Roth Conversion

It’s hard to believe. During these times of budgetary doubt and worry, when folks have stood by and watched, helplessly, as their stock market funds plummeted to terrifying levels, it makes you wonder why anyone would want to capitalize on a Roth conversion.

But the reality is, there are numerous Roth IRA benefits that an individual, starting right away, could use to potentially build up considerable wealth for retirement, put money into more secure, more profitable properties and holdings, all while getting a good-sized tax benefit, compliments of Uncle Sam.

The Objective of a Roth Conversion

A Roth conversion gives you the opportunity to take funds from a traditional IRA and convert them to a Roth. Why would you want to do this? Well, the objective of a conversion is to take advantage of the rules which prevent the distributions from a Roth Individual Retirement account from being taxed as income. As such, the funds you rollover from your traditional IRA are then included in your taxable income for that year. In other words, you’re being taxed NOW, instead of later.

If you’re scratching your head and wondering why you would want to do this, just consider that the tax bracket you are currently in is probably much lower than the one you will find yourself in by the time you retire.

Not only that, if you do a Roth conversion this year, you will be able to take financial lemons and make lemonade. What am I talking about? Well, its likely that the value of your traditional IRA has dropped anywhere between thirty to fifty percent. This means your current taxable income is a lot less. Read the rest of this entry »

Account holders never need to take the cash from a roth 401k. This is the second most amazing thing about these retirement savings vehicles.

The first, of course, is that the profits grow tax-free. This includes any interest or income earned by investments made with funds from your account. Because these funds never have to be withdrawn and used, the money can go to the named beneficiaries when the taxpayer dies and these heirs will not have to pay taxes. Owners have total control of this account.

What a Roth Ira 401k Is

A Roth 401K is a government approved savings plan designed to help average Americans improve their retirement years. Once a person stops working after reaching retirement age, they still need income to support themselves.

This plan, usually made available by an individual’s employer, encourages taxpayers to save money during their working years and letting the profits grow. In fact, the profits and investments are not reported to the IRS at any time if the simple regulations are followed.

However, what plan participants must understand is that the money placed in a Roth 401k must be earned income which has already been taxed. This differs from a traditional IRA which defers taxes on contributions until the account holder begins to withdraw their funds at retirement.

One more thing that must be taking into consideration before making the decision to participate in a roth 401k is that any contributions you make to your account will be irrevocable. Once the funds are in your account you won’t be able to change your mind and transfer them into a traditional 401(k).

However, you should know that any funds in a roth 401k are eligible for roll over into a Roth IRA whenever an employee decides to leave their job.

When Contributions Stop

Taxpayers can continue contributing to the account as long as they have earned income. Earned income is money made from a business or working for someone else. Read the rest of this entry »

The Roth 401k, a type of retirement savings plan once scheduled to sunset out at the end of tax year 2010, was legislated by Congress in 2006 to become permanent. The opportunity to participate in this still fairly underused retirement savings opportunity (while also contributing to a traditional 401(k) account) is now being offered by larger employers, who will stimulate other companies to provide access to the program.

Adoption of these plans has been slow, according to employers, because the plans require additional payroll processing and a greater amount of record keeping by the company’s program administrator. Anyone whose employer offers this program is presently eligible to set up and contribute to one. These contributions by the employee are irrevocable. Once money is invested in this account, it cannot be transferred to the employee’s regular 401(k) account, if one exists. However, an employee may roll the account over to a Roth IRA if his or her employment is terminated.

The plan combines of some of the advantages of the original 401(k) elective deferral plan with advantages of a Roth IRA retirement account. A traditional 401(k) plan allows employees to contribute some of their pre-tax earnings (known as elective deferrals) to a retirement plan.

Employers may add matching funds to the employee’s account, where its growth is tax deferred until it is disbursed during retirement. The IRA, on the other hand, requires post-tax contributions but allows tax-free distributions from and growth to the account on the conditions that the money has been invested in the IRA for at least five years and is not disbursed until the owner is at least 59-1/2 years old.

Contributions to this program are not allowed if income exceeds a certain amount ($110,000 for one individual or $160,000 if married and filing jointly). Contributions that are allowed are a great deal more limited than those allowed for a 401(k). Read the rest of this entry »

Let’s face it! When it comes to learning about financial matters, like a Roth conversion, 401(k)s, individual retirement accounts and stock investments, many of us get a cold chill down our backs and simply hope they’ll pull our numbers at the next Lottery drawing.

But the truth is, these issues are nothing to be afraid of. In fact, they are quite easy to understand. All it takes is a little time to explore some readily-available resources and you can quickly gain the expertise you need to put this information to good use. You have nothing to lose and everything to gain.

Contrary to what you may have been led to believe, learning about personal finance is extremely interesting. There are such a wide variety of topics, which all manage to weave together at some point, you can easily become engrossed and excited about what you are learning.

Before you begin to tap into some of the great resources I’m about to tell you about, it’s important to, first, sit down with paper and pencil and give some serious thought to your financial goals. Just telling yourself you want to be “financially secure” is not going to cut it. You have to be more specific if you’re going to reap the greatest benefit from your financial education.

It may be helpful to begin by putting together a timeframe for what you’d like to accomplish. In other words, what are your short, medium and long-range financial goals?

For example, a short-term goal may be to pay off some of your smaller debts, or save for a family vacation. A medium-term goal might be to pay off larger debts or purchase a bigger home. Of course, long-term goals include things like paying for college, building a retirement nest egg or, even, buying a motor or vacation home. Read the rest of this entry »

Because of the Small Business Jobs and Credit Act of 2010 (H.R. 5297; Pub. L. No. 111-240), signed into law by President Obama on September 27, 2010, many people want to know what an in-plan Roth conversion is. This new provision makes it possible for any employer-sponsored plan, that includes a qualified Roth contribution program, to make this new feature available.

Employees who participate in an employer-sponsored retirement savings plan can now elect to roll over any eligible rollover distribution of non-Roth sums into an individual Roth account within the same plan.

Before this law was enacted, participants could only make a Roth conversion by rolling over their distribution completely out of their employer-sponsored plan and then into a Roth IRA.

Current or former participants are eligible to exercise this option, along with surviving spouses of participants. However, non-spouse beneficiaries of participants are excluded from this option.

Eligible participants can elect to accomplish an in-plan Roth conversion either directly, or within 60 days. Of course, the conversion is taxable, but without the usual 10% early withdrawal penalty. And for the 2010 tax year, the applicable taxes can be paid in two equal installments…one in 2011 and the other in 2012.

Moreover, as of 2010, the income limits which used to apply to Roth conversions have been eliminated. Read the rest of this entry »

Recently, an investment savvy friend of mine, looking to start his young graduate on the road to wealth, was evaluating the benefits of a Roth IRA vs traditional IRA.

You see, setting up investment funds for young people is the latest trend in graduation gifting. Not only does the growing value of one of these accounts provide the gift that keeps on giving, but it helps teach young people about the importance of saving and investing.

Of course, making the decision to give such an important gift may not be as straightforward as it first appears. There are some important issues that you must first take into consideration before heading over to your banking institution.

First, and most important, is your relationship with the graduate. How well do you know their current financial needs?

If you’re the parent you’ll probably be aware that you son or daughter is going to have some expenses as they head out into the adult world. Paying off student loans, relocating for a new job or just buying new clothes for a job search can mean your child might be better able to put a cash gift to immediate good use.

However, if you’re not the parent, but a beloved family member, you won’t get a lot of “say-so” in how your monetary gift will be spent. Since your intentions may be more future-oriented, setting up an investment fund may just be the way to go. Read the rest of this entry »

A friend of mine recently came to me with a question about helping her mom do a Roth conversion as part of her estate planning. You see, her mother wanted to be able to leave the monies in her individual retirement account to her heirs, without using any of the funds, herself, for retirement.

Before I could give her an answer, I had to ask a couple of questions.

First, I needed to know how old her mother was. This information was important because the laws governing traditional IRAs require the owner to begin taking minimum distributions from the account at age 70 ½. Her mom was 68, so she still had time to do a Roth conversion.

Now, I needed to know if her mother was married and, if so, was her spouse her sole beneficiary? My friend’s father was still living, so there were a couple of things her mother needed to consider with regard to doing a Roth conversion.

Her first option would be to convert her traditional IRA to a Roth and then bequeath the funds, entirely to her husband.

In this instance the surviving spouse would not be required to take minimum distributions, no matter their age. In fact, if the surviving spouse wishes, he can leave the funds where they are and allow them to continue to grow tax-free. Read the rest of this entry »

Did you know that if an employer wishes to offer employees participation in a Roth 401k plan they are required to make a traditional 401(k) plan available as well? Well, to be a little more precise, the requirement of the traditional plan comes into play when employers make matching contributions. These matching funds must go into a regular plan which can then be rolled over into a Roth.

When it comes to employer-sponsored retirement plans it is no secret that 401(k) plans have dominated the retirement savings landscape. These retirement savings plans have enjoyed great popularity as they allow workers to save for retirement, defer income taxes, reduce their taxable income, and, in some cases, receive matching contributions from their employer.

It’s only been in recent years that employers have had the opportunity to offer their personnel a plan which is funded with after-tax dollars. This means that once a Roth 401k participant reaches age 59½ their funds, both contributions and earnings, are available to them tax-free. The only stipulation is that the savings plan must be five years old or older.

In this case the employee has the option of making contributions either to the traditional or Roth, or both of these plans, simultaneously. This ability to contribute to both can come in handy when the employee is unsure of what their tax bracket will be when they reach retirement.

If the employee predicts their tax bracket at retirement will be higher than the one they find themselves in currently, a Roth 401k can be a smarter choice. This prediction is usually reasonable given that a person can expect their tax deductions to decrease as they get closer to retirement. Read the rest of this entry »

If you are unaware of the changes made by the government to Roth conversion rules in 2010, you may be operating under three big myths which can effect your decision to move your funds into one of these retirement savings accounts. In order to make the best choices for your particular situation it’s important to have all the facts so that your money remains safe, secure and financially viable.

These three myths are related to filing status, income restrictions and who, exactly, should make a Roth conversion. Let’s take each one of these myths separately and expose any misconceptions.

Myth #1 Roth Conversions Are Not Available to Individuals With High Income

One of the most pervasive myths is that people who enjoy a high income are not eligible to make a Roth Conversion. This is because before 2010 the income limits for a Roth IRA eligibility was $100,000. However, following the government’s 2010 change of rules, anyone can contribute to a Roth.

There are a couple of stipulations which go along with this change. If someone makes a Roth conversion they are required to complete Tax Form 8606. They are also required to name their beneficiaries. The designation of beneficiaries is necessary to prevent the money in the Roth from being taxed following the death of the owner. Read the rest of this entry »

If you are participating in an employee-sponsored Roth 401k, do you believe it is your responsibility to manage your funds, or do you prefer to leave it to your employer to oversee these accounts?

This question is not intended to make you feel irresponsible. As a matter of fact, your decision to participate in the company retirement program or Roth 401k, shows a level of personal responsibility lacking in a large majority of people.

But does it make you wonder about what exactly is happening to your money while it’s sitting in the employer accounts?

Of course, you can always look at the account statements and see if your principle is sound and your investments are growing in value. This is usually enough to make most employees quite comfortable when it come to leaving their money in the hands of their employer.

But other than making sure the funds are withdrawn from your paycheck, there is little else your employer does to affect the growth and security of your funds. This responsibility often falls to a professional financial firm hired by the company you work for.

You pay for these services with money taken out of your investment account without having an opportunity to evaluate whether or not the services are worth it.

You may not be aware but you do have rights when it comes to the management of your retirement capital. It is possible for you to meet with the company-hired financial planner on a regular basis to get an accounting of exactly what they are doing. Read the rest of this entry »