Equity Indexed Annuities (EIAS) are not suitable for all investors. EIAS permit investors to participate in only a stated percentage of an increase in an Index (participation rate) and may impose a maximum annual account value percentage increase. EIAS typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 591/2 may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims paying ability of the issuing insurance company.


Securities offered through LPL Financial, Member FINRA/SIPC


High Unemployment Rate Could Perpetuate Vicious Cycle


August 2010 unemployment reached 9.6%, according to the U.S. Department of Labor. A bad number – but not so bad as to cause a crisis.  

Not only are thousands of Americans unemployed, but almost half of them have been unable to find a job for more than six months. A quarter of Americans between 16 and 19 years old in the labor market are without a job. 

“The longer it takes to understand and address these issues, the more likely the U.S. will get stuck in a protracted low growth/high unemployment trap. In addition to considering the welfare costs of substantial joblessness, policy makers should keep in mind the following four facts,” says Mohammed El-Erian, chief executive officer of Pimco. 

  • First, persistently high unemployment erodes labor force skills, especially among the young. This reduces productivity and growth potential.
  • Second, a high rate of joblessness puts pressure on inadequate social safety nets such as the unemployment benefit system. It also exacerbates the strain on government budgets already stretched at both the federal and state levels.
  • Third, stubbornly high unemployment makes the unemployed more cautious. They decide, or are forced, to spend less, aggravating the economic slowdown.
  • And finally, high unemployment has historically induced companies and countries to become more inwardly oriented. Many firms have already moved to a “self insurance” mode including holding large cash balances rather than investing in equipment and hiring people.

Robert Shiller and George Akerlof, college professors and co-authors of the book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, have tried to determine why the unemployment rate remains so high. They feel that the problem stems from the failure of the labor market to create jobs that pay wages attractive to workers. 

Shiller and Akerlof have posed a question. “If the unemployed are unable to get jobs, why do they not simply ask for a lower wage? Or, why do they not seek jobs with fewer qualifications?” The principal problem, the authors say, is that people do not want jobs that offer a lower wage than they believe they deserve, or which require fewer qualifications than those they have. Additionally, Shiller and Akerlof note, “…the efficiency or effectiveness of labor depends on the wage that employees are paid.”  Thus, even if an employee does take a job with a lower wage, he or she will lack the motivation to be an effective worker and will not perform tasks at his or her full potential. 

However, unemployment is definitely not a hopeless cause. In a recent New York Times article, Shiller suggested using government policy to directly create labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research.

As an example, he cites the New York subway stations. Cleaning and painting them can be easily neglected in a period of severe austerity. Yet, the long-term benefit to businesses from an appealing mass transit system is enormous. Such benefits are hard to measure precisely because there is no current market price for them.

Congress has designed a program that will triple the size of AmeriCorps, the modern equivalent of the Civilian Conservation Corps, so that by 2017 AmeriCorps would employ 250,000 people.

As El-Erian said, instead of simply debating the case for further government stimulus, policy makers also should come up with a comprehensive strategy that focuses on improving human capital, particularly through a greater emphasis on education and training. By presenting a multi-year policy proposal, lawmakers will help companies and individuals navigate what is currently a highly fluid and uncertain outlook.

Experts and Public Differ on Inflation Fear


Things are afoot in the land of the free economy. Big things.

For the first time in several years, the threat - or perceived threat - of inflation is beginning to loom, and there are whispers in the corridors of power asking what can be done about it.

The reason for this sudden interest is more about the "when" than the "what." A dramatic rise in inflation at a time when the country and the world are still limping away from a catastrophic recession could create all sorts of fresh difficulties and long-term dangers.

Will it happen though?

Before we address that question, it's important to note that inflation can have positive or negative consequences, depending on its extent and duration.  The main negative is a drop in purchasing power of money.  In extreme cases, consumers may start hoarding money if they fear continued and aggressive price increases.  The positive side of inflation is that it can decrease the real value of debt, or essentially provide debt relief.

We're concerned with the probability of negative inflation. However, it would be a reckless commentator to show his cards this early as even the economists remain divided about the likelihood of any real change in inflation. In 2009, the National Association for Business Economics conducted a survey that highlighted just how divided the experts are. The results showed that while close to 50% thought the Federal Reserve Board will successfully keep inflation down over the next couple years, another 41% believed the chances of seeing some significant inflation is high. 

The American public, however, doesn't feel so uncertain. A survey conducted in December 2009 by the Conference Board showed that consumers expect a 5.1% increase in prices in 2010 alone. If correct, the consequences would be devastating.

To give you an idea why, consider that the Consumer Price Index hasn't gone up more than 5% in a single year since 1990 when Iraq invaded Kuwait and created a sudden surge in the price of oil.

As Greg McBride, senior financial analyst at, put it: "If inflation averaged 5 percent, that would cut your buying power in half in 14 years."

Making economic projections is far from a scientific process, so it's not surprising to find valid arguments on both sides of the divide.  Those economists who happen to be right will help investors drive returns during the next three years.

The problem is that while the figures seem to confirm the American public's disquiet, none suggests that very many are doing enough about it. It could be a costly mistake as individual savings and investments would be among the first and hardest hit casualties.

So, could we avoid inflation?

That is the trillion-dollar question no one can answer now with any real certainty. Gregory Mankiw of the New York Times recently argued that while the United States is exhibiting some of the classic precursors to out-of-control inflation, a deeper look suggests that the story is not so simple. He points out that one basic lesson of economics is that prices rise when the government creates an excessive amount of money. In other words, inflation occurs when too much money is chasing too few goods.

A second lesson is that governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collections, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall.

So, is there any hope?

The fact that soaring inflation is still only a fear, despite the U.S. apparently meeting some key criteria, must tell us that yes, there most definitely is hope.

A few go further and argue that inflation isn't something we should even fear. All we need, they say, is a convincing commitment from the U.S. government to both near-term stimulus and longer-term fiscal responsibility to keep the monster in its box.

Let's hope they're right because as recent events have clearly shown, what happens in the U.S. can have enormous consequences for the rest of the world. 

And things do seem to be afoot in the land of the free economy.



The above material was prepared by PEAK.

Weigh Factors in Roth IRA Conversion


Thinking about converting to a Roth Individual Retirement Account (IRA)?

While many people will make that decision more from their heart than head, one important question to ask yourself is, how long can you keep your money in a Roth IRA?         

If you decide to convert, here are some other factors and strategies that will help you now and in the future.

Non-deductible contributions - Income limits prevent many people from making tax-deductible contributions to a traditional retirement account. However, if you act before April 15, 2010, you can contribute to a non-deductible traditional IRA, in anticipation of converting that traditional IRA later in 2010. In 2009, the maximum permitted contribution to a non-deductible IRA was $5,000, or $6,000 if you were 50 or older at year-end.            

By starting now and making another contribution soon in 2010, you can effectively convert two years worth of contributions to a Roth IRA in 2010. Be careful: You will still have to pay taxes unless that is the only IRA you have. That is because of a little known rule called the "Pro-Rata Rule."

The IRS says when calculating the taxable and non-taxable amounts of a conversion, all of your traditional IRAs, including SEP and Simple IRAs, must be included. Here's the bottom line: You cannot just withdraw or convert the non-deductible fund and pay no income tax, even if the non-deductible IRA contributions were kept in a separate IRA. Any year you make non-deductible contributions, you must file Form 8606 which details the non-taxable portion of your IRA.              

Recharacterization - A recharacterization will undo a Roth conversion. It has been called the "do over option," which can be exercised any time before the due date of your income tax return for the year of the conversion, including extensions.        

Recharacterizations for 2010 can be made through October 15, 2011. One of the most common reasons to reverse a conversion is that the portfolio's value has declined after the conversion to a Roth IRA.

First, establish a new Roth IRA to hold each year's conversion amount separate from any of your existing Roth IRAs. This will make it easier to identify the funds being recharacterized. If the funds are commingled, the recharacterization process can become more complicated.                        

Next, consider establishing multiple Roth IRA accounts if you are converting a large amount of money. If you have multiple asset classes in one Roth IRA, the tax effect of losses and gains are proportional to the account. But, if you maintain multiple Roth IRAs, each with a single asset class (examples: US Large Cap, Domestic Small Caps, Foreign Stocks, Emerging Market Stocks, Commodities, etc.) you can pick and choose recharacterizations to take advantage of the tax break.                    

For example, let's assume you have $500,000 in your retirement account. You decide to convert $100,000 and set up four accounts, $25,000 in each account. You can keep the best performers as Roth IRAs and recharacterize the laggards back to traditional IRAs.            

However, there is another strategy to consider in this situation. "Instead, convert $500,000 to five separate accounts of $100,000. Basically, you will keep the best one and recharacterize the other four accounts," says Barry Picker, Certified Public Accountant, of Picker, Weinberg & Auerbach CPAs, P.C. This will also give you the flexibility to convert more money if it makes sense to do so.

The downside of this strategy, however, is that it involves a lot of paperwork, and you need to keep detailed records. Still, the multiple Roth IRAs don't have to remain segregated forever. Once the converted Roth IRAs are beyond the recharacterization deadline, they can be merged into one account.

Tax Bracket Strategy - What tax bracket were you in for 2009 and where will you be in the year of the conversion?

In choosing the "optimum" amount to convert to a Roth IRA, you would most likely convert an amount that would be taxed at a rate equal to or less than your projected future tax rate. For example, if you are in the lowest tax bracket, your strategy may require a series of partial conversions each year to remain in the 15% federal tax bracket.

Be aware: various deductions and credits, such as medical expenses and the child tax credit, may be impacted. Parents of students may find that increasing adjusted gross income will reduce their eligibility for college financial aid and scholarships.

Another important tax consideration is that you must make sure you have funds available in a non-retirement account to pay the taxes that will be due on conversion.

It is important to work with your tax adviser to evaluate all the results of a Roth IRA conversion and see if they will differ if the conversion is shifted from one year to another.                  

If you are eligible, the advantage of converting for the tax year of 2009 is that tax rates are known. The big uncertainty is what will tax rates be in the future? That is why many taxpayers will pay the tax in 2010 as opposed to splitting the income tax on the conversion between 2011 and 2012 tax years.

For those who are not eligible to convert for 2009, you should convert early in 2010. There is no real advantage to waiting.

Restrictions, penalties, and taxes may apply. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.


The above material was prepared by PEAK.

Struggling States Are 'A Drag on the Economy


Tough decisions must be made.

The Pew Center recently reported that 10 states - Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island, and Wisconsin - are barreling toward economic disaster. Double-digit budget gaps, rising unemployment, and high foreclosure rates are just some of the reasons. 

People who are re-entering the workforce are taking an average 40% pay cut from their previous jobs, estimates Kenneth Couch, an economics professor at the University of Connecticut, based on the experiences of Connecticut residents during the 2001 recession and on other studies during the 1981 recession[1].  In the past, Couch said it has taken six years before people were earning an average of 80% of their old paycheck with younger workers creeping closer to their old wages more quickly than older workers.

Foreclosure starts, as reported by the Mortgage Bankers Association and other data from the Center for Responsible Lending, indicate that foreclosures in most states will more than triple during the next four years, reaching a total of 8.1 million foreclosures. 

Throughout the country, states filled 30-40% of their budget gaps for the current fiscal year with federal stimulus money.  They were allotted about $250 billion of the $787 billion stimulus package, most of which will be distributed by the end of next year.  Without more federal help, state budget cuts will shave nearly a percentage point off the nation's gross domestic product growth. The cuts also will eliminate roughly 900,000 jobs in fiscal 2011, according to The Liberal Center on Budget and Policy Priorities.  

"The problems are evident from coast to coast," said Mark Zandi, chief economist for Moody's  "Without more help to state and local governments, the resulting budget cuts will become a very significant drag on the economy." 

So, how can the country dig out of this hole? Ideally, the best way is to grow out of it. Strong economic growth may help individual states and the country as a whole stop the red ink. Of course, the government is aware of this and they're trying to do what they can. Unfortunately, the government's hand is somewhat limited because of budget concerns.  

Ultimately, there are no simple solutions to our economic malaise. It may take time and even more pain before we get back on sound financial footing.


The above material was prepared by PEAK


Root Causes of Recession Unaddressed


Our last crash into recession generated a huge volume of news coverage, speculation, and analysis. You may wonder why the news of its apparent end isn't now being shouted from the rooftops.

This is particularly curious given that the optimists include many of the world's most respected commentators - some of whose opinions were reported on an almost hourly basis when the crisis began.

It is, they say, a measurable fact that the unprecedented monetary and other stimuli thrown at the crisis by governments worldwide are now reaping rewards. Deflation hasn't been a problem, economic stagnation has been largely controlled, and, thanks to radical government intervention, real growth is just around the corner.

And yet, the response, particularly in the developing world, remains muted.

Iraj Abedian, chief executive officer for Pan African Investment and Research Services, believes he knows why. The explanation is one that the developed world may not want to hear though. 

He suggests that the problems that created the global crisis are not - contrary to what accepted wisdom would have us believe - cyclical. Consequently, all the remedies created to deal with it are at best inadequate and may even prove highly damaging in the long term.

In his opinion, the recent injections of monetary and fiscal action addressed a problem that simply wasn't there - at least not in isolation. He believes a far greater understanding of the problem is required. "While the tipping-point action was caused by the U.S. mortgage excesses, the root causes are mostly structural and not financial," he says.

Abedian believes three key failures must be accepted, understood, and addressed before any long-term solution can work. First, he points to the moral failure of the Anglo-Saxon governance system, and he cites these examples: "When the private sector knowingly bundles together bad assets and sells them on; when credit rating agencies knowingly rate these assets too high; and when regulators knowingly fail to put a stop to it."

Second, Abedian says that "the market knows best" paradigm has failed and has done so spectacularly on the world stage. What's more, governments share in the failure. The U.S. government's understandable need to recover from the 9/11 attacks and the resulting consumer confidence crisis may have inadvertently sowed the seeds of the subprime disaster.

Last, but not least, is the unbalanced global trade regime. The developed world annually spends more than $1 trillion in agricultural subsidies to manage its own market prices - suffocating the developing world's best efforts to produce and sell goods at a fair price. For Abedian, this self-interest is neither economically sensible nor morally acceptable.

Addressing such deep-rooted structural and economic imbalances may demand a major mind-shift and include longer-term structural, regulatory, and behavioral changes. But, if Abedian is even remotely correct, the price is one we have to pay for a more prosperous, sustainable, and inclusive global economy - one that we can all celebrate.


Rob Garcia is a Registered Principal with and offers securities through
LPL Financial Services member FINRA/SIPC
The above was prepared by Peak

The Perfect Retirement Storm


When 401(k) plans were officially sanctioned by Congress in 1982[1], the S&P 500 index had been struggling to gain traction for more than a decade.[2] Back then, few could have imagined one of the longest bull markets in U.S. history was about to begin![3] By the time the new millennium arrived on January 1, 2000, the S&P 500 had generated an average annual total return during the ‘80s and ‘90s of more than 17.5%,[4] according to Vanguard!  

But, the seeds of potential disaster were being sown for some soon-to-be retirees in the early 2000s as they began to implement the "lessons" they'd learned over the previous two decades. Here are three of the soon-to-be-doomed lessons:

  • Stocks may go down temporarily, but they'll soon go back up. For plan participants who'd been watching their account balances balloon over the years it was normal to believe that owning stocks wasn't as potentially risky as they'd been told. And the last five years of the 1990s "proved" this to be "true" as the S&P 500 total return averaged over 20% per year from 1995-1999,[5] according to data from Yahoo! Finance. Many media pundits were proclaiming a "New Era" of ongoing investment gains had arrived as our global economy was linked via the internet, forever canceling normal business cycles.
  • Use "conservative" withdrawal rates from your 401(k) - like 10% per year. When it came time to retire and begin taking income from their retirement accounts, some retirees logically assumed they could easily withdraw 10% per year without eating into their principal. After all, stocks had been doing much better than that for many years. But, a hypothetical retiree with $500,000 in the S&P 500 who began withdrawing 10% annually in 2000 would have no money left by 2007, according to Thomson/Reuters Investment Analysis.  
  • Leave your money in your 401(k) when you retire because it's "free." Some retirees believed they would be better served by leaving their funds in their 401(k) when they began taking withdrawals because there were no or low fees. But, that's not necessarily the case according to the Department of Labor (DOL). A DOL study found that the fees charged for 401(k) plans varied widely, and were often difficult for consumers to understand.[6] And, in some cases, it may cost no more to engage a professional investment consultant with access to literally thousands of investment choices.[7]

As the decade of the 2000s winds down, another historic investment milestone appears to be in reach - that of the worst decade for stocks in the history of the market. It may eclipse the disaster of the 1930s during the Great Depression, which saw the S&P 500 produce an average annual total return of 0.0%, according to Vanguard.[8]

Unfortunately, for many retired 401(k) participants who bought into the "lessons" learned during the heady days of the ‘80s and ‘90s, time is not on their side. The funds they have lost over the past decade can't be easily replaced. And some may have lost everything they had spent a lifetime accumulating for their "golden years."  Of course, hiring a professional financial advisor doesn't guarantee retirement success. But, it usually provides access to many more choices and opportunities for retirees to possibly reach the goals for which they've worked so hard.



[2] Thomson Reuters investment analysis

[3] Ibid

[4] Ibid

[5] Ibid


[7] Ibid

The above material was prepared by PEAK.


The Time is Right to Consider Roth IRA Conversions



Since its creation more than a decade ago, the Roth Individual Retirement Account (IRA) has been among the best tax breaks available. You get tax-free withdrawals of your earnings after your taxed dollars have been contributed, and once the five-year and age 59½ (whichever is later) (or death, disability, or first-time home buyer) requirements are met.

And, now, you have a unique opportunity to keep more of your eligible retirement assets protected from any increase in federal and state taxes by moving those monies into a Roth IRA while taxes are still relatively low. The planning you do now can have major long-term impact for you and your family.

Is a Roth IRA conversion right for you? Now is the time to decide.

Here are some other benefits:

  • No required distributions (i.e., withdrawals) for Roth IRA owners. 
  • Roth IRA beneficiaries can stretch tax-free distributions over their lifetimes.
  • Since distributions are tax free, Roth IRAs remove the uncertainty over future income tax rates.
  • Roth IRA conversions can be undone up to October 15th of the year following the conversion.
  • Anyone considering a Roth IRA conversion in 2009 must meet the $100,000 modified adjusted gross income (MAGI) limit. That $100,000 ceiling applies to joint or single returns. 
  • However, a new Roth era begins in January 2010. Anyone will be able to convert to a Roth IRA.

The $100,000 MAGI ceiling for Roth IRA conversions will be permanently repealed. As a bonus, for the tax year 2010 you will be able to spread the tax impact (remember - money contributed to a Roth IRA is taxed upfront) over the next two years on your 2011 and 2012 tax returns. In all other years, income must be included on the current year return.

Many individuals will want to implement conversions as soon as possible, while tax rates are low and account values are still depressed. But, before you decide, there are a few things to consider:

  • First, the tax should be paid from other monies. Taking cash from the IRA to pay the tax bill would diminish the benefit of the Roth IRA conversion.
  • Second, determine how much of your traditional IRAs you might want to convert. Consult with your tax advisor to figure out what deductions and credits might be lost. For example, parents of students might find that increasing adjusted gross income will reduce your eligibility for college aid and scholarships.
  • Third, determine the best timing for a conversion. "For individuals who are currently eligible in 2009, more information is known. They know their IRA balances are depressed after last year's stock market decline, income taxes are at the lowest historical levels in years, and converting now will start the five-year clock for withdrawals as of January 1, 2009," says Ed Slott, CPA and author of Parlay Your IRA into a Family Fortune. That five-year period is important because a converted amount that is withdrawn from the Roth IRA before the period ends is subject to the 10% premature distribution penalty tax.

Slott adds, "However, if you wait until 2010, you will delay the reporting of income to your 2011 and 2012 tax returns."

The big Roth IRA question is, "Can you trust the government to keep its word about tax-free withdrawals?" There are no guarantees as to what might happen in the future if budget deficits keep expanding. However, Slott believes there are some reasons why Roth IRAs won't be taxed.

  • First, such a reversal would be politically risky. Most of the legislators in office today voted for this provision and could be seen as reneging on their promises of a tax-free retirement savings account. 
  • Second, the federal government would lose the tax revenue that is collected upfront.

And, even if the government does change the rules on Roth IRAs to make them less appealing, existing accounts may well be grandfathered, based on how Congress has acted in the past. Therefore, the sooner you act, the greater the chance you would qualify for any potential grandfathering. 

Of course, you can determine on your own what makes sense for your situation, taking into account the whole picture including cash flow planning both now and in retirement, as well as tax, investment, and estate planning. Also, be aware that not all Roth IRA conversion calculators are created equal. Depending on the size of the conversion, you might want to seek advice from a professional who specializes in this subject.

Is a conversion right for you? Now is the time to decide.


  • The above material was prepared by PEAK.
  • LPL Approval 575157
All Posts