More Planning

Well I am feeling the summer heat here in Chicago. It’s a bit humid, try 80% humidity! Whew it is hot. I am in Chicago for a convention of estate planning attorneys. Each year the meeting is held with all the best estate planning attorneys from throughout the country, and of course learning from the best of the best! My husband was able to join me and get continuing education credits as a Certified Financial Planner, so it’s a double education source for us. Yesterday, we had a little time off and took a walk to the Navy Pier and nearly melted in the humidity.

Today we are in full force for an all day session. I will keep you posted of our week and the latest developments in estate planning and especially in tax with the upcoming changes taking place in 2011. If you would like to follow me you can follow on twitter or even my blog. I would love to hear your comments about my articles.

When I return, I will be implementing some new marketing and strategies. So hang tight! In the meantime, give me a call to schedule your appointment before school starts.

In the featured article today, is a discussion explaining the difference between traditional and roth IRA’s.

If you have any questions, give me a call at 888-735-7686 or send me a note via twitter or even my blog! Plenty of room to make comments, would like to hear from you!

Traditional vs. Roth IRAs – Which is the Better Choice?

The talk this year about changes in the availability of Roth IRAs has raised questions from many people eligible for the benefits of these individual retirement accounts. One of the hottest topics of discussion is the advantages of a traditional IRA versus a Roth IRA, and whether or not you have to convert your traditional IRA to make it a “stretch” IRA.First of all, the answer is no, you don’t have to convert your traditional IRA to make it a “stretch” IRA.

A “stretch” IRA is not a particular type of IRA. It’s merely a strategy used to stretch out or prolong the tax advantages of an IRA (most commonly a traditional IRA or a Roth IRA).
Before Congress passed the Taxpayer Relief Act of 1997 and created Roth IRAs, the term “stretch” IRA was used to describe the financial strategy used by a spouse, child or grandchild to draw out distributions (and tax deferrals) when they inherited a pretax traditional IRA. The longer the beneficiary expected to live, the smaller each payout had to be to “stretch” the advantages.

With a traditional IRA the money is taxed as you take it out of the IRA. By stretching out the IRA, you have extra time, and this could be decades, to compound tax-deferred interest. That’s one of the things that makes an IRA a good investment opportunity.

Now that Roth IRAs are available to taxpayers at all income levels (beginning this year), there are more ways to stretch out a Roth IRA as well.

This is what you need to know to take full advantage of the tax savings:

If you have a traditional IRA, you have to start taking withdrawals by April 1st of the year after you turn 70 and a half. To calculate your required minimum distribution, just take the account balance on December 31st of the previous year and divide it by the number of years left in your life expectancy (you can get this number from the Internal Revenue Service’s “Uniform Lifetime” table). You pay taxes on what you take out in each withdrawal.

Now, this is what confuses people with regard to a Roth IRA. In converting to a Roth IRA from a traditional IRA, you move money to the Roth IRA and must pay ordinary income taxes on whatever amount you move. However, you don’t have to take annual minimum payments and all future growth in the IRA is tax free, and so are any future withdrawals. That leaves more money for your heirs to stretch out unless you have to take money out for your own living expenses.

By converting from a traditional to a Roth IRA, you can leave a larger IRA for your heirs and it will be tax-free rather than tax-deferred. That’s why the Roth IRA is such a big deal.
One more thing to think about when considering an IRA is your choice of beneficiary. You have to indicate your choice on the beneficiary designation form when you open the account. Don’t worry. You can amend it later if you need to. Money in your IRA is distributed according to this form, NOT your will.

If you leave the IRA to someone other than your spouse, they have to take required minimum distributions, regardless of the type of IRA. A Roth conversion eliminates this requirement for you, but not for your heirs. These requirements are slightly more lenient for your spouse than for a non-spouse heir.

And one more word of caution. Never name your estate as the beneficiary of your IRA. If you do, under the worst possible combination of circumstances, the money may have to be withdrawn within five years of your death. If you have a traditional IRA, the income tax has to be paid as the money comes out. Always name contingent beneficiaries just in case your first choice dies before you do. Otherwise, the funds go to your estate by default.

If you currently have an IRA and want to know more about converting it or want to make sure that you’ve set it up properly for estate planning purposes, call us to schedule your Family Wealth Planning Session today. We can identify what needs to be done to ensure that you have the right documentation to make your wishes known and followed. Our Family Wealth Planning Session is normally $750, but since you are reviewing the ezine, you can mention this article and have a complete planning session with me at no charge.