Author Archive

May 13

How to Unwind a Roth Conversion

Now that we are in the midst horse racing season and California Chrome’s hopeful endeavor for a Triple Crown, there’s been a lot of discussion about how to pick a “winning” horse — a topic that sounds a lot like the conversations I have with clients about their IRA investment strategies.

But, when we “bet” on a stock or portfolio plan, it isn’t just fun and games; our futures (and those of our loved ones) are at stake. So, if I told you there’s a way to “hedge your bets” and ensure you put your money on the best horse, you’d want to know more, right?

Imagine this: An opportunity with Roth IRA planning where you can put your money on both the odds-on favorite and the long-shot option, and position yourself to “undo” one or both of these decisions, if necessary.

Let’s run with this horse racing analogy to discuss a savvy strategy for ensuring that your retirement dollars stretch as far as they can, grow as quickly as possible, and incur the least amount of tax liability.

Minimizing taxation via Roth recharacterization

Wouldn’t it be great if you could first watch the Triple Crown and then adjust the amounts you had bet on each horse? Well, if you’re converting your retirement investments from a traditional IRA to a Roth IRA, there is a way to do just that.

Here’s how: Let’s say, for example, you have $100,000 in a traditional IRA and you want to convert a portion, say $50,000, to a Roth IRA in 2014. Instead of converting the $50,000 into one portfolio, subjecting the entire sum to the same investment strategy, consider “betting on two horses” — investing one half aggressively (your highflying technology stock) and the other half more conservatively (a dividend-paying utility company). After a year, there’s a good chance that one will have proven itself a winner.

Under current laws, you have a year to sit back and watch how each “horse” runs the race. If you’re not happy with the way the investment matures, you can “undo” the Roth conversion, taking advantage of IRS rules that permit “Roth Recharacterization” — reverting to a traditional IRA and avoiding the tax liabilities you would otherwise incur.

When moving funds from a traditional IRA to a Roth, investors are required to pay taxes on the converted funds by April 15 of the following year (or October 15 with an extension). The tax bill is assessed according to the value of the IRA at the time of the conversion. So, if the Roth’s account value declines significantly, you owe taxes on money you no longer have. In other words, if you converted $50,000 from a traditional IRA to a Roth, and a year later, the investment has declined to a value of $30,000 — you still owe taxes on $50,000.

But suppose you converted your IRA into two separate Roth IRAs worth $25,000 each, with plans to use the Roth Recharacterization option after the race. A year later, you see that your first Roth, converted at $25,000, is now worth $15,000; and your second Roth, converted at $25,000, is now worth $40,000. After you see which strategy serves you best, you can recharacterize the underperforming Roth and avoid paying taxes on the lost value. Later, you can reallocate your assets, directing more traditional IRA funds into the Roth IRA that performs best. Or, if you choose, you could reverse all three conversions and maintain a traditional IRA.

If this sounds like something you’d like to explore, here are a few things to keep in mind:

•Conversions must be completed by Dec. 31.

•Taxes are assessed on the conversion amount you plan to keep on April 15 the following year.

•Investors have until Oct. 15, if they file an extension, to reverse (“recharacterize”) an IRA conversion.

It’s important to work with an adviser who possesses an advanced understanding of Roth IRAs. Because these investment vehicles can be complicated and confusing, expert guidance is a real asset when it comes to capitalizing on the opportunities they present.

May 10

Give your wife security this Mother’s Day

MarketWatch RetireMentorsAbraham Lincoln said that “All that I am or ever hope to be, I owe to my angel mother.” Instead of treating your wife to a card, jewelry, and brunch again this Sunday, make it even more meaningful by safeguarding her financial future.

When it comes to financial planning, here are some gifts that you should consider for your spouse this Mother’s Day:

1. Maximize your Social Security and pensions to protect your spouse in the future. Did you know that 80% of married women fall into poverty after their spouse passes away? Social security and a pension are likely some of your largest retirement assets you have. Leave a larger benefit for your spouse my maximizing your income benefits.

2. Properly prepared estate documents will provide security for your loved ones in the event of incapacitation or death. Do not make the mistake of believing that the estate planning process is either expensive or morbid. Leaving your family a mess when a health care crisis or death occurs is what is expensive and morbid. Imagine the hassle of your spouse having to involve attorneys and the court system should you become incapacitated and you have not properly planned. An estate plan should include, at a minimum, your will, your health-care directive, your power of attorney. Discuss trusts and their benefits with your attorney.

Read entire article here.

Apr 18

Death & taxes: Planning for the unavoidable

MarketWatch RetireMentorsWe’re commonly reminded that the two certainties in life are death and taxes. Unfortunately for many retirees, neither certainty is included in their comprehensive financial planning.

While the omission of tax planning most often will slowly erode the value of retirement resources as unnecessary taxation trickles away, avoidance of death planning will typically result in sudden and unexpected financial crises that can rearrange and upend an otherwise secure retirement for a surviving spouse. Each can be costly and leave families living on considerably less than they had hoped for or needed to fulfill a stress free retirement.

It’s important that you recognize these potential sinkholes in your own retirement plan so you can discuss them with your financial adviser and make the necessary corrections.

Read entire article here.

Mar 04

10-point checklist for choosing an adviser

MarketWatch RetireMentorsYour retirement dream is picture perfect. It’s a sandy ocean beach, grandchildren’s weddings or that garden that you have never had the time to grow. The reality is your retirement picture is much like a jigsaw puzzle, and there are many components. A fresh set of eyes can help you put those last pieces in place.

Solid financial planning advice brings your dream together. However, the purchase of an inappropriate financial product can haunt you for years and completely change the picture you’ve always dreamed about.

Families will tell you that there is a night-and-day difference between a comprehensive adviser, with your best interests at heart, and the transaction-based financial salesman, making a commission and moving along. While few financial professionals would define their purpose as a product pitchman, the reality is that very few offer the holistic approach that most retirees seek. Below is a 10-point checklist that you should go through to see if your financial adviser is indeed retirement planning-focused or a mere hit-and-run salesman.

Read entire article here.

Feb 21

5 Ways to use donor-advised funds

MarketWatch RetireMentorsDonor-advised funds offer powerful tax advantages within a comprehensive retirement plan for charitably inclined families.

Most families realize that the Gates, Buffetts, Carnegies, Rockefellers and Fords have successfully used charitable gifting and foundations as a tax reduction strategy, but families fail to best utilize charitable gifting in their own planning. Families, and advisers, have incorrectly assumed great wealth is needed to compensate for additional accounting and foundation expenses and achieve any significant benefit of coordinating charitable gifting and retirement planning.

On the contrary, Middle America can recognize many of the fantastic benefits of incorporating charitable planning with their financial planning by utilizing a simple and tax smart charitable giving vehicle called a donor-advised fund. Created over 30 years ago by community foundations and now available nationally, donor-advised funds are a popular form of family philanthropy in America today, outnumbering private foundations by a margin of 2 to 1. Simple to open and inexpensive to operate, they are a wonderful financial vehicle which astute retirees use to both improve their retirement-planning situation and satisfy their accustomed charitable gifting. Consider these powerful advantages:

Read the rest of the article here.