Monday, November 23, 2009
Converting your IRA to a Roth IRA has estate tax benefits that should be evaluated especially if you are unlikely to utilize the Roth IRA account balance during your lifetime.
On October 30th of this year, I posted an entry to this site discussing several items that should be considered in evaluating whether to convert your IRA to a Roth IRA. One of the items discussed is whether the account owner plans to withdraw the account balance during their lifetime. This issue is important because of the potential estate planning opportunities for a Roth IRA.
The estate planning benefits are possible because a Roth IRA is not subject to required minimum distributions that are an IRS requirement for traditional IRA’s. Therefore, the account owner can allow the account to grow tax free during their lifetime and then leave the account to their heirs upon their passing.
Roth IRA distributions are not subject to income taxes to either the owner or their heirs. Although the value of the Roth IRA might be subject to estate tax, the account will grow tax free as long as the assets are not distributed to either the account owner or their heirs.
The estate planning strategy is for an account owner to convert an IRA to a Roth IRA and pay the income tax on the conversion immediately. The Roth IRA then grows tax free for the remainder of the account owner’s life and for a significant portion of the lifetime of the heirs as well. Therefore, it is not unreasonable for a Roth IRA account to grow tax free for as many as 60 - 70 years.
Posted by Ron on 11/23 at 05:10 AM
IRAs
Sunday, November 08, 2009
It is never simple but determining a general idea of how much money you need to retire doesn’t require a thirty page analysis.
The question that I hear more than any other is, “How much do I need to retire?” If I am sitting in front of my computer when posed with that question, I input some numbers into my favorite spreadsheet and generate a comprehensive Retirement Income Projection that accounts for the numerous expected variables that are relevant to the person posing this very important question. Unfortunately, a spreadsheet and your favorite financial advisor are not always sitting across the table when this question pops into your head.
In situations where a simplified ballpark amount is useful, a person can generally assume that they will need an investment portfolio large enough where the amount removed each year will not exceed 4% of the total portfolio. Based upon various historical analyses, it has been shown that a person will not likely exhaust their portfolio as long as they do not withdraw more than 4% of their investments each year. Therefore, if a person has an investment portfolio of $1,000,000, an investor can plan to withdraw $40,000 during the first year of retirement. The investor can then assess whether this ballpark estimate is sufficient to meet their needs in conjunction with any other potential sources of income such as Social Security, pensions, etc.
The asset amount against which the 4% withdrawal rate is applied includes only those assets which can be liquidated in order to obtain the cash required for withdrawal. Therefore, the value of your house, jewelry or car should not be included in the value of your investment portfolio. If you plan to sell any of these assets, you can use their value in the calculation. For example, if you plan to sell your house and move in with a friend or relative you should include the equity in your house in the calculation.
Every investor should have a comprehensive calculation that considers the variables of your unique situation. However, the 4% rule is useful when you are not sitting across the table from a financial advisor with a computer and need a quick and easy estimate.
Posted by Ron on 11/08 at 07:21 AM
Retirement
