SmartIRA planning may save you money in the long run
Posted on 25. Nov, 2009 by Cindy in Blog, Retirement Planning
If you own an IRA or have another retirement account, the words that follow may ring a bell, especially if you’ve been contributing to a retirement account for a long period of time.
Think back to when you first started investing in the account. Remember what you were told? See if this sounds familiar:
1- Put money away today in a retirement account and you’ll be able to use your contribution as a tax deduction against your other income.
2- Invest the contribution that you made to the retirement account wherever you want and the growth on that contribution will grow tax deferred.
3- When you retire, and begin to take withdrawals from your retirement account, you’ll be in a lower tax bracket since you’ll be retired which means that you’ll be able to put money away on a tax deductible basis when you’re in a higher tax bracket and take money out during retirement when you’re in a lower tax bracket.
Assuming that you were told all three of these things when you started to contribute to a retirement plan, my question for you is this: Were all three things true?
My experience working with clients tells me that in many cases only 2 of these 3 things were proven true – number 3 above, for many clients, was not.
Don’t get me wrong, IRAs and retirement accounts are useful products, but many folks who put money away in one tax bracket while they were working are now retired and drawing money from these retirement accounts only to find that they’re actually in a higher tax bracket now than they were when they were putting the money away.
Why did that happen?
It could be a number of reasons, but in many cases the culprit is the fact that the Internal Revenue Code, the rules that the tax ‘game’ is played by, changed.
In fact, under today’s tax code, if your estate is large enough, up to 67% of your IRA could be lost to tax at death, unless you do the appropriate planning.
That’s where the SmartIRA planning strategy may come in. The SmartIRA planning process is designed to reduce, or in some cases, even eliminate taxes on a client’s IRA. However, the outcome of the strategy is dependent upon the circumstances of your individual situation, so results will vary.
If you have an IRA, you may want to get more information about the SmartIRA planning process. Please contact our offices for more information.
Special Note: With Traditional IRAs early withdrawals may be subject to a surrender charge. In addition, distributions prior to age 59 ½ may be subject to a 10% tax penalty.
* Assumes maximum federal estate and income tax and no state income tax. If your state has income tax, your tax may be higher. Eg. $500,000 IRA @ 45% Estate Tax. Remaining taxed at 35% Federal Income Tax Rate. Total tax of $322,500 which is approximately 65% of $500,000.
Investment advisory services offered through
Absolute Return Solutions, a Registered Investment Advisor.
Should I convert my Roth IRA to a Traditional IRA?
Posted on 20. Oct, 2009 by admin in Blog, Retirement Planning
When it comes to talking about IRA’s, one of the big topics of conversation today is whether a client with a traditional IRA should convert to a Roth IRA. In this Financial Strategy of the month we’ll investigate the differences between the two retirement accounts and the option to convert from one type of account to another.
Let’s begin by discussing the basic differences between the two accounts. Contributions to a traditional IRA are tax deductible, while contributions to a Roth IRA are not tax deductible. Roth IRAs require that your income must be below certain levels to qualify to make contributions. Traditional IRAs may not be fully tax deductible if your income is above certain levels.
While either type of retirement account will allow an investor to invest where he or she would like, the tax implications on the growth is dramatically different from the traditional IRA to the Roth IRA. Growth within a traditional IRA occurs on a tax deferred basis, while growth within a Roth IRA occurs on a tax free basis.
Then, at retirement, when funds are withdrawn from the retirement accounts, the differences are even more obvious. Withdrawals at retirement from a traditional retirement account are taxable while qualified withdrawals from a Roth account are completely tax free.
Here’s the interesting part. A client that has a traditional IRA may elect to convert their account from a traditional account status to a Roth account status. In order to convert, in addition to certain criteria being met, a client needs to pay the tax due on the traditional retirement account.
For example, if I’m eligible to convert from a traditional IRA to a Roth IRA, and my current traditional IRA account balance is $100,000, I’m required to pay tax on the entire $100,000 traditional IRA account balance.
However, once I pay that tax, the retirement account is converted from a traditional account to a Roth account, meaning that all future growth on the account is tax free rather than tax deferred, provided I follow all the rules relating to maintaining a Roth IRA.
A Roth IRA conversion can be a great alternative for many traditional IRA account holders. To learn more, attend one of our upcoming informational seminars or come to our office for a Roth conversion analysis. Please contact our offices for more information.
Special Note: With Traditional IRAs early withdrawals may be subject to a surrender charge. In addition, distributions prior to age 59 ½ may be subject to a 10% tax penalty.
Investment advisory services offered through Absolute Return Solutions, a Registered Investment Advisor.