Dollars & Sense Education

Funding a tax-deductible Traditional IRA will garner you an immediate tax break, investments grow tax deferred, but withdrawals are taxed as ordinary income.  A Roth doesn’t offer an immediate tax deduction  but investments grow tax deferred and withdrawals are tax free.  Unfortunately, if you are covered by a retirement plan at work and make more than $116,000 if you are single and $169,000 if you are married filing jointly - you can’t contribute to either.

Non deductible IRAs in the past were a very un-popular investment vehicle.  Contributions are not deductible on your tax returns, they grow tax deferred but are withdrawn at regular income tax rates.  However, in 2006 a new law was passed that said in 2010 individuals who were restricted from contributing to a Roth IRA are allowed to convert their non deductible and deductible Traditional IRAs to Roth IRAs regardless of salary. 

Converting your non deductible to a Roth in 2010 without paying additional taxes is an excellent strategy.  However, be careful not to trigger more tax liability!  Lets say you have $100,000 in a regular Traditional IRA and $25,000 in a non-deductible account.  You would owe taxes on the $21,000 because it would be assumed that the $25,000 was coming pro rata from the whole IRA rather than just the non deductible IRA.  You don’t want to pay taxes twice so what can you do? 

Solution #1: Roll the deductible portion of your Traditional IRA into a 401(k) if allowed.  Then when you go to roll over the non deductible portion into a Roth you will not be double taxed!

Solution #2: Even if you have a large IRA that you don’t want to mingle with non deductible IRA money to be converted, your spouse may not.  If not, your spouse can fund a non deductible IRA until 2010 and then convert it to a Roth.

Who Needs an Estate Plan and Why?  

Everyone.  A will tells the world exactly where you want your assets distributed when you die.

It’s also the best place to name guardians for your children. In addition to a will, there are plenty of other unpleasantries that make you unable to manage your own affairs for a while — that can go much more smoothly for you and your loved ones if you’ve prepared for them ahead of time.

What Does an Estate Plan Include?

An estate plan has several elements: a will; assignment of power of attorney; and a living will. For some people, a trust may also make sense.

How Much Does an Estate Plan Cost?

Typically a basic will plan costs $300-$2,000.

This includes a will, a living will, a health-care proxy and a power of attorney. More complex plans may include long-term tax planning as well as provisions for a bypass trust to take effect upon first spouse’s death.

So a Will Governs Where All My Money Goes?

Not all of your assets are governed by your will. Things like retirement accounts and life insurance go to the people you name on beneficiary forms. Changing your will or creating a trust won’t automatically change your beneficiaries on these accounts, so make sure you update information on all your accounts.

What is a Living Will and Health Care Proxy?

A living will is a statement of your wishes for the kind of life-sustaining medical intervention you want in the event that you become terminally ill and unable to communicate.

Most states have living will statutes that define when a living will goes into effect.  You increase your chances of enforcing your directive when you have a healthcare agent advocating on your behalf.

You can name such an agent by way of a healthcare proxy, or by assigning what’s called a medical power of attorney. You sign a legal document in which you name someone you trust to make medical decisions on your behalf in the event that you can’t do so for yourself.

A healthcare proxy applies to all instances when you’re incapacitated, not just if you’re terminally ill.

Why Should I Assign Power of Attorney?   

No one is immune from aging or the loss of mental clarity that may come with it. And you’re never immune to health crises that may leave you unable to handle the business of your life: paying bills, managing investments, or making key financial decisions.

Granting someone you trust the power of attorney allows that person - known as your “agent” or “attorney in fact” - to manage your financial affairs if you are unable to do so.

 Your agent is empowered to sign your name and is obligated to be your fiduciary - meaning they must act in your best financial interest at all times and in accordance with your wishes.

There are different kinds of powers of attorney, but in estate planning there are two essential types you should know:

The first is the “springing power of attorney,” which only goes into effect under circumstances that you specify, the most typical being when you become incapacitated.

There is also the “durable power of attorney.” It is effective immediately, and your agent does not need to prove your incapacity in order to sign your name.

An attorney can help you decide which form makes the best sense for your circumstance. In any case, take care in choosing your agent. That person should be competent, trustworthy, willing to take on the burden of your affairs, and financially secure.

Stay On Top of It

A marriage, divorce, or new child or grandchild can change your estate plan. Get the help you need to make appropriate changes and make sure that your wishes never go out of style.   

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
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