IRA

In January 2010, many investors who had previously been prevented from considering a Roth IRA conversion because of income limits will be able to consider converting to a Roth IRA.

Asset manager Charles Schwab recently published a useful list of tips that are worth considering in light of the Roth IRA conversion opportunities.

Much of the content naturally focuses on tax considerations and differences between traditional and Roth IRAs.

Source: Charles Schwab

The IRS requires that individual retirement account (IRA) owners start taking minimum distributions from the account once they reach age 70 1/2.

Failure to take the mandated withdrawal triggers a 50% tax penalty on the amount that should have been taken out.

The financial crisis has prompted the government to approve a one year suspension of the required minimum distribution rule.

The article referenced at the bottom of this page provides very good information about IRA withdrawal rules and the temporary suspension.

Source: Associated Press

The income limits on Roth IRAs will change in 2010.

Current restrictions on Roth IRAs are set at $105,000 for singles and $166,000 for couples.

Removal of these restrictions will open-up a much wider market for Roth IRAs.

Higher income earners will simply need to establish a conventional IRA and then convert to a Roth.  Taxes due on the conversion can be paid over the course of 2011 and 2012 rather than at once in 2010.

Source: Investment News

This past weekend President Obama discussed his "common sense" steps to reform and simplify the system of retirement savings in the United States.

President Obama seeks to extend incentives and simplified savings vehicles to the 78 million Americans who do not have access to a retirement savings plan through their employer.

Some of the President's proposed changes include:

Income limits on Roth IRA conversions are set to go away in 2010.

This opens-up an opportunity for many to benefit from the tax advantages associated with the Roth IRA.

Conversion may also make sense as a hedge against the distinct possibility of tax increases and higher tax brackets for future retirees.

That said, the Roth IRA also happens to be an enormously efficient vehicle if there is a bequest motive or desire to pass assets to heirs:

The Street reports that several states are working on initiatives that would provide broader access to retirement savings vehicles.

Universal Voluntary Retirement Accounts would serve as inexpensive IRAs that are combined with a state's existing retirement system.

One fundamental objective would involve increasing participation rates among parts of the population that have limited access to retirement plans:

The SEC put a stop to a $50 million real estate focused Ponzi scheme that targeted elderly investors in the Detroit area.

John Bravata and Richard Trabulsy apparently lured more than 400 elderly investors with the promise of safe 8% - 12% returns.  Many of the investors were solicited with "free lunch" seminars.

The reality of the situation, however, was very different than what was promised:

A good article from Investment News on the use of calculators for Roth IRA conversion calculators.

Deciding whether to convert to a Roth IRA is fairly complex.  There are a number of variables that come into play such as tax rates, investment returns, inflation rates, etc.

Faulty assumptions for any one of the factors will produce faulty results and possibly poor decisions.

Free, web-based calculators are often less robust than those used by financial advisors.

Writing in the Huffington Post, CBS MoneyWatch Editor in Chief Eric Schurenberg says he thinks it is time to consider major changes for 401k plans.

His criticisms include:

• 401k plans randomly create winners and losers.
• 401k plans leave people poor.
• 401k plans expose people to longevity risk.

Comments on longevity risk include:

The shame of this is, longevity risk can be insured away by averaging out the risk over an entire population. Every annuity does this. Why not the national retirement savings plan?

A good, straightforward article on how annuities are taxed from Kiplinger Contributing Editor Kimberly Lankford.

There is discussion of tax implications of using qualified funds (i.e. funds from an IRA or 401k) to purchase an annuity versus non-qualified funds.

Also basic discussion of how different types of annuities such as deferrerd and immediate are taxed.

1035 exchange tax issues are also addressed.

Source: Kiplinger

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