Starting this year, anyone can convert all or some of their regular IRAs into a Roth regardless of their income or tax-filing status. Before 2010, you could not convert if your modified adjusted gross income exceeded $100,000 (single or married filing jointly) or if you filed your tax return as married filing separately. Those limitations are now gone for good (or until Congress changes its mind).
Separate income limits prohibit people who make too much money from contributing to Roth IRAs. Those limits remain in place.
The amount you convert to a Roth is added to your income, usually for the year of conversion. This year only, you have the choice of adding it to your 2010 income or splitting it evenly between 2011 and 2012.
Whether they should convert is a matter of debate. Accelerating a tax payment generally makes the most sense for people who expect to be in the same or higher tax bracket in retirement, have a long time horizon for the tax-free gains to make up for the tax payment or who are so wealthy they won't need the IRA and plan to pass it to heirs.
Who else may a conversion now benefit?
Roths are most attractive to young people who are in low tax brackets now but expect to earn more in the future and high-income taxpayers who have been put on notice that the Obama administration plans to hike tax rates on the rich.
Basically you need to consider your options and make sure a conversion is right for you. But if you do consider the conversion the right choice for you breaking your traditional IRA into multiple Roths and using a strategy known as recharacterization to counteract investment performance will save you some money, experts say.
Regardless the decision to convert or not to convert will be affected by many issues such as life expectancy as well as your tax bracket expectation at retirement. Exploring the possibility of a conversion in 2010 to a Roth IRA could prove to be beneficial for you and your retirement savings.
Posted by: Administrator in solok with roth, self directed ira, roth, retirement, real estate, nonrecourse loan, myblog, investment, Brooklyn Troy, 401k rollover, 401k on
Jan 11, 2010
Many people are still unaware that just because their 401k balance isn't enough to purchase a property it doesn't mean that they can't take advantage of the current real estate market. The fact is that there are several options for investors to utilize the funds that are available and successfully roll them over into a real estate investment. What is the primary vehicle needed to complete this transaction? Non-Recourse Loans.
There was a previous entry several months back that goes into a lot more details, but in a nut shell you are able to obtain a loan, up to 70% loan-to-value, to purchase an investment property using your 401k or IRA funds. Because the IRS mandates that all loans involving retirement funds must be non-recourse the only collateral that is needed is the property itself. The advantage of this being that derogatory personal credit, previous foreclosures, bankruptcies, etc, are completely irrelevant when trying to obtain a non-recourse loan. The lenders solely base their loan decisions on the property, it's cash flow potential, and minor reserve requirements within your IRA account. What does this mean exactly? Basically with a standard loan your bank will require you to personally guarantee the property. In the event of foreclosure you the borrower would then be personally liable. With a non-recourse loan involving your IRA funds the government wanted to make sure that in case a real estate investment soured the lender couldn't just come an wipe out your remaining IRA funds if the loan went into default.
At Brooklyn Troy we have seen purchases of properties involving IRA funds increase by 80% in 2009 and 20% of those purchases involved our clients obtaining non-recourse loans. Here is an example of one of the transactions we recently completed.
The purchase price of the property was $130,000 and this particular client had just over $40,000 available for a rollover into a Self-Directed IRA. Initially our client thought that their only option was to purchase a property for no more than the $40k in their retirement account, which significantly limited their investment options in their area. The solution to the problem was obtaining a non-recourse loan. In this particular area the lender was willing to lend up to 70% loan to value which gave roughly $130,000 of purchasing power. Already having several properties already picked out we simply analyzed each property and the potential ROI on each. After narrowing it down to two properties we were then able to make our move. Our client then made an offer on their first choice and actually were able to purchase the property for $125,000. After obtaining the loan for $87,500, and utilizing the $40,000 they had rolled over into a self directed IRA our client was able to purchase a property for $125,000.
Posted by: Administrator in UBIT, TPA, solok with roth, solok, SEP IRAs, Salary Deferral, profit sharing, myblog, Faisal Sublaban, Brooklyn Troy on
Oct 06, 2009
There is a common misconception that the only real retirement option for self employed individuals is a SEP-IRA. A lot of advisers aren't too familiar with the Solo 401(k) and especially the solo(k) with a Roth option.
Who Can Benefit?
Real estate professionals, sole practitioners, entrepreneurs, independent contractors, interior decorators, essentially any self employed person.
What is the difference?
Here is a general breakdown of the two:
SEP IRA's allow for tax-deductible contributions as well as deferred growth. The contribution limits for the SEP IRA is 25% of your compensation with a cap of $44k. The only issue with this is that the IRS only allows you to contribute 25% of you net profit. This is where one of the major advantages come into play for a solo(k).
A Solo(k) has the same contribution limits however you can not only contribute 25% of profit sharing you can also contribute tax-deductible salary deferrals of up to $15k per year. Basically you can make very little self employed income and defer it all. This gives you an added advantage if your self employed income is your secondary income and you are looking to maximize your tax advantages. Best of all there is no UBIT on leveraged real estate or investments, and you have the ability to borrow against the plan. You can also add your spouse to the plan and your total annual contributions can total $109k for joint filers over the age of 50!!
Another key advantage is that you can separate your Solo(k) into four Sub-Accounts or ''buckets":
1) Two Salary Deferral Buckets: Allocate up to $16.5k or $22k (if over age 50) to either:
- Roth Sub-Account (No restriction on AGI)
- Traditional Tax Deferred Sub-Acount
2) Profit Sharing Bucket: Lessor of:
- A) $49k (minus $16.5k from salary-deferral)
- B) 25% of your ''compensation'' or ''earned income''
3) Rollover Bucket: All Rollovers go here, both funds are not permitted
4) A TPA is required. Pre-established relationship with Pension Benefits Consultants (PBC)
In summary you can win big being self-employed and having a Solo(k).
