Why the Downturn in the Financial Markets Could Be Good News For IRA Owners


I don’t know of too many people that were happy watching their investments “tank” along with the financial markets. Heck, some close friends of mine didn’t even look at any of their mutual fund/brokerage statements for the past few months. They went from the mailbox to the “circular file,” and while I didn’t go that far personally, reading the “red ink” didn’t exactly make me jump for joy either.

At Halas Consulting, we don’t just focus on our clients’ investments, we also focus on risk management, and tax planning and preparation, and it’s on the tax planning side that we discovered the huge opportunity that an IRA owner can take advantage of if he/she is a long term thinker. More details please visit:-triathlonhaaste.fi pa-resurs.se webplett.no rowlab.no bokpanett.no norskaero.no orland-bluesklubb.no

As much as I like Traditional IRAs, I absolutely LOVE Roth IRAs; after all how could I not? Who wouldn’t like totally tax free money at retirement, or even after just 5 years from when you opened the account if you happen to be older than 59 1/2 at that time? If you’re under 59 1/2 you can take your money out without tax liability up to the amount you invested, you have to wait till you’re 59 1/2 to take out the growth amount. Once you reach age 70 1/2 you MUST start taking required minimum distributions (RMDs) from a Traditional IRA, whether you need them or not. This isn’t the case with a Roth IRA, you can take money out if you wish, or if you want to leave the money in to grow because you decided to work a few more years, go right ahead. In short, if you like flexibility AND saving money on a tax advantaged basis, a Roth IRA is hard to beat.

Now, you may be wondering, what does the aforementioned Roth IRA discussion have to do with the crappy investment markets that we’ve been having lately? I’m glad you asked. You see, when I have clients that have IRAs, one of the first things I like to do is find out how we can convert those rascals to Roth IRAs as soon as possible. The only “bug” in this particular soup is that there is a tax liability to the IRA owner if he/she converts to a Roth IRA. Since Uncle Sam may never make another cent off of this thing, he wants to get his “licks” in while he still can. Whenever the investment markets are real high like they were a few years ago it would cost more money in taxes to convert an IRA. For example if your IRA was worth $100,000 in 2006, it would cost a little over $20,000 to convert an IRA to a Roth IRA if you are in the 25% tax bracket and your income for the year, including the conversion was about $77,000 (note: this number is a rough estimate of the tax liability, it doesn’t take into account any extraordinary factors that may be present in your individual tax situation.)

If however, you decided to convert your traditional IRA to a Roth IRA in the 2008 tax year, and your $100,000 IRA is now worth $65,930 because it was invested in the S&P 500 Index, which was down 34.07% as of the end of October 2008, your tax liability would be about $13,449.72 figuring everything else remained the same. Maybe that’s still a bit too much for you, but would you be in favor of converting half of your Traditional IRA to a Roth IRA? If so, a $32,965 conversion (half of $65,930) would cost you about $6724.86 in taxes. When the market goes back up again, and it always has historically, you’ll then have the amount that you started with (or more) AND you’ll potentially NEVER have to pay taxes on that money again, nor will the government be able to tell you that you have to take a certain amount every year after you turn age 70 1/2!


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