Monthly Archives: June 2015

Profiting from an IRA Conversion?

PigOnMoney300x200

Many Americans have traditional Individual Retirement Accounts, where your annual contributions are reduced from your taxable income, yielding a tax deduction now, but your withdrawals are taxed. And many also have Roth IRAs, where the money you invest is taxed normally in the year you deposit it, but the profits grow tax-deferred and can be withdrawn tax-free after you retire.

The two options raise the obvious question: Would you rather pay tax on the seed money now or the crop of money later? This point has been debated for years, but for this post we are going to assume you would rather pay the known tax now vs. an unknown tax later.

Many people with traditional IRAs also open and fund a Roth IRA. But, if you’d like, you can convert a traditional IRA into a Roth account. Taxes are due on any amount you convert. The benefits of conversion:

As great at these benefits are, a conversion may not be for everyone. The longer you have until the money is needed, the better a move conversion can be. Get advice from a professional, input your data into one of the many software programs designed to calculate the costs and benefits, or email me for a free customized analysis.

Partial Conversions Can Be Powerful

Many people don’t realize that they can convert just a portion of a traditional IRA. If you combine the partial conversion with certain financial products, your tax burden can be lessened dramatically.

Let’s assume you have $400,000 in a traditional IRA and your effective tax rate is 20 percent.

You initiate a partial conversion of $130,841, which would mean you have to pay $26,168 in taxes. This gives you $104,673 for your Roth account and leaves you $269,157 in your traditional IRA.

You could elect to combine the conversion with a rollover into a solid fixed indexed annuity that offered a initial premium bonus. If you roll over your $269,159 traditional IRA into a product that gave you a 7 percent premium bonus and did the same thing with your new Roth account with a balance of $104,673 after taxes, then you would receive a $26,168 bonus that would put your starting balance of your combined IRA accounts back to the original $400,000 before the conversion.

The difference is that now $104,673 is now tax-free and not just tax-deferred. Assuming a modest 5 percent growth rate inside of both accounts, after just 10 years, you would be $43,785 ahead with this strategy than if you just let your traditional IRA stand. In 20 years, you will have over $83,000 more in your combined accounts (even after factoring in the taxes on your traditional IRA) than you would have had without the conversion.

Creating and preserving wealth is much like any other endeavor in which you would like to have success. A good system plus discipline equals more success than just “winging” it in life. This one simple strategy can create tens and even hundreds of thousands of extra dollars in your later years or to leave behind for those you love. If you would like more information on this strategy visit us and request your free report.

Is it too Late to Leave a Nice Estate For Your Family

When my mother entered her 70s, she began focusing more on what she would leave for her kids than her own financial well-being. She was more than fine; she had assets and steady income from two pensions, Social Security and an annuity. If you’re in that phase of life, you may have similar priorities. The question is: Do you know the best ways to increase your estate?

OLYMPUS DIGITAL CAMERA
Most people mistakenly believe that once they stop working, their net worth will shrink as they draw on assets for living expenses. Many people who are still working into their 60s and 70s also believe that it’s too late to add any significant wealth to their estate. Neither of those has to be true — if you have a well-designed plan.

Whole Life Policy

Let’s consider a client who is 64 and plans on working another 10 years. He is reallocating some existing assets and putting some extra cash into life insurance. We are not talking about an end-of-life policy sold by the truckloads by TV personalities with a $10,000 payout to cover funeral expenses. This might be a good call if you have very little in assets and worry about your kids paying for your funeral. This client has some resources, so we could do something a little more creative.

He elected to fund a whole life policy with $25,000 a year for eight years for a total of $200,000. His starting death benefit is $310,000. If he dies in the next eight years, his family would receive $310,000 to $508,000, depending on when that happens. If he reaches 72, he will have the entire $200,000 that he put into the policy over those eight years back in the form of cash value in the policy. He is free to take loans and disbursements, or just let the money sit and grow during the rest of his lifetime.

Should he reach 85, he would have more than $376,000 of cash value in the policy — even though he has only paid in $200,000 into it. Upon his death, his family will receive more than $470,000 of tax-free cash. He will more than double his estate by simply reallocating assets and letting tax-free compounding and guarantees go to work. Meanwhile, he can access the cash he is funding the policy with. If he does, he will lower the death benefit, but he has no need in the foreseeable future.

Fixed Indexed Annuity

Another client, who is 70, had concerns about leaving money behind to benefit a child with a mental handicap. The first step was finding a rock-solid trustee to make sure any money benefits the child after the death. Since the client was 70, the cost of life insurance was prohibitive.

The client had put away $300,000 for the child. The last market downturn had cost $130,000, but most of those losses have been recouped.

The client was very clear on wanting no market risk and elected to go with a fixed indexed annuity with a death benefit rider. This rider guarantees that the $300,000 will never decrease in value and will increase at a minimum of 4 percent — plus any indexed market gains. The least average growth rate combined with the 4 percent percent guarantee means that if the client dies in 10 years, the client will leave behind more than $650,000 in cash. If the client lives only five more years, annuity will leave behind $488,000.

A fixed indexed annuity can also have a lifetime income rider that guarantees you income no matter how long you live and even if the underlying cash goes to zero from income withdrawals. The National Association of Fixed Annuities has more information about how these products work.

 

Image Credit iStockPhoto -by nanita

Give Yourself a Raise!

In last week’s article we gave you an introduction to the United States Tax code and why you need to take control of how much you pay to the government. This week we will give you the most powerful strategy to legally and dramatically reduce the amount you pay in taxes.

The #1 Tax Strategy in America – Do something with the INTENT to make a profit from your home!

The “Business” tax breaks were passed by Congress for 2 reasons:

 1) To stimulate the economy by creating more businesses and more jobs.

 2) Encourage people to have additional sources of income to pay off their debt and contribute to their retirement.

An activity with the INTENT to make a PROFIT, can be considered a “Business” and qualify for “Business” tax deductions. You can do this as a sole proprietor (in your own name) or as an entity (corporation, LLC, etc…) either way works. In order for a business to be able to deduct all ordinary and necessary business expenses it must be able to show that the business is being run with the reasonable intent of making a profit. You do not need to actually make a profit as long as you intend to make a profit.

So here are the requirements set forth by Congress

  •  Have the intent to make a profit
  • Work your business on a regular & consistent basis
  • Treat it like a business – Keep good records

Meet these 3 requirements and you can qualify for $1,000’s in new Tax Deductions.

So let me share with you just 4 of the many Tax Deductions you will qualify for when you take the time to meet the above 3 requirements.

TAX DEDUCTION 1 You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:

  1. The meeting is directly related to your trade or business, and
  2. It is reasonable to hold the meeting outside the North American area.

NAmericanCountriesList

It is considered “REASONABLE” to have a business meeting in any of these countries! (See chapter 1 of IRS Publication 463)

TAX DEDUCTION 2Travel Rule Basics:

Basic Rule: For each business day of travel, you can deduct 100% of your lodging and 50 percent of your meals and entertainment.

Workdays: You can count a business day as any day during which your principal activity during normal business hours is the pursuit of business. You must work more than half of the workday.

Tried-to-work days: You count a business day as any day you intended to work but circumstances beyond your control prevented you from actively pursuing your business objective.

Weekends, holidays: If a weekend or holiday falls between two business days, the weekend or holiday is considered to be a business day and is tax deductible. This applies only when it is not be practical to return home for the weekend because of time required or expense involved.

Saturday night travel: Airlines sometimes charge you less if you stay over a Saturday night. If you can save money by staying over Saturday night, you count the stay-over as a business days.

Travel days: Travel days are business days.

TAX DEDUCTION 3  –  Meals & Entertainment

The IRS considers “entertainment” to be any activity that provides “entertainment, amusement, or recreation, and includes meals provided to a customer or client.”

You are permitted to deduct 50% of all of your ordinary and necessary meals and entertainment costs for your business.

The 50% limitation applies to all meals (whether local or in travel status) and entertainment expenses.

In order to qualify for the deduction, you must discuss business during the entertainment (directly related entertainment) or immediately before or after the entertaining – within 24 hours (associated test for entertainment expenses).

You must be able to document Who, Where, When, What & Why. Most receipts have the Where & When printed on them – you just have to document the Who, What, & Why

  • The Tax Code does not provide any guidance as to what constitutes a “substantial and bona fide” business discussion for purposes of meals and/or entertainment.
  • There are no rules that specify how long the discussion must be before it will constitute a business discussion for deducting your meal or entertainment expenses.
  • Your business discussion does not need to take a greater amount of time than your non-business discussions for the meal or entertainment expenses to become deductible.
  • As long as a business discussion is the primary purpose of the entertaining, the expenses will qualify for a deduction.

TAX DEDUCTION 4  –  Dutch Treat

DEDUCTING “DUTCH-TREAT” BUSINESS ENTERTAINMENT

Many business expenses do not involve paying the expenses of clients or prospects. They are Dutch-treat. Everyone pays for himself or herself.

But how do you handle Dutch-treat expenses? How do you know if they’re deductible?

General Dutch-Treat rule: IRS regulations state that the taxpayer may deduct entertainment “even though the expenditure relates to the taxpayer alone.” The IRS says its objective test precludes arguments that “entertainment” means only entertainment of others.   Further, the IRS acknowledges that business entertainment may include an activity that satisfies a personal, family, or living expense. The IRS notes that an individual in business may deduct the entertainment cost, including his personal benefit, as a business expense.

Translation: Business entertainment deductions aren’t limited to the costs of treating others; you’re also allowed to deduct your own costs if you “go Dutch.”

Tune in next week when we will give you more strategies to reduce your income taxes thereby giving yourself a raise!