After visiting the Dyehard Toastmasters club in Belmont, NC, I came to realize that it was a group of positive individuals and business leaders who wanted to foster exceptional leadership and communication skills in themselves and in others within their community.  I joined  the group back in February 2008 because of my phobia of speaking in public or in front of people I didn’t know.    Since joining Toastmasters, I have come to realize that it is one of the top organizations worldwide to improve your leadership and oral communication skills, which in turn fosters self-confidence and personal growth. 

Toastmasters has detailed and systematic educational programs for both communication and leadership.  One of the great things about them is that you are able to go at your own pace.  So many other training and education programs require you to go at the instructor or trainers pace – if your schedule does not permit you to keep up – to bad.  For more information on Toastmasters Educational Program- click here.

One of the greatest things about Toastmasters is the cost – it is cheap!  While individual dues vary by club, it is easily the best bargain out there for this type of training.  For example, ongoing dues at my club are only $24/quarter which covers both our local and our international dues.  Compare this to the thousands of dollars that some “leadership” programs charge for a week of training.  The frequency that clubs meet depends on the individual clubs – some meet weekly, other biweekly, and others only monthly.  The club I belong to meets every week.

I challenge everyone who is serious about improving their leadership qualities to take the time to find some local Toastmasters clubs and visit them.    I invite anyone local to visit our club over in Belmont.  We meet every Tuesday night from 7pm to 8pm.  There are nearly 50 Toastmasters Clubs in the Charlotte area alone – surely you can find one that meets your scheduling requirements:

For a List of Charlotte Area Toastmasters Clubs: Click Here.

To Find a Toastmasters Club outside of the Charlotte area:  Click Here.

(P.S.  If you didn’t notice, I have officially changed the name of this series of posts from “Smart’n Up to Invest in Yourself.  )

For other posts in this series, please visit:

Part I: What is a Roth IRA? What is changing about Roth IRA Rules?
Part II: Reasons to Convert to a Roth IRA.
Part III: Reasons NOT to Convert to a Roth IRA.
Part IV: Planning Ideas around Converting to a Roth IRA
Part V: Planning Ideas – What is the Pro-Rata Rule?

In this post, I will review a few more tax planning considerations related to Roth IRAs. It is important to keep in mind that everyone’s situation is different and that these ideas may or may not apply to you. You should sit down with your tax professional and do proactive tax planning prior to doing anything.

Can’t Afford to Convert?  If you are like many taxpayers, you look at the cost of conversion and it is overwhelming.  The good news is that you don’t have to do the entire conversion all at once.  You can convert a small portion of your IRA each year over a several year period – depending upon what you can afford to pay in additional taxes for the year of conversion.  In addition, this allows you to sit down with your tax planner and find out the magic amount that you can convert this year without being pushed into a higher tax bracket.  By planning this conversion out over several years, you may be able to lower the taxes that you pay on the conversion, as well as spread it out over many years.

The Pro-Rata Rule.  Wouldn’t it be great if you could choose to convert your nondeductible contributions and keep the contributions that you deducted as traditional IRAs – thus paying very little, if any tax?  Sorry, but that is where the Pro-Rata Rule comes into play.  When determining the amount of your conversion that was from deductible contributions and the amount that was from non-deductible contributions, the IRS looks at all of your IRAs.  You must add the value of all of them together, then divide by the nondeductible contributions, and this will give you the percentage of any conversion that you make that is tax- free.    This prevents you from converting only your nondeductible contributions.  The good news is that you may be able to use a loophole – the 401(k) loophole below.

401K Considerations.  Balances in 401(k) accounts are not included in the calculations for the Pro-Rata Rules.  In addition, some employer 401(k) plans allow you to rollover your traditional IRA into the plan.  By doing so, it can allow the taxpayer to exclude some or all of their deductible contributions from the calculation.  This will result in a higher percentage that can be converted to a Roth IRA tax free.  In the event that a taxpayer that plans to do a conversion has already rolled their 401(k) into a traditional IRA, they may wish to consider rolling it back to a 401(k) if their employer plan allows.

Due to this Pro-Rata Rule, it is not usually recommended that you convert your 401(k) to a traditional IRA until after you are through with any Roth IRA conversions that you plan to do.  The exception to that would be if you wanted to convert the 401(k) balance to a Roth IRA as well.  Even if you do, it is probably a good idea to sit down with your tax planner to make sure that you structure the timing of the conversions in a manner that will maximize your tax savings.

Minimum Distributions.   As mentioned several times during this series of post, if you are over the age of 70 1/2 and you are taking Required Minimum Distributions (RMDs) from your traditional IRA or workplace plan, you can not include the current years RMD in the conversion amount.  You must pay the necessary tax on that RMD, and then you can convert the remaining balance.  (Note:  There are no RMDs for 2009 because Congress passed legislation to waive them due to the down market – fearing that they would wipe out many peoples retirement accounts.  RMDs are scheduled to resume in 2010.)

For other posts in this series, please visit:
Part I:  What is a Roth IRA? What is changing about Roth IRA Rules?
Part II:  Reasons to Convert to a Roth IRA. 
Part III:  Reasons NOT to Convert to a Roth IRA.
Part IV:  Planning Ideas around Converting to a Roth IRA.
Part V:  Planning Ideas – What is the Pro-Rata Rule?

In this post, I will review some tax planning ideas.  It is important to keep in mind that everyone’s situation is different and that these ideas may or may not apply to you.  You should sit down with your tax professional and do proactive tax planning prior to doing anything. 

Local Taxes.  Have you thought about where you plan to live when you retire?  Where you plan to retire could be a major factor in deciding whether or not to do a conversion – especially if you are close to retirement age.  If you are living in a high tax locale, such as New York, and you are planning to retire in one of the states that currently have no income tax (such as Florida), it may not make sense to convert.  If you convert while still living in the high tax state, you will have to pay a tax when you convert, when you would not be subject to that state income tax when you are in retirement.

The opposite is also true.  If you are currently living in a no state income tax-state such as Alaska, and plan to move to North Carolina for your retirement, it may make sense to convert while you are not subject to state taxation of those funds. 

Of course, as stated in prior post, we can not predict what the tax laws will be in the future.  This obviously applies to the individual states the same way it does to the federal government.  As most of the states are struggling to pay for hefty state employee pensions and Medicaid programs, there is a possibility of higher taxes at the state levels – as well as the implementation of income taxes in current no state income tax states.

Future Tax Rates.  What tax bracket are you going to be in during retirement?  Many individuals expect that their income to be lower during retirement, and thus have a lower marginal tax rate.  If this is the case, it may not make sense to convert.  Why pay tax at a high tax rate now, when you can pay a lower tax rate later? 

Conversely, other individuals may have higher income during retirement – especially once the required minimum distributions from retirement accounts kick in at age 70 1/2. 

Over the Income Limit.  Do you currently want to fund a Roth IRA, but are over the income limits for contributing to a Roth IRA?   You can open a traditional IRA, which is not subject to the income limits that a Roth IRA is, then contribute the maximum amount allowable and convert it to a Roth IRA in 2010.  Depending upon your individual tax situation, the contributions to the traditional IRA may or may not be deductible.  Just remember that if you can not deduct the contribution now, it will not be taxable upon conversion – although any earnings would be.   Many taxpayers have been maxing out their nondeductible contributions to traditional IRAs for several years now in anticipation of converting to a Roth IRA in 2010.

Protect Yourself Against Losses.  In future tax years, you can help to protect your account from losses or at least the taxes on money that you lose.   An individual can hold two Roth IRA accounts – one that is their “new” Roth IRA and one that is their “old’” Roth IRA.   Overtime, the individual will migrate all of the assets to the “old” Roth IRA.  Each year, contribute your funds to a traditional IRA (see “Over the Income Limit” above) and then subsequently convert that traditional IRA to the “new” Roth IRA.    The reason that you want to convert it to a “new” Roth IRA instead of just combining it into your “old” Roth IRA is that the tax law allows you to recharacterize a Roth IRA as a traditional IRA within certain time limits.  By doing this, if the investments in this “new” Roth IRA suffer a loss during the first year, you can recharacterize it as a traditional IRA and eliminate the taxes due from the conversion.  You can then reconvert the assets to a Roth again, at the deflated value, which would create a lower tax due.  This eliminates the possibility that you may have to pay taxes on value that no longer exists (See IRS Publication 590 for timing details surrounding your ability to recharacterize the IRAs).  In the event that the account increases in value, you could then transfer the assets to your “old” Roth after the time to recharacterize the account to a traditional IRA expires.  You can repeat this process each year that  you plan to make contributions. 

If that whole process was not enough pain for you, you can extend it even further to protect from losses in the investments.  You can open a separate Roth for each type of investment that you make with the converted money.  For instance, if you are investing the funds in three different investments, roll the funds into three separate Roth IRA accounts.  This way you can pick and choose which particular investments that you recharacterize – not just which Roth IRA account.  For example, if you had the following three investments:  Investment A that doubles in value during the year, Investment B that stays the same during the year, and Investment C that becomes worthless.    If all three of these investments were held in the same Roth IRA account, the total value would be the same and you would have to pay taxes on the converted amount as such.  If they are in separate accounts, you can pay the tax for the conversation of Investment A and Investment B, then recharacterize investment C as a traditional IRA – thus eliminating the taxes due on that portion of the conversion amount.

Estate Planning.  As discussed in Part III, Roth IRA’s do not have any required minimum distributions once they reach age 70 1/2 like they are required by traditional IRA’s.  If a retiree does not need the funds to live on, the earnings on their investments can continue to grow tax-free inside the Roth IRA.  Another advantage is that beneficiaries do not have to pay income tax on withdrawals that they make from an inherited Roth IRA.    Although, Roth IRA beneficiaries do have to take distributions across their life expectancies, Roth assets are still included in an estates value for Estate Tax purposes.

Tax Diversification.

Zig Ziglar is appearing at Get Motivated! in Charlotte on October 29, 2009.

If you are around the Charlotte area, this is a must do event for personal development!   

Get Motivated! is a dynamic seminar series that is put on by Peter Lowe that features some of the best speakers from around the Country. The good news is that it is coming to Time Warner Cable Arena (aka Bobcats Arena) in Charlotte on October 29th!  Even better news is that it only cost $4.95 per person (or $19 for your entire office)!  The price at the door is $225/person, so register in advance!  (Note, prices are not typos!)

This year, speakers at the Charlotte seminar will feature:

Zig Ziglar
Terry Bradshaw
Laura Bush
Dr. Earl Mindell
General Colin Powell
Tamara Lowe
Rudy Giuliani
Steve Forbes

Topics covered include time management, team building, leadership, personal development, goal achievement, sales training, negotiation skills, financial management, investing, relationships, health and fitness, spiritual success, business strategies, motivation, customer service, communication skills, productivity and more!

To register or to find out more information, visit the Get Motivated! website.  I already have my tickets!

Other cities on the tour include:

Hershey (Oct 20th)
Fort Worth (Oct 26th)
Jacksonville (Nov 2nd)
Orlando (Nov 10th)
Corpus Christie (Dec 1)
San Antonio (Dec 2)

For other posts in this series, please visit:
Part I:  What is a Roth IRA? What is changing about Roth IRA Rules?
Part II:  Reasons to Convert to a Roth IRA. 
Part III:  Reasons NOT to Convert to a Roth IRA.
Part IV:  Planning Ideas around Converting to a Roth IRA.
Part V:  Planning Ideas – What is the Pro-Rata Rule?

In this post, I will explain some of the common reasons that you will want to consider for not converting to a Roth IRA.  It is important to keep in mind that everyone’s situation is different and that these reasons may or may not apply to you.  You should sit down with your tax professional and do proactive tax planning prior to doing anything. 

Reasons NOT to Convert to a Roth IRA. 

Taxes!  If you convert your traditional IRA to a Roth IRA, you will most likely have to pay income taxes on the amount of your pretax contributions and earnings that are included in the amount that you convert.  If you have $100,000 sitting in your retirement account, this could be a hefty tax bill to absorb.

It is usually not a good idea to convert to a Roth IRA  unless you have other sources from which to pay the taxes other than retirement funds.  Depleting these funds to cover the taxes, offsets the positive benefits derived.  Another downside to paying these taxes with retirement assets is that you are “locking in” you losses that you have experienced over the last couple of years.  Once you cash these investments in, there is no chance for recovery.  In addition, if you are not 59 1/2, you would likely have to pay a 10% tax penalty on the funds you withdraw to pay the tax.

Possibility of Future Surcharge on the “Rich.”  As stated in Part I, under current law, distributions under Roth IRA’s are to be tax free since the tax was paid at the time of the contribution.  The key word there is “current law.”  We have no way of knowing what Congress will do in the future as it becomes more and more desperate to raise tax revenues for its never ending laundry list of government programs and agencies.  There is a possibility that at some point in the future Congress will find it “necessary” to tax a portion of Roth IRA distributions for “wealthy” Americans.   While most politicians will say this will not happen, keep in mind that they also told us that no portion of Social Security benefits would be taxable since it had already been taxed once.  

When our country was formed, our founding fathers were vehemently opposed to the income tax.  It wasn’t until the ratification of the 17th amendment in 1913 that the income tax was Constitutional.  At that time, we were assured by our politicians that it would never need to go above one to two percent, and that it would only apply to the wealthiest Americans.  Well, we have all seen how that promise played out.  My point is that most of the publications and articles I read on the Roth IRA assume that all distributions will always be tax free.  Keep in mind that they may not be.

Fair Tax.  Another possibility that we must be aware of is what happens if the Fair Tax or something similar ever becomes law?  What if there is a total transformation of our tax system in which the income tax is eliminated and replaced with a transaction oriented tax?  Would the people who converted their traditional IRA’s to Roth IRA’s and paid in hefty sums in taxes to do so get the shaft?  I am willing to bet they would.  It is unlikely that this is going to happen in the next few years, but some people are planning 20, 30 or 40 years out.  There is no telling what the political landscape or the tax system will look like at that time.  (See Tax Diversification on Part IV)

Part I:  What is a Roth IRA? What is changing about Roth IRA Rules?
Part II:  Reasons to Convert to a Roth IRA. 
Part III:  Reasons NOT to Convert to a Roth IRA.
Part IV:  Planning Ideas around Converting to a Roth IRA.
Part V:   More Planning Ideas - What is this Pro-Rata Rule?

In this post, I will explain some of the common reasons for converting to a Roth IRA.  It is important to keep in mind that everyone’s situation is different and that these reasons may or may not apply to you.  You should sit down with your tax professional and do proactive tax planning prior to doing anything. 

Reasons to Convert to a Roth.

Low Values in Accounts.  Due to the market conditions over the last few years, many retirement accounts have plummeted in value.  Converting now would allow individuals to pay taxes on this currently deflated value.  Keep in mind though that for this to be an advantage it assumes that the market is going to recover quicker rather than slower.  There is no way to predict if account values will soar back to their prior levels anytime soon.  Nevertheless, it does yield a lower tax bill than it would have if a conversion were done when the account values were at their peak.

Possibility of Higher Taxes in the Future.  Let’s face it, the finances of our nation are in turmoil.  With massive record deficits and an Administration and Congress that are proposing massive new government programs, it is unlikely that we will see income taxes go much lower than they are today.  The federal government rarely, if ever, cut their budget from one year to the next.  It just keeps growing.  Because of this many taxpayers are betting on much higher tax rates in the future – even for retired middle class Americans.  Why does this apply to Roth IRA conversions?  Many taxpayers are choosing to pay the taxes on their retirement money now – at a rate that they anticipate to be much lower than in future years.

Withdrawals are Tax Free.  As long as you have held your assets in your Roth IRA for at least 5 years or are age 59 1/2, withdrawals are generally tax free (special rules apply to earnings that have not been held in an account for 5 years).   Keep in mind that they say this is “tax free,” but the fact is that you have already paid the tax on your contributions in the year that you made them.  What they are really meaning is that you just do not owe tax when you pull the money out because you already paid it.   Also, bare in mind that this “tax-free” status is based on current law, and that does not mean it will be the law when you retire (see below).

Income Tax Deferral Option for 2010.  As part of the law change that goes into affect on January 1, 2010, Congress is allowing taxpayers who convert to a Roth IRA to defer the tax and pay half of it in 2011 and half of it in 2012 based on their tax brackets for those years.  Taxpayers who wish to pay the entire tax due in 2010 may do that also.   While this does not provide a taxpayer an eternity to come up with the money to pay the taxes, it does provide them with a couple of years .  Of course, not converting defers the tax until the funds are withdrawn during retirement.  The biggest advantage here is that if you are converting for other reasons, this gives the taxpayer an option that was not available before.  This option to spread the tax over the following two years is only available for conversions completed in 2010.  This is something that should be discussed during your tax planning session with your tax professional.  The timing of when you pay the tax could affect your tax brackets, your alternative minimum tax (AMT) situation or cause other tax issues.  You want to make sure you do it in the right years.

No Minimum Distributions.  I will discuss some planning ideas around this in Part IV, but another advantage to a Roth IRA over a Traditional IRA is that you are not required to take minimum required distributions (RMDs).  Traditional IRA’s require that once you reach age 70 1/2, you must take a distribution amount that is calculated based on your life expectancy.  This is a negative if you do not need as much money that you are required to pull out.  With a Roth IRA, you can leave the funds in there as long as you wish with no distribution requirements during your lifetime.  See Part IV for some tax planning ideas around the Roth IRA and No Minimum Required Distribution.

Have You Done Your Retirement and Tax Planning?

There has been much in the news lately about the January 1, 2010 change to the rules surrounding the conversion of ROTH IRAs. I am going to write a short  long series of posts that will explain the rules around Roth IRAs, as well as what the recent changes in the law means. I will also provide you with some reasons to convert, as well as some reasons not to convert. In addition, my final posts will include some tax planning tips around the Roth IRA.

Part I:  What is a Roth IRA? What is changing about Roth IRA Rules?
Part II:  Reasons to Convert to a Roth IRA. 
Part III:  Reasons NOT to Convert to a Roth IRA.
Part IV:  Planning Ideas around Converting to a Roth IRA.
Part V:   More Planning Ideas - What is this Pro-Rata Rule?

What is a Roth IRA? First, let me assume that at least a few of you are unfamiliar with what a Roth IRA even is. The biggest different between a traditional IRA or retirement vehicle (such as a 401(k), and a Roth is that traditional IRAs typically allow the taxpayer to deduct the contributions against income when they contribute them. In turn, those taxpayers will pay taxes on those funds when they remove them during retirement.  With a Roth IRA, taxpayers pay their taxes on those earnings now, and under current law would pay no tax upon withdrawal of those funds.

In order to contribute the maximum amount allowed to a Roth IRA in 2009, individuals must have a modified AGI less than $120,000.  Married couples filing jointly or a qualifying widow(er) must have a modified AGI less than $176,000 to make their maximum contribution.  The maximum contributions begin to be phased out when those income limits reach $105,000 and $166,000, respectively. 

The maximum allowable annual contribution to a Roth IRA is $5,000 annually for 2009 if you are under age 50.  If you are over age 50, the maximum contribution is $6,000 for 2009.  Starting in 2010, these amounts are going to be indexed to inflation.

 What is changing about Roth IRA Rules?  As part of the Tax Increase Prevention and Reconciliation Act of 2005 (signed my President Bush on May 17, 2006), the $100,000 income limit for converting certain retirement plans to Roth IRA’s has been “permanently” removed. This means that regardless of your income, you can now convert your qualifying retirement assets to a Roth IRA. Because Roth IRA conversions create immediate income tax revenue for the government, it is unlikely that the Obama administration is going to push to put the limits back in place.

In addition, married couples who file separate tax returns can also convert to Roth’s. Prior to the January 1, 2010 rule change, these individuals would have been prevented from doing so except under certain circumstances. What types of plans can you convert to a Roth IRA?

You can convert all of part of the assets from your own or an inherited employer-sponsored qualified pension, profit sharing or stock-bonus plan, such as a 401(k), 403(b) annuity plan or a government deferred compensation plan, such as a section 457 plan. You may also convert your own, but not an inherited SEP-IRA or SIMPLE IRA, although you must hold a SIMPLE IRA for at least 2 years from the date of establishment to convert to a Roth IRA.

For 2009, under full retirement age recipients can earn up to $14,160 in a year without limiting their social security benefits (full details are available at www.ssa.gov).  With self-employment, there are many opportunities to structure income and time the income to make sure that earnings fall under this limit and benefits are maximized.  Here are a few ideas that we discuss in this situation:

1. Is your spouse collecting social security benefits?  If not, there may be an opportunity to employ your spouse and shift income.
2. Is there an opportunity to increase pre-tax retirement contributions?
3. Can a medical reimbursement plan be used to lower taxable income?
4. Is a C-corporation structure able to reduce personal income?

This has become a popular subject and we offer a customized solution to maximize your social security benefits and minimize your tax effects.  Call us today to schedule your strategy and planning meeting.

North Carolina

Beginning with your North Carolina 2009 tax return, your overall top rates may increase based on a surtax.  This is an increase to the top tier rates if your taxable income is more than $100,000.  Its what we otherwise call a “TAX INCREASE” for North Carolina sources of income.  Just another reason to prepare with good tax planning.

For example, if your filing status is “married filing jointly” and your North Carolina taxable income shown on Line 13 of Form D-400 is $150,000, you would compute your “regular” state income tax on Line 14 and then multiply that amount by 2 percent.  The result would be added to your “regular” tax on Line 14 to give you your total tax liability. Then you subtract credits, withholding, payments, etc., to find out if you are due a refund or if you have to pay any additional tax.

Note:  there is no penalty (interest) for underpayment of estimated tax if the underpayment is because of the surtax.

For further information, please see the North Carolina Department of Revenue site.

The show’s hosts, John Wall and Christopher Penn, record the show every week from a coffee shop in Natick, MA, just outside of Boston and publish it each Thursday morning.  It is available for FREE via their Marketing Over Coffee website, iTunes, or through an RSS feed.  I download it to my iPod and usually listen on my morning walks.

They usually cover several different topics throughout each 25-30 minute episode.  They usually focus on a variety of Internet and web marketing topics, but sometimes branch out to traditional marketing topics as well.  Like I said previously, I pull several good ideas from each episode.  If you are a small business owner who is struggling to understand the “new” marketing opportunities that are created by the web, this podcast can help you to clear the fog a bit.    These ideas will especially help you if you are doing a lot web marketing – especially if you are taking on a portion of the work load yourself.  Even if you are outsourcing a lot of this work, it is a good idea to have an overview what your Internet marketing people are supposed to be doing.