The strategy of converting to your Roth IRA is emerging as among the shiny places on an otherwise dismal money landscape ira gold advisor. As you know & as I mentioned in my retirement blog, once qualified money is placed in a Roth IRA it, and subsequent earnings, is income tax free forever. While you may not know, now is an excellent time to convert to your Roth IRA if you can qualify. Qualifications are straightforward: first you must have qualified money in a retirement account that can be moved, and second your Adjusted Gross Income (single or married filing jointly) cannot exceed $100,000 during the conversion year. Should the smart money pivot to the Roth?
Since late 2007 the stock market has lost roughly 50% of its value as measured by the broad market indexes. Dividend rates have been slashed, bond issuers have defaulted or been downgraded, plus bank CD and other fixed rates have plummeted. Virtually every investment from AIG to Zales has tanked along with everything in-between, including all types of real estate and commodities from aluminum to zinc. In fact, all investments allowed for company-sponsored retirement accounts, except gold and other precious metals which usually are not among the choices, are in the cellar.
Since you must eventually pay taxes on retirement money, why not pay the IRS when the burden is the lowest? The smart money is betting that the market is closer into the bottom than the top. Even if wrong about the market, it appears taxes are headed higher because there are limited ways to address the massive deficits now being logged by the federal government: raise taxes, cut spending, inflation, economic growth or a combination. The consensus for the win, place and show is: higher taxes, higher inflation but tepid growth, respectively. Lower government spending is not likely. How might this affect the typical retirement-minded couple?
The Losels are a middle-income couple in their mid-60’s and managed to save $350,000 in IRAs. This nest egg, along with Social Security of $25,000 annually was thought to be enough for a modest retirement income of $45,000 annually based on a 30-year retirement and earnings of 4% annually. Unfortunately for the Losels, they invested their money in mutual funds that have lost 50% since 2007 and now are $175,000. They’ll need a 100% increase to get back to break-even. The Losels’ plan is to convert $100,000 into a Roth IRA in 2009, pay the taxes when they file their 2009 return and avoid future market risks. They met with their financial advisor to determine how much they should convert to minimize taxes and also where they should invest their Roth IRA money. They’ll pay $25,000 in additional taxes for tax year 2009 from other money they have; thus, the entire $100,000 in the Roth IRA will be tax-free when used.
The Losels now have the following advantages: they have $100,000 that will grow tax-free; they can remove it tax-free from the market to some safe place; they will not have required minimum withdrawal requirement; they can pass tax-free any unused amount to heirs who can withdraw it tax-free over their lifetime; withdrawals will not be used to compute taxes on their Social Security benefits; if income taxes rise in the future they will not be impacted; if they leave it in mutual funds and values drop further before their 2009 taxes are filed, they can undo the conversion and redo. If the Losels have a long retirement, changing to the Roth will, when looking back years from now, have been a very smart decision. And, the really good news is that beginning in 2010 there will be no income limits to qualify. If you need a rescue package, consider a Roth IRA conversion.