Tag Archives: Roth

Just how big is Oil … Friday Away from Office

A really cool chart follows below.  After a big Roth article mid week, we thought it nice to coast into your weekend…

Today is a Friday and I am out of the office, returning on Monday… Enjoy your weekend! 

What a fabulous chart by VisualCapitalist…

So much is always spoken of Gold or other Commodities such as Silver or Iron. This chart puts it all into perspective.

Think a movement from $140 to $28 a barrel doesn’t have a global ripple ? Think again! 

img_0665

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

 

 

 

 

When to contribute to a Roth, when not to contribute to a Roth, benefits and limitations

Recently we have received several questions about the Roth IRA. While many studies show only about 1 in 4 would benefit from a Roth, there are times when a Roth is the best choice. There are distinct differences in Roth’s versus other pre-tax plans which make appropiate tax planning very important when implementing a Roth contribution.

Roth Versus 401k or other Pre-tax Plans

The most important factor in determining to contribute to a Roth or not is understanding one key component:

A Roth is a bet your tax rate will be higher at retirement or in the future rather than currently!

Due to the tax benefits, all other items being equal, a Roth is most beneficial when one expects to be in a higher tax rate later or at retirement. Under normal circustances most families are in a LOWER tax bracket at retirement than during their working years, making a pre-tax plan more appropriate.

As a refresher, a Roth is an after tax contribution that grows tax deferred until used. No tax deduction up front makes for less immediate tax benefits but greater benefits during retirement or later in life when draws are taken on a tax free basis, under current tax laws.

Roth plans have less stringent RMD (Required Minimum Distribution) requirements than many other IRA/401k type plans. Pre-tax plans have mandatory distribution requirements due to their “never taxed” status. Since the contributions to funds and growth in pre-tax plans are without taxes, the IRS wants to get their taxes. 70.5 is the latest age one can defer the distributions of a pre-tax plan in most cases. Contrasting that to a Roth; Since taxes were originally paid on the contributions, distributions are not mandatory in most cases as the IRS receives no benefit under current law and thereby deems no mandatory distributions unless a Roth has been received as a beneficiary in which is it subject to similar mandatory distributions of pre-tax plans.

When a Roth is correct? 

Since a Roth is a bet taxes will be higher in retirement or later in an earning career, lower income periods of employment/careers tend to be the most beneficial for making contributions. Think early in a career or on off years of regular work for most tax beneficial Roth contribution times.

In a year of negative or low income the conversion of IRA to Roth may be an optimal strategy. Under certain situations a regular IRA may be converted to a Roth showing the income from the IRA. This would essentially pull forward the taxes from the IRA to the current year, which may be beneficial during very low or even better during a negative earning year. There are very few limitations on converting a IRA to a Roth as the IRS is benefiting early from the pull forward to taxes. These conversions, done correctly are without the normal early IRA 10% penalty.

Since a Roth is after tax and growth is tax deferred, the earlier the better for maximizing a Roth’s full potential. Tax deferred growth over longer periods of time will have greater benefits than short periods of time. In fact, VERY short periods of tax deferred growth in a Roth make it MUCH less appealing, if even appropriate at all!

Roth contribution limits

Single filers cannot make a Roth contribution once their income is greater than $133k in 2017 and married filing joint cannot make a contributions with incomes greater than $196k.

Roth contribution limits in total are $5500 regular plus $1000 catch up for those greater than age 50. Some employers offer Roth 401k plans which allow higher contribution amounts similar to the $18k and $6k catch up of regular 401k plans, however mandatory RMD distributions do come with these types of plans.

Conversion from IRA as mentioned above has no limits on income or earnings to qualify. Since the IRS is receiving tax dollar early, all other things considered, the rules are much more flexible for converting an IRA and creating a tax liability earlier than may otherwise have occurred (as mentioned above, carefully timed conversions may lead to very little tax liability if other outside factors have lowered the tax exposure.)

In closing, we agree with the studies that most do not need a Roth and many may never have the option for a Roth at all. This being the case, there are always certain circumstances that may make a Roth or a Roth conversion an ideal tax planning tool to offset unique income years as mentioned above.

Have a Great Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

October 2015 Year End Tax and Financial Planning Tips, Capital Market Review (Video by John Kvale)

Welcome to our monthly Economic, Capital Market, and Financial Planning tip of the month.

This months Special Tax Financial Planning Tip of the month is not one, but two tips that may save you tax dollars before year end !

For those new to our writings, we touch on the most pertinent Financial “stuff” along with a video of my mug that has even more specialized details of the latest month as well as this post.

Ok…let’s go!

VIDEO

YouTube Direct Link 

 

Clump or Push those property taxes

  • If you are just under the standard deduction for itemizing, consider clumping your property taxes
  • If you had a very big year of income and may have phase outs of deductions, consider pushing those property taxes into another yearProperty Tax

In our clumping or pushing post, here we discussed in great detail a neat technique to maximize your property tax itemization write offs. Now is a good time to pull out last year’s tax return and review your options — we will be glad to help if you have any questions!

Roth Conversion to Offset Active Losses

  1. Flatten your loss – not lose it
  2. Possibly freely convert your taxable IRA into a Roth
  3. Future appreciation in your Roth will be without taxes – tax-free withdrawals tooRoth Conversion

In our Roth Conversion post we discussed in great detail a possible flattening of your income and losses should you find yourself in this situation – this is a complicated, but rewarding technique – if applicable!

Give us a call if you have any confusion/questions! Do not try any of these techniques without first visiting with you professional advisor!

The Bounce back

Never go all in or all out !

This graph from our Monthly video last month:

9-30-15 Vanguard Total World Equity

Seemed silly to just watch our hard earned funds slip — and slip !

Fast forward to the end of October — The Great Bounce !

10-30-15 Total World Index

Just another reason to NOT watch this on a monthly or even quarterly time frame — decades is more appropriate!

Have a Great Day!

John A. Kvale CFA, CFP

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225JK Street Cents Logo

March 2015 Financial Planning Tax Tip, Capital Market and Economic Review (Video)

Welcome to our monthly Economic, Capital Market, and Financial Planning tip of the month.

This months Financial Planning Tip of the month, like last months, may save you valuable tax dollars!

Once again a special thanks to all of  YOU … the best clients and friends as your experiences have again given us the subject matter for our Financial Planning Tip of the Month.

For those new to our writings, we touch on the most pertinent Financial “stuff” along with a video of my mug that has even more specialized details of the latest month as well as this post.

Ok…let’s go!

VIDEO

You Tube Direct Link   or   Vimeo Direct Link

 

Another special Tax saving Financial Planning Tip:

If you think your taxes in retirement, like most, will be lower than during your earnings years, forget the Roth!

A deductible IRA and a Roth have the same exact outcome if taxes are the same before and after retirement. Same

  • Statistically, most have lower taxes during retirement
  • If you can fund both do so, but if it is either or, the odds favor the deduction up front

 

US Markets On a road to nowhere

US Capital markets rightly were stuck in the mud in the first quarter .. essentially going nowhere. Earnings over the next year are slated to be flat, making expectations for the capital markets to do the same.

3-31-15 SPX

Overseas Rocking … BUT

We have been crowing about overseas markets for some time … We were right, but not rewarded … yet!!!

The tremendous strength in the US Dollar had muted foreign market returns. This works itself out over time, so not to worry, the reward will come!

 

Dax V US Euro ytd q 1 2015

If you want to travel overseas, now is the time… US Dollar strength equals nice exchange rates!

John A. Kvale CFA, CFP

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

Fund a Roth? … Versus Deductible IRA … Might be surprised!

Knee deep in the middle of tax season we are reminded of the puzzling Roth. First rolled out as the best thing since sliced bread, after careful review … maybe not!

The Main Reason to fund a Roth

If you believe your taxes will be higher in retirement than now, you are a strong candidate for a Roth. Our experiences, and the vast studies show lower effective tax rates after retirement than while working. See below, but all other items being equal, deductions now are better. Roth V IRA

Roth V Deductible IRA

A Roth is the opposite of a regular deducible IRA. A Roth is funded with after tax dollar and grows tax deferred. Distributions are made at retirement without taxes. An IRA is funded with pre-tax dollars, grows tax deferred and is taxable upon distribution.

We will spare you the calculations, but if your tax rates are exactly the same in pre and post retirement, a Roth and an IRA have exactly the same end result!

In closing, if you can do both, certainly do so, but if it is either or, in most cases a deductible IRA is better.

Lastly be sure you qualify for any of these as the rules have changed and continue, via income and other plan participation.

Have an Awesome Day!

John A. Kvale CFA, CFP
http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

Hot Off Presses: New Tax Ruling Allows Rolling After Tax Funds into a Roth … Yes You Can …

One of our favorite things to do on this site is to break new interesting financial planning techniques. Even more fun is breaking tax savings techniques, especially when they occurred from researching a client related question.

Rolling After Tax Funds From Qualified Plan to Roth

Roth 401k IRAWe read all the industry rags and after saying I am 99% sure we cannot easily do this, I happily came back biting my tongue to a long time client.

In this September 18, 2014 IRS letter ruling, clarification for the following was established (IRS Notice 2014-54):

  • Regarding post/after tax contributions at a company retirement plan
  • Rolling over pre and post tax separately is now approved by the IRS
  • Pre-Tax can be rolled into a regular IRA
  • Post-Tax can go into a Roth IRA (possible huge tax savings)
  • If by chance you have done this earlier in the year, you MAY go back and reclassify, based on this letter ruling

Words of caution:

  1. This ruling is so new, company plans may not be prepared, feel free to show them the letter ruling from above for assistance
  2. Both rollovers (pre and post tax) must be done at the same time
  3. September 18, 2014 is the line in sand date commencement date with some flexibility

Here is a great example from the IRS Notice 2014-54:

Employee C participates in a qualified plan that does not contain a designated Roth account. Employee C’s $250,000 account balance consists of $200,000 of pretax amounts and $50,000 of after-tax amounts. Employee C separates from service and is entitled to, and requests to make a direct rollover of $80,000 to a traditional IRA and $20,000 to a Roth IRA. Employee C is permitted to allocate the $80,000 that consists entirely of pretax amounts to the traditional IRA so that the $20,000 rolled over to the Roth IRA consists entirely of after-tax amounts.     ….. From IRS Notice 2014-54

Lastly, we are not CPA’s, and this is a unique, new technique. Check with your tax advisor before making ANY adjustments as this is not a recommendation for all situations and expect some push back from corporate plans due to the newness of this ruling.

There you have it … cutting edge tax savings ideas, hot off the presses!

Have a Happy Roth Possible Rollover Weekend ! yaya … Nerds …

We know .. Shoe fits !

John A. Kvale CFA, CFP

www.jkfinancialinc.com
www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225