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Playing Defensively in 2010 Could Provide Future Tax Benefits

Roth IRA Conversion: 4 Things You May Not Know

Which IRA is Right for You

WITH THREE FLAVORS to choose from — Roth, deductible or nondeductible — figuring out which IRA is best for you can be confusing. So let me make this simple: If you qualify for a Roth, this is almost always the way to go.

If your employer offers a 401(k) plan with a match, you should always max it out before considering any type of IRA. Any employer match, no matter how small, is an immediate ROI (return on your investment). Let’s say for every dollar you contribute to your 401(k) your employer adds 50¢. That’s a 50% return, immediately. No other investment is that good!

If you have more to save, a Roth will typically give you the best bang for your buck. The reasons are simple and the time to do it is early in your earning cycle. WHY? The opportunity to contribute to a Roth ends when your earnings reach a certain threshold. But if you get all of the Roth that is available, the benefits of compounding continues and the other unique benefits of a Roth over a traditional IRA are too good to be true. I personally believe that the Government has not fully realized how good it REALLY is for the taxpayer. You and I both know that "a good thing never lasts forever". One day, I predict, the Roth will be revised to eliminate some of its finest features.

WHY is a Roth better? Unlike traditional IRAs (both tax-deductible and non-deductible), withdrawals from Roth IRAs after age 59 1/2 aren't generally taxed. You pay your taxes on the front end by contributing after-tax dollars. So Roth IRAs enable savers who remain in the same income tax bracket at retirement to accumulate more money than even tax-deductible IRAs do. However, unlike a traditional IRA which is required to begin distributions when your reach 70½, the Roth has no such requirement. Therefore, if your plans include leaving an estate, you never have to take a distribution from your Roth. You can leave it for your heirs, and theirs, and theirs…..Yes, tax free.

The theory behind deferring taxes on retirement savings is based upon the precept that we will be in a lower tax bracket when we retire than we are when we contribute. Now, I am NOT saying I don’t recommend deferral because I do. But if we can pay tax on $2,000 when we are young and have access to more than $110,000, tax free 30 years later — that’s a good deal!! That assumes 10% simple interest compounded annually and no other contributions beyond the $2,000.

So, let’s say that you contribute $2,000 each year for 10 years when your income has reached the limit for making a Roth contribution but you leave the Roth in tact, until age 60.

If after the initial period of contribution, 10 years, you left the investment to grow tax deferred for an additional 20 years.  At a 10% annual return (and the market has consistently returned 10% on average for an extended period, the following table summarizes the results:

Now assume that when contributions were being made, you were in a 28% bracket. By making after tax contributions to your Roth IRA, you paid Federal tax on the contribution in the amount of $6,160. Assume further that you are in a 15% bracket when you retire — HIGHLY UNLIKELY! The tax on $274,000 would be $41,140.58. But, there’s more! Since many of us won’t need to draw upon our IRA to live, the Roth can be left to satisfy estate planning issues while a traditional IRA must be withdrawn at a prescribed rate, subject to tax, regardless of our need.

So you see, a Roth is a great tool for those just starting out. If you would like more information on how a Roth can fit into your financial planning, give me a call.

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Medicaid Figures Adjusted

(Reproduced with the permission of Czepiga Daly Dillman, LLC. http://www.czepigalaw.com)

MEDICAID FIGURES ADJUSTED

Effective July 1, 2010, the following changes to the Medicaid regulations take effect:

1. The penalty period divisor changes from $9,959 per month to $10,366 per month. Example: a gift of $50,000 results in a Medicaid disqualification period of 4.8 months. This figure changes each July 1st. Remember - penalty periods now begin not when the gift is made, but in the month that the maker of the gift is in a nursing home and has no other assets.

2. The minimum monthly needs allowance for the healthy spouse remains unchanged at $1,821.25. In other words, in a married couple situation, the Community Spouse is allowed a monthly income of $1,821, no questions asked. This is dependent, of course, on the ill and healthy spouses' own fixed incomes being sufficient to produce that amount. This figure changes each July 1st. There was no increase this year because there was no increase for social security benefits.

3. And the Personal Needs Allowance also remains unchanged at $69/month. The following rules remain in place (these figures change each January 1st):

1. The minimum amount of assets protectable for the Community Spouse remains at $21,912. In other words, if the couple's combined assets are $25,000, the Community Spouse may minimally retain $21,912 without any requirement to justify a need for that amount.

2. The maximum amount of assets protectable, without a Fair Hearing, for the Community Spouse is $109,560. Additional assets may be protected above this amount if there is a demonstrated need.

3. The maximum monthly income available to the community spouse without exceptional circumstances remains at $2,739.00

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