Nov 10, 2009

Take Control

2008 is a year that will make history books. The year began with a $130,000,000,000 stimulus package
passed by President George Bush. He was quoted as saying that our economy was “fundamentally strong”. Since then, we have seen an unprecedented turn of events that has had widespread effects on American companies and American’s pocket books. To date, Washington has committed an additional $7.8 trillion toward a rescue plan for our struggling economy. 

This year’s financial turmoil was much more than anyone could have expected. Investors are left
wondering what happened and how they could have been so wrong. Investor panic has driven the stock
market.  

The good news is that not everything is beyond our control. Losses in the stock market have created a few opportunities that the savvy investor should consider carefully. 

1. Roth IRA Conversion: With account balances down, investors with Individual Retirement Accounts (IRAs) who meet certain requirements can convert their account to a Roth IRA by paying taxes on the account today. You may ask yourself, “Why would anyone do that?” 

Imagine that your IRA is down 25% from $100,000 to $75,000. If you convert to a Roth IRA now, you pay ordinary income tax on the lower account balance and you can withdraw that money tax-free at retirement. With likely tax increases in the future, this can be a wise decision for many investors. 

A conversion can also be a powerful estate planning tool. Your heirs will receive the Roth IRA tax free as well. Another benefit of the Roth IRA is that investors are not required to take minimum distributions from the account after 70.5. The fact that you don’t pay tax on the growth or on distributions and you are not required to deplete the account can create an excellent tool for passing tax-free income to
your heirs. 

Many employers in Montrose offer qualified plans such as 401(k)s that have a Roth option. 

2. Offsetting Capital Gains: When markets go up and investors sell securities, they pay tax on the money they make above their initial investment. These capital gains taxes can be substantial. You can offset capital gains with capital losses. In years like this, an investor can “harvest” taxable losses to offset current gains, or an investor can carry-forward losses to offset future gains. If an investor does not take advantage of losses and the investments end up being sold at a gain, the entire gain is
taxable. Capturing losses in down markets and carrying them forward can ease tax burdens in future years and make a big difference to an investor’s bottom line.

3. IRA Rollover: Western Colorado has not seen as many challenges as the rest of the country. Still, many have been subject to downsizing and have lost jobs. Often qualified plans through employers such as 401(k)s and 403(b)s, pensions and profit sharing plans have few investments to choose from. These investments often see large losses when the markets are down and have a hard time gaining ground during rallies. In many cases these accounts are not monitored and investments within these plans may be poor performers. If you are no longer employed by the sponsor company this is an excellent time to roll-over these accounts to an IRA which allows many more investment options. At Elderado Financial we offer a complimentary initial consultation to discuss whether a roll-over is right for you. 

The markets are filled with uncertainty and investors are worried about events they can’t control. During this time there are many opportunities to take control and implement strategies that will save you money in the future. This year was beyond what most of us expected but the savvy investor is working to plan for his or her future. Making small changes and planning now will put you miles ahead in the future. 
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