Dec 30, 2009

“I Was Rothed By My Advisor”



Don’t get caught up in the hype; find out if the 2010 Roth Conversion is right for you.


It fascinates me to see the hype each year about the newest toy. I remember just a few years ago when folks were standing in line waiting for a Nintendo Wii. There were numerous acts of violence, people fighting over the latest fad.

It isn’t just this generation, folks fought over the Raggedy Ann doll in 1915, they fought over Monopoly in 1935. A few of my favorites included G.I. Joe, the Original Nintendo, and Teddy Ruxpin. Then there were the toys that got all of the hype but were sure to be the hottest garage sale item the following summer; Pogs, Tickle Me Elmo, The Furby (what was that thing?). Today they are fighting over things we can’t even pronounce: Pokemon, Robosapien, Webkinz and most recently a rat-like creature named the Zhu Zhu Pet.

We sure like to get caught up in the hype and it isn’t always the Christmas toys. Next year marks the end of the $100,000 income limit on converting money to a Roth IRA. It seems that there is a new article every day talking about just how easy it is. They give the same facts and figures, making the conversion seem cut and dry.

The problem is, for many folks the Roth Conversion deserves more than a ‘canned’ answer. I am concerned that too many folks will jump in with both feet. With a tax substantially higher than the price of a Furby or Troll Doll, this is not a decision to take lightly. There will certainly be conversion-happy advisors who leave their clients feeling like they have been inappropriately ‘Rothed’ and lawsuits are sure to follow.

Here are a few considerations that may help you avoid making a ‘purchase’ that doesn’t fit.

Not a royal flush. Diversification is important, not only across asset classes, but across tax brackets as well. The Roth IRA Conversion is certainly not the Royal Flush of poker, in fact there is question to whether it is worth the hype at all. Place your bets and pay taxes on your IRA assets, but don’t ‘go all in’. Use the Roth IRA as a tool in your tool bag to maximize retirement income. When the IRS is the dealer, you never know when the rules may change.

Too much of a good thing. As you convert assets in 2010 your marginal tax rate will increase. The Roth Conversion assets will be taxed at an increasing rate as you leap from one bracket to another. Investors should not look at 2010 as a once in a lifetime chance. The current law will allow for conversion beyond 2010. Take a good look at your taxes and make sure you are not moving up-bracket needlessly. The Roth Conversion may be a good tool to keep around; you can watch your income each year and convert a bit at a time.
Pay the man… and pay the other man. If you choose to convert in 2010 you can elect to split the tax bill across 2011 and 2012. This tax-deferral may make the transaction worth it for you, but don’t get caught off guard if your state requires you to pay their share up front.  

Too little too late. The closer to retirement you are, the less sense the Roth Conversion will make. One of the keys to Roth Conversion is the tax free growth. If you will need to begin distribution from a Roth IRA soon, it may be prudent to wait and pay the tax a bit at a time as you use the money.
Apples to apples. In many examples we see a comparison between an account converted to Roth and an account left in an IRA. These examples are intended to show the after-tax results of the Roth Conversion. In many examples, the tax on the Roth Conversion is paid from an outside source of funds. For many reasons it is a good practice to pay the taxes using outside money, but make sure that your comparison takes that into account. If you take this money from a taxable account you may be forfeiting growth in that account, which may be taxed at a more favorable capital gains rate. If you have to use money from the IRA to pay for the conversion, it might be more beneficial to wait.  

The black sheep. Many qualified plans are eligible for Roth Conversion and the conversion will look the same. Simple IRAs, SEP IRAs, Standard IRAs, many 401ks-- There is one type of IRA that doesn’t fit the same mold. The Non-Deductible IRA seems to throw a whole new spin on the Roth Conversion. Non-Deductible IRA assets are taxed differently at conversion. The principal was not a tax-deductible contribution, you can consider that amount a ‘freebie’ when it comes to conversion. The gain in the account is taxed at ordinary income.

It would make sense to choose to convert only Non-Deductible IRAs, but the IRS has gone and changed the rules. They require folks converting these non-deductible contributions to convert the rest of their IRA assets on a pro-rata basis. That means that in order to convert all of your Non-Deductible assets, you would also have to pay tax on the rest of your IRA assets. There are a few work-arounds to this but it can get pretty complex.

Cover me. I’m going in! When it comes to paying taxes, especially paying them early, get help. If your situation is complicated at all, bring your financial planner, accountant and attorney to the table to make sure no stone is left unturned. This type of meeting really should happen once a year. It may keep you from feeling Rothed a few years down the road.

Reap the benefits.
·          If you elect to make a conversion you can avoid the required minimum distributions after age 70 ½ on money in the Roth IRA.
·          If you have dealt with the Alternative Minimum Tax or AMT, a Roth Conversion may help you minimize the effects of the AMT. Work with your accountant to convert just the right amount to pay taxes at a more favorable rate.  
·          In retirement you will have one more tool in your belt to combat that tax bill. As the IRS changes the rules during the game you will be ready to draw income and make charitable contributions from the right accounts.

Before you go through the hassle of picking up that shiny new Roth in 2010, make sure it is right for you. Just because it is the hottest thing doesn’t mean that you have to have it. 







Dec 27, 2009

Bankruptcy: It isn't always about the money!

 "If I give everything I own to the poor... but I don't love, I've gotten nowhere.  So, no matter what I say, what I believe, and what I do, I'm bankrupt without love."

1 Corinthians 13:3 [The Message]

Dec 3, 2009

A Value Menu for Your Non-Profit




More and more restaurants are preparing a value menu for their customers. In the non-profit world we should be offering a value menu for key donors. With the Charitable IRA Rollover set to expire at the end of 2009, the last 30 days of December are a perfect time to bring the value menu to donors. In the commercial McDonalds adds value and tells about a product on their value menu. Use the IRA Charitable Rollover as a newsworthy reason to contact donors, build a relationship and share your value menu.

A Value Menu for Your Non-Profit
Connecting with donors to improve their bottom line… and yours.


I love watching folks order from the value menu at fast food restaurants. Fast food chains are competing for business in a difficult economy. They are promoting the value of their food and calling hungry customers to action. I believe they are on to something; it seems like more and more folks are piecing together meals that can be paid for with spare change.

How are you adding value for your key donors? How are you calling them to action? Most key donors are already passionate about your organization. They are already giving and they don’t need a sales pitch. Instead, you may be able to sweeten the deal and build a relationship by presenting them with a menu of options that will add value.

You can do this by understanding how your donors are taxed and working with them to give more effectively. If you save them money by allowing them to give more to your organization, you have succeeded. Their finances are better because they did something they were passionate about.

Understand charitable donations. Folks give in different ways and from different sources. Here are a few basics on charitable giving:

Checkbook Philanthropy. When a donor writes a check, they are using after tax income to support your organization. If you are a tax-deductible organization they will receive a deduction at the end of the year which will reduce taxable income… maybe! In order for this to help, your donors must itemize on their tax return. According to the IRS, only about 36% of tax returns for individuals and families are itemized.

Appreciating appreciated assets. In this economy, it is difficult to discuss assets that have gained in value. This sort of conversation with donors at the end of 2008 may have gotten you laughed out of the room. Despite how things feel in this economy, many Americans still have securities and real estate that has appreciated. If they were to sell these assets they would owe capital gains on the appreciation. If your donor bought stock at $1 per share and sells at $10 per share, she owes capital gains tax on the $9 of taxable gains. However, if she were to gift that $10 stock to your organization, she gets a deduction for the entire $10. Remember, she only paid $1. As icing on the cake for your donor, she no longer owes the capital gains tax because she made the charitable contribution. Your donor supported your organization, got a full deduction, and did not have to pay the tax on capital gains. She has saved money.

Let them leave a legacy. What would happen if your largest, most consistent donor passed away tomorrow? How would it affect your budget? If your donors are passionate enough to offer support during life, perhaps they would be equally passionate about supporting your organization after they are gone.

There are many ways to go about this. It can be as simple as adding your organization as a beneficiary on an investment account. Some donors opt to create charitable trusts, donor advised funds, or participate in charitable foundations. These options offer flexibility and can allow donors to receive a deduction now, remove assets from their estate, and support your mission long term.

Don’t get overwhelmed, get help. You are probably a bit concerned at this point, feeling like your role in the organization just got bigger. There is good news: you don’t need to know everything about taxes, deductions and charitable giving to be effective. Instead, consider partnering with folks who are passionate about your organization, and who know their stuff when it comes to taxes. Seek out financial advisors, accountants, and attorneys, partnering with them to educate donors. You may find a few of these professionals are already a part of your donor base.

Tax laws are constantly changing but professionals in your community can keep you ‘in the know’. Ask these folks to look for tax changes that may benefit your organization and act as a call to action for donors. Use each opportunity to present a newsworthy new addition to a robust value menu.
You are beginning to look like a super-hero. You are connecting with folks that are passionate about your organization and you are adding value by saving them money. Congratulations!
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