Wednesday, July 29, 2009

Is it Time for a Roth IRA Conversion?


When it comes to retirement planning, conventional wisdom has always dictated deferring income until you retire. A lower tax bracket will probably prevail once retired. The bigger question now... does this rule still apply?

Our national debt is expected to surpass $10 trillion this year. A staggering figure! This has many people speculating... me included... that current tax rates are unsustainable. At some point, the IOU's issues all over the world via our US Treasury Department will have to be repaid.

It's great to think this will occur through current income tax collections, estate taxes, capital gains, etc. Unfortunately, I think the math is faulted. Higher taxes will probably be coming in the near future. Further, while the Obama Administration feels higher net income people could foot the bill, the income threshold is already starting to come down. At some point, it will probably be spread across all income levels. I don't think he will have a choice.

If you believe tax rates are going to increase, there are several reasons to consider a Roth IRA conversion:


    1. Investors are not required to do a full conversion. Converting some funds to a Roth IRA gives the investor a hedge against future tax increases.

    2. Investors will pay less in taxes for conversions today than they would have several years ago when their IRA account values may have been higher.

    3. For long-term investors converting during the current bear market, all the gains i the next bull market will grow income-tax free for life.

    4. The Tax Income Prevention and Reconciliation Act of 2005 eliminates the $100,000 income restriction for conversions in 2010 and half the income can be recognized in 2011 with the balance in 2012.

    5. The Pension Protection Act of 2005 says that employer plans can now be converted directly to a Roth IRA and retirement or separation of service is considered a triggering event. If a 401k plan offers in-service withdrawals, those distributions can be converted to a Roth IRA. Plus, beneficiaries of an inherited employer plan can now convert those funds directly to a Roth IRA. (Note: $100,000 income limit still applicable for 2009)



    Monday, July 20, 2009

    When to refinance?


    How did the mortgage process get so complicated? Products have become so confusing in recent years, it's hard to understand how they actually work. With products like, negative amortization, 7/1 ARM, interest only, reverse mortgage, etc. It's hard to know what you're getting yourself into and what changes will occur at a future date.

    Fortunately, it doesn't have to be this difficult! Mortgage rates are near historic lows and good old fashioned fixed mortgage (15 or 30 years) will answer a lot of prayers for first time home buyers and/or individuals looking to refinance.

    When it comes to refinancing, there are a number of reasons to do so:


    1. Lower Your Monthly Payment - This is the most common reason for getting a new mortgage. Reducing your interest rate and thus your monthly payment(s) makes good economic sense. Most people will follow the "2%" rule of thumb, but this doesn't always apply. The bigger the mortgage, the less of a change you need to make it worth your while. A big mortgage will change the numbers. For example, a 750,000 mortgage (30 year fixed @ 6%) requires a monthly payment of $4,497. Simply reducing the rate to 5.5% lowers your payment to $4,258 (a savings of $339 per month or $2,863 per year).

    2. Consolidate Debt - Bundling debt into one payment can make sense for some people. Should you carry credit card debt that is not paid in full each month, the interest rate could be significantly higher than that of a mortgage. Some rates are now in the 20% range. I'll be the first to admit putting your HDTV on a mortgage turns a short term purchase into a 30 year commitment. The amount of money you will pay for your television will be significantly higher. But, if monthly cash flow is a concern, this could be a way of reducing monthly expenses. Any savings could be applied to the principal on your mortgage.

    3. Borrow Home Equity - Owning a home is expensive. Sometimes refinancing and using some of your equity allows you to upgrade a kitchen or a bathroom. It would be ideal to pay cash for this renovation, but coming up with $10,000- $50,000 isn't an option. Some parents also use their home to finance kids college or a purchase of a new car. As a Financial Advisor, I recommend against this as college and cars should be separate goals with different time frames. However, using your home to finance these items is becoming more common. Also, the interest can be tax deductible.


    Wednesday, July 1, 2009

    Madoff - The Simple Math




    150 - Jail sentence issued to Bernard Madoff on June 29, 2009


    1,341 - Number of Madoff customers according to company records.


    12 - Recommended prison term in years recommended by Madoff attorney.


    109 - Number of nights Madoff spent in jail since pleading guilty in March.


    $13 Billion - Estimated net losses suffered by Madoff clients since 1995.


    $1.225 Billion - Amount recovered by bankruptcy trustee for Madoff victims.


    $188 Million - Cash advances promised to Madoff investors as of June 23.


    $973 Million - Losses deemed not covered by Securities Investor Protection Corp. (SIPC).



    61727-054 Bernard Madoff federal prison inmate number.