| Convert to a Roth; reduce and defer the conversion tax (for those whose income is < $100,000). If you have an IRA account or could convert to an IRA account (retirees who still have retirement plans with their former employer), you can convert to a Roth IRA. Roth IRAs are IRAs that grow tax free and never require distributions. You take tax-free money only when you want. Furthermore, the tax free growth can be extended though the life of your children and grandchildren resulting in a potential for three generations of tax free growth. Tax free is better than tax deferred! When you convert to a Roth, you must pay income tax on the transfer. Hence a $100,000 cash transfer would trigger a $28,000 tax assuming a 28% tax bracket. The tax can be paid by taking $28,000 from your liquid assets such as a checking or brokerage account or you can pay the tax by taking a tax free withdrawal from the newly created Roth. Of course, the more you have in the Roth growing tax free the better, so that it makes more sense to pay the tax with other sources. You may be able to reduce the conversion tax by using tax planning. Consider transferring an asset instead of cash. Some assets can provide a tax discount. For example, a CD may provide such a discount. When transferring a CD, the IRA custodian could report the CD’s liquidation value (the value you would get if you prematurely liquidated the CD) vs it’s face value. Of course with CDs the discounts are very small, but with other assets the discount can be as high as 25%. Furthermore, with good timing, you can defer the conversion tax for up to 2 years. Here’s how. Your IRA purchases an asset today, let’s say April 2002. Transfer the asset to a Roth account in January of 2003. Pay the tax in April 2004. By enacting the transfer in this manner, you have deferred the tax for 2 years (bought the asset in April 2002, but did not pay the tax until April 2004). Hence you have reduced the conversion tax by up to 25% and have deferred the tax obligation for 2 years. Anyone considering a Roth conversion should consider this attractive option. Let us show you how this program will benefit you. Ask us for a personalized presentation. --------------------------------------------------------------------------------------- Grow part of your retirement plan, income and estate tax free for your heirs (for those whose income is >$100,000 and have a net worth > $1,500,000) The PAT strategy is perfect for those who say, "There's a part of my retirement plan I'll never need. I am saving the money for my kids!!!" Income and estate taxes may “eat up” most of your retirement plan. Assume you have $1 inside your retirement plan. Over your lifetimes (you and your spouse), the $1 grows to $4. That’s the good news. Now for the bad, the entire amount may be subject to both income and estate tax resulting in a 75% combined tax. Hence using our simple example, the heirs get only $1 due to taxes taking all the growth. If you desire to grow part of your plan income and estate tax free, the solution is simple. Take money out of your plan today, pay the income tax and then gift the remainder to the heirs who can reinvest the money. At least you were able to shelter the growth from estate taxes (a step in the right direction), even though you had to incur an income tax to do it. You may be able to reduce the income tax by using tax planning. Consider distributing an asset instead of cash. Some assets can provide a tax discount. For example, a CD may provide such a discount. When transferring a CD, the IRA custodian could report the CD’s liquidation value (the value you would get if you prematurely liquidated the CD) vs it’s actual value. Of course with CDs the discounts are very small, but with other assets the discount can be as high as 50%. Coincidentally, the asset that gives you the biggest tax discount, can also provide for tax free growth. Hence you have reduced the income tax by up to 50% and may eliminate the estate tax. Anyone with disposable retirement plan assets should consider this attractive estate option. To learn more about the PAT program, please give us a call. ------------------------------------------------------------------------------------- Convert 1/2 of your IRA to a Roth IRA. Generate more tax free income. If your income is < $100,000 and you have a retirement plan > $100,000, you ought to convert at least 1/2 of your IRA to a Roth account. Here’s what you should do. Create two sources of money, one an IRA account and the other a Roth IRA account. Your IRA grows tax deferred and your Roth grows tax free!!! Use the IRA account for current needs. And the Roth account for long term needs. For example, assume you have $100,000 in an IRA. Transfer $50,000 to a Roth account and keep the remaining $50,000 in the IRA account. Tap the IRA account first for current needs, realizing that each withdrawal is taxable. When the IRA account is depleted, you are left with the Roth account growing tax free and without any required distributions. So now when you need future income, you can get it tax free by tapping the Roth. Additionally, the Roth is an excellent choice for your family in that the Roth can be inherited income tax free and grows income tax free for up to two more generations (through your grandchildren’s life). Like the idea of tax free social security! By replacing taxable IRA distributions with tax free Roth distributions, you reduce your taxable income which may allow you to qualify for tax free social security benefits. Worried about the increased tax brackets that single (widowed) people face? Replace taxable IRA distributions with tax free Roth distributions. No matter how high your tax bracket is, Roth distributions are income tax free. If you like this simple but powerful idea, let us show you how to reduce the Roth conversion tax typically associated with Roth conversions. We can show you how to reduce and defer the conversion tax so that there is more for you and less due in taxes. -------------------------------------------------------------------------------------- Convert your IRA to a Roth, simplify your life, reduce or eliminate taxation. Many seniors own retirement accounts such as IRAs, part of which must be distributed every year starting age 70.5. These accounts face taxation upon distribution. Distributions increase your taxable income which may affect the taxability of social security. In addition, when one spouse dies, the other often a higher tax bracket. Therefore, IRA distributions are often taxed at a higher rate when the first spouse dies. Let’s review a common profile. The senior couple gets $20,000 annually in social security, maybe $10,000 annually in ordinary (pension, rents, earned income, etc) income and $40,000 per year in IRA distributions adding up to $70,000. Unfortunately, the taxable income makes the social security taxable. Plus the surviving spouse will have to pay more in taxes due to the increased tax bracket. The solution is easy, convert to the Roth and pay virtually no tax and eliminate the required minimum distributions associated with taxable IRAs. By converting to a Roth, the taxable IRA distributions are replaced with tax free Roth distributions. In our prior example, a senior's taxable income is only $10,000, much of which can be received income tax free due to the standard deductions. Plus the subsequent Roth distributions are tax free and do not count towards determining the taxable threshold for social security. Therefore the social security benefits can be received income tax free. Practically all of the senior's income would be tax free. Plus, monies in a Roth account do not require minimum distributions like the taxable IRA. For many seniors, the MRDs are minor annoyances that must be attended to prior to the end of each year after age 70.5. Do you want to be monitoring another financial matter, no matter how small, each year for the rest of your life? Furthermore, the Roth IRA can continue to grow tax free for your kids and grandkids. |
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| © 2001, 2002 Strictly Business Magazine All Rights Reserved. A division of S&S Enterprises, a Floyd Snyder Production. Santa Maria, California, 93454 Feedback. |
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| Senior Finances Specializing in Investment Management and Asset Preservation For Mature Investors Published by: |
| Trent J. Benedetti, C.P.A., C.F.P. |
| Benedetti & Associates Certified Public Accountant,Inc. 2151 S. College Drive, Suite 101 P.O.Box 5958 Santa Maria Ca. 93456 Tele: (805) 922-4881 Fax: (805) 922-7953 Email Mr. Benedetti |
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| Special: Roth Conversion and Pension Asset Transfer Strategy |
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