Roth IRA

Retiring soon? You need a self managed IRA. Self managed IRAs, or what can be sometimes be called self directed IRAS, are by far the best management vehicle for soon to be retirees, or for that matter anyone who plans to retire in the future, and that’s all of us.

Retiring in the future is going to be a problem for those who want to retire comfortably. As the population ages and the tax base shrinks relative to those needing retirement pensions, pressure on government funds for retirees is going to grow. Those smart enough to recognize the problem need to act now, and a self directed IRA, preferably invested in real estate, is the best way to do it.

How serious is the problem for future retirees? A recent Social Security Administrations trustee report has found that by 2040 social security will not be able to meet full retirement benefits. Scary isn’t it?

An IRA, or an Individual Retirement Account, is a vehicle to direct money into a fund that is set up to provide for your retirement. And anyone serious about their retirement needs to plan and invest wisely for it, right now.

Why would you do that through a self managed IRA? Why not just save up for your retirement?

The answer is all to do with tax. The government has graciously allowed us all substantial tax benefits for planning for our retirement through an Individual Retirement Account.

Why would the government give you tax benefits for planning for your retirement? To encourage people to self fund their own retirement to take pressure off limited future public funds. I won’t go into all the tax benefits that attach to IRAs, except to say that if you’re serious about a comfortable retirement you simply must have your own IRA to help you plan and invest for your retirement. For more details on the tax advantages talk to your financial advisor.

Of course many people already have their own Individual Retirement Account. Problem is that these are set up through the banks and trustees and investment companies, which of course direct your IRA retirement funds into their own products. And the investment returns on these products are not spectacular. You won’t set yourself up with a comfortable pension on 6% or 8% return on investment.

Most IRA custodians only allow investments in a narrow range of investment vehicles like stocks, mutual funds, bonds and CDs.

However those in the know recognize that a self managed IRA is a far better vehicle to maximize returns on your retirement funds. If you rollover your current IRA into a self directed IRA you have full control over how, and where, your future retirement funds are invested, and far more potential to maximize your investment returns. And so to maximise your comfort level in retirement.

A self directed IRA custodian will allow you a much wider range of investments, and these include real estate.

Why would you want to invest your IRA into real estate, particularly in 2008 when the real estate market is in meltdown?

Firstly because real estate is always the best long term wealth creation tool, especially when it’s tax advantaged. It’s solid and less volatile than any other investment, and so allows you to borrow safely. Mortgages over real estate are much easier to obtain than, say, a loan to buy shares. Even in 2008.

And what about the current state of the property market? Why would anyone with a self managed IRA want to invest in real estate right now?

Because, like in any market, there are always fantastic opportunities available if you know where to look and how to invest. Not all real estate is a disaster, and there are some very good advisers with spectacular real estate investment opportunities available, even now.

One in particular offering no money down real estate investing opportunities to ordinary IRA and 401(k) investors (and ordinary credit investors) right now. Guaranteed returns and immediate equity, and backed by a solid investment strategy backed by a US public company with an impeccable record in real estate investing.

So if you’ve been thinking about your retirement, either in the short term or the long term, and either have your own IRA or need to set one up, do it. Set up your own self managed IRA or rollover into one, and get started planning and investing for your retirement, no money down, guaranteed.

You’ll be comfortable in your retirement if you do.

Want to make lemonade from the lemons in your IRA? This year’s market tumble has handed you a recipe.

Usually IRA owners can’t take advantage of capital losses on their stocks and funds. Since earnings aren’t taxed year by year in such a retirement account, there’s no point harvesting losses to offset gains.

That maneuver only works for shareholders in their taxable accounts.

But this year offers you a special opportunity. It involves converting a traditional IRA to a Roth IRA, which takes after-tax contributions but allows tax-free compounding of investments as well as withdrawals.

Any year that you convert a traditional IRA to a Roth IRA, you owe income tax on the amount transferred. The silver lining to 2008’s cloudy market performance is this: If your IRA assets have been devalued by the bear market — and whose haven’t been? — you’d owe less tax on any conversion.

You’re eligible to convert if your modified adjusted gross income this year, for marrieds filing jointly or singles, is $100,000 or less.

To do a conversion, tell the mutual fund group or bank that is your IRA custodian what you’d like to do. You’ll have to fill out some forms.

Here’s an example that shows the advantage of a Roth IRA conversion now. Suppose a hypothetical Sue Adams retired at the end of 2007. Her MAGI this year is $95,000.

At the beginning of 2008, Adams rolled her 401(k) account into a traditional IRA. Her IRA was invested in stock funds worth $800,000.

If Adams had converted her traditional IRA to a Roth IRA in January 2008, she would have reported $800,000 of ordinary income. The $800,000 in income from the Roth IRA conversion does not count for determining if Adams is over the $100,000 MAGI limit. Assuming an effective 35% tax rate, Adams would have owed $280,000 in income tax on her conversion.

Lower Levy

Instead, Adams chose to keep her traditional IRA. Now those stock funds are worth only $500,000.

If she can convert to a Roth IRA now, at a 35% rate, Adams would owe only $175,000. So she’d save $105,000 in tax vs. converting her IRA early in the year.

Adams would still pay tax now. Why would she want to pay so much tax before it’s required?

Because once she’s 59 1/2 and her account is five years old, she can withdraw her principal and earnings tax free.

All Roth IRA conversions in 2008 have a Jan. 1, 2008, starting date, notes Ed Slott, a CPA who publishes the IRA Advisor newsletter.

So the five-year mark will be reached on Jan. 1, 2013, just over four years from now.

Suppose Adams’ stock funds have rallied by then and her Roth IRA is back up to $800,000. She can withdraw all of it, including $300,000 of growth, and owe no more tax.

Adams does not have to convert the entire $800,000. She can convert part of it and owe tax only on the amount she converts.

Adams might convert another part in early 2009, if her MAGI for the year won’t exceed $100,000. If her stock funds are still depressed, she will owe relatively little tax for that conversion in 2009.

And she’ll have more low-priced stock funds in position for tax-free gains within her Roth IRA if the market recovers.

Nearly 170,000 taxpayers converted traditional IRAs to Roth IRAs in 2004, the latest year for which data is available. The total amount was over $2.8 billion.

What if you converted to a Roth IRA early this year, when your stocks and funds were worth much more than now?

You can undo the original conversion — known as recharacterizing. Now, if you convert a second time you’ll owe less tax. But IRS rules require you to wait until the next calendar year before doing the second conversion.

You could even delay the recharacterization. A 2008 Roth IRA conversion can be recharacterized up to Oct. 15, 2009, Slott says.

You can reconvert to a Roth IRA 30 days after recharacterizing or on or after Jan. 1 of the year after the conversion, whichever comes later.

Suppose Adams converted her IRA to a Roth IRA in January 2008. She recharacterizes in November 2008, reversing the conversion.

On Jan. 1, 2009, she can reconvert the account to a Roth IRA. But if Adams recharacterizes in December 2008, she’ll have to wait 30 days before reconverting.

Either way, she may owe less tax than she owed on her earlier conversion. That assumes her stock funds don’t make a big comeback by the earliest date in January when she can reconvert.

If stock funds continue to decline, any conversion to a Roth IRA now can be recharacterized by Oct. 15, 2009.

You can recharacterize and aim to reconvert each year at or near the market bottom. Then you’ll pay less tax and have more opportunity for tax-free growth.

With less than two months to go before 2009, I though it would be worth taking a look at IRA contribution limits for 2009. As of 2008, contribution limits are indexed to inflation and will increase in $500 increments (as necessary). Unfortunately, there’s not much to report here, as the limits are staying the same in 2009 as they were in 2008. What follows is a table of contributions limits starting back in 2002, and running through next year.

The silver lining here is that the cutoffs for making Roth IRA contributions and for deducting Traditional IRA contributions have increased 2009.

Roth IRA Contribution Thresholds

If you’re married and filing jointly, you can make your full Roth IRA contribution as long as your modified adjusted gross income (MAGI) is below $159k, and your ability to contribute phases out entirely at $169k. For single filers, the thresholds are $101k and $116k.

Traditional IRA Deduction Thresholds

If you’re married and filing jointly, you can make deduct your full Traditional IRA contributions as long as your modified adjusted gross income (MAGI) is below $85k, and your ability to deduct contributions phases out entirely at $105k. For single filers, the thresholds are $53k and $63k.

Deadlines for Contributing

Remember, you can make 2008 contributions all the way up to April 15, 2009. As for 2009 contributions, you can start as early as January 2nd, 2009 with a deadline on the back end of April 15, 2010.

Myth 1. Use the university medical plan. You need to understand your current medical insurance plan. Many plans have increased costs for out-of-network doctors, however, it could be even more expensive to use the medical insurance your school offers. Do a comparison of the plans and costs; just make sure you don’t go without any insurance.

Myth 2. You must wait until after college to start a retirement plan. College is a great time to start a Roth IRA. Put away some of the money you earn from your summer or part-time job in a Roth IRA during college. This was one of the key reasons I was able to leave the workforce at 29.

Myth 3. You must pay your tuition with a check. Find out if you can pay your tuition on a credit card. If so you can use cash rewards credit cards to get cash back on your tuition. My aunt mentioned this weekend that was her plan. Great idea!

Myth 4. Buy everything for your dorm room. Instead, give your new roommate a call. By coordinating bigger items, you’ll save some money and avoid showing up with two toasters and no t.v.

Myth 5. Always use the meal plan. I can’t tell you how much money I wasted on the meal plan since you could only add money in $250 increments. Plan ahead and you won’t have to spend $200 on food in one week! In addition, be sure to check out other options for cheaper (and healthier) food choices.

Myth 6. Keep using your hometown bank. You may want to explore local banks in your college town. Our university had a free credit union with branches all over campus. They had free ATMs, checking and savings accounts. It might be more convenient than your old bank.

Myth 7. Buy everything you could possibly need. You can save a bundle by waiting to finish your shopping. Before leaving for school, I made sure to buy everything on those college checklists. It wasn’t until I was there that I realized I could still go to a store and buy some stuff; you might find you don’t even need it all to begin with.

Myth 8. Assume your belongings are insured. Inform your insurance agent that you are moving out. Determine if your belongings will be insured under your homeowners policy, or check out a renters policy. You’ll also want to let them know if you are taking your car, as it will be garaged at a new location. Don’t end up uninsured in the event of a fire or other catastrophe.

Myth 9. Student loans are the only option to finance your education. Being frugal in college doesn’t have to ruin your fun. Check out how to be a frugal college student for ideas.

Myth 10. Buy your textbooks immediately. Wait until after your first class to see if you need a certain version of the recommended text. Other textbook tips for college students include shopping for books online and reselling them once you are finished.