Posts Tagged ‘tax’

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you’re a high-income taxpayer, chances are you haven’t been able to participate in the Roth revolution. Well, new rules apply in 2010 that may change all that.
What are the general rules for funding Roth IRAs?
There are three ways to fund a Roth IRA–you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later).

In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2010. If you’re age 50 or older, you can contribute up to $6,000 in 2010. (Note, though, that your contributions can’t exceed your earned income for the year.)
But your ability to contribute directly to a Roth IRA depends on your income level (”modified adjusted gross income,” or MAGI), as shown in the chart below:
What’s changed?
Prior to 2010, you couldn’t convert a traditional IRA to a Roth IRA (or roll over non-Roth funds from an employer plan to a Roth IRA) if your MAGI exceeded $100,000 or you were married and filed separate federal income tax returns.
In 2006, however, President Bush signed the Tax Increase  revention and Reconciliation Act (TIPRA) into law. TIPRA repealed the $100,000 income limit and marital status restriction, beginning in 2010. What this means is that, regardless of your filing status or how much you earn, you can now convert a traditional IRA to a Roth IRA. (There’s one exception–you
generally can’t convert an inherited IRA to a Roth. Special rules apply to spouse beneficiaries.)
And don’t forget your SEP IRAs and SIMPLE IRAs. They can also be converted to Roth IRAs (for SIMPLE IRAs, you’ll need to participate in the plan for two years before you convert). You’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after you convert.
What hasn’t changed?
TIPRA did not repeal the income limits that may prevent you from making annual Roth contributions. But if your income exceeds these limits, and you want to make annual Roth contributions, there’s an easy workaround. You can make nondeductible contributions to a traditional IRA as long as you have earned income at least equal to the contribution, and you haven’t yet
reached age 70½. You can simply make your annual contribution first to a traditional IRA, and then take advantage of the new liberal conversion rules and convert that traditional IRA to a Roth. There are no limits to the number of Roth conversions you can make. (You’ll need to aggregate all of your traditional IRAs when you calculate the taxable portion of the conversion–more on that below.)
Calculating the conversion tax

When you convert a traditional IRA to a Roth IRA, you’re taxed as if you received a distribution with one important difference– the 10% early distribution tax doesn’t apply, even if you’re under age 59½. (The IRS may recapture this penalty tax, however, if you make a nonqualified withdrawal from your Roth IRA within 5 years of your conversion.) If you’ve made only nondeductible (after-tax) contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth. But if you’ve made both deductible and nondeductible IRA contributions to your traditional IRA, and you don’t
plan on converting the entire amount, things can get complicated. That’s because under IRS rules, you can’t just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist Roth IRA Conversions–New Opportunities for 2010

If your federal filing status is:
Your 2010 Roth IRA contribution is reduced if your MAGI is:
You can’t contribute to a Roth IRA for 2010 if your MAGI is:
Single or head of household More than $105,000 but less than $120,000
$120,000 or more

Married filing- jointly or qualifying widow(er)
More than $167,000 but less than $177,000
$177,000 or more Married filing, separately
More than $0 but less than $10,000 – $10,000 or more
Ameriprise Financial
Jeffrey D. Carlson, CFP®
CERTIFIED FINANCIAL PLANNER practitioner
10025 Governor Warfield Pkwy
Suite 209 A
Columbia, MD 21044
(410) 740-8000
jeffrey.d.carlson@ampf.com
April 07, 2010

Redefining risk in a down market

By

Jeffrey D. Carlson, CFP®

Has Wall Street hit rock bottom, and is the U.S. economy bound for recovery? Some claim the worst is over, which is of small comfort to many investors. Just as the stock market crash and Great Depression of 1929 had a lasting impact on those who lived through it, our current recession could change the way Americans earn, save, invest and spend money. The question is how will we improve our individual and shared financial future?

We all make choices. The tanking economy has triggered all kinds of responses. Some investors have simply pulled the plug on their remaining investments however; a mass exodus from the stock market will do more damage to the economy as a whole. The other problem with this approach is that once you sell a stock, you forfeit any opportunity to regain the value you lost. Some investors are paralyzed by fear and have not corrected or adjusted their financial position in the marketplace. While this is a common and natural response, it’s not necessarily in your best interest to stand still. Whether you ultimately move or adjust your stocks, it’s important to take time to evaluate your investment positions and make changes as you see fit, all the while proceeding with due caution.

Rebalance your holdings and diversify. The widespread nature of the downturn means almost every sector of the economy has been negatively affected. Those portfolios that were weighted heavily in risky investments generally suffered the largest losses. Many investors re-evaluated their risk tolerance. Low-yielding CDs, money market funds and Treasury Bills grew in popularity since they were considered less risky investments. Unfortunately, these options don’t provide much return. In fact, your assets may remain rather stagnant in these investment vehicles, but some argue that could be better than watching your savings drop in value.

Buy low if you can bear the risk. This suggestion may seem counterintuitive, but if you are in a position to accept risk, right now is a great time to invest. The market is full of bargains and there will be people who can profit from the market’s downfall. As the old adage goes, buy low and sell high. But as recent history shows, investing involves risks — more than many of us bargained for — and there are no guarantees.

Recoup some of your losses through tax breaks. With the failure of mortgage companies, banks, development firms, car manufacturers and other businesses, some investors have experienced losses that simply can’t be replaced. If you find yourself at ground zero (or below), keep in mind that you may be able to offset your losses in the form of tax breaks. Talk to your tax advisor to determine if you can deduct a portion of your losses from your taxable income.

Consult with a financial advisor. Now more than ever, investors can benefit from the insights of an experienced financial advisor who can help you sort through your options. As survivors of the recession, we can potentially work even harder, adjust our expectations and appreciate what we have. Much of the success or failure of the stock market relies on something intangible — buyer confidence. If we can find our way back to confident investing, we could be on our way to a stronger economy.

Jeffrey D. Carlson is a CERTIFIED FINANCIAL PLANNER practitioner™ who can be reached at (410) 740-8000, 10025 Governor Warfield Parkway, Suite 209, Columbia, MD 21044. Or visit www.ameripriseadvisors.com/jeffrey.d.carlson.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Diversification helps you spread risk throughout your portfolio, so that investments that do poorly may be balanced by others that do relatively better. Diversification is not a guarantee of overall portfolio profit or protection against loss.

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