How many of you remember WorldCom? How it kept reporting profits when all of the other long-distance carriers reported dismal performance. I thought something was not right, I just didn’t know what it was. Voila – it turned out that WorldCom's accounting was revealed to be a fraud – the company was counting its network access costs as capital expenses. Once the real numbers came out, the company imploded in what was the largest bankruptcy in American history up to that point. Then came ENRON !

For the past three years, Goldman Sachs has been reporting quarter after quarter of excellent results when all of the other investment banks were hurting. Some analysts suspected that something fishy was going on with Goldman but just couldn’t find a smoking gun, but they knew a giant fraud would be discovered eventually.

In October 2008, one analyst said that Goldman had insured all of its subprime exposure via AIG. This allowed it to book huge profits on its subprime investments long before they were actually paid off because the bonds were insured. Of course, it was all a sham – AIG didn't have nearly enough money to pay off any of the insurance.

However, in the spring of 2009, it was revealed that Goldman had roughly $20 billion in exposure to AIG and received roughly $14 billion of the money the federal government used to bail out AIG. Of course, Goldman refused to comment on the matter at first, but eventually admitted that it had insured roughly $20 billion worth of subprime CDOs(Collateralized-Debt Obligations) with AIG and had major exposure to the firm. But the New York Federal Reserve and Goldman Sachs never revealed this critical fact: Goldman didn't merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Goldman bought insurance on these CDOs because it knew they'd collapse.

Borrowing the exact words of Porter Stansberry “This is tantamount to building a house, planting a bomb in it, selling it to an unsuspecting buyer, and buying $20 billion worth of life insurance on the homeowner – who you know is going to die! “

These facts all came to light because of research done by the office of Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform. These new documents will certainly lead to a full investigation of the Goldman-AIG dealings and the subsequent $180 billion bailout led by the New York Federal Reserve. I vigorously hope that not only will heads roll, but the people responsible will go to jail for a long, long time. Everyone involved in this mess should be punished. And what is so horrible about letting a horribly managed institution fail? We should no longer accept this “TOO BIG TO FAIL” reasoning. We were kept in the dark with this cover up! People are losing jobs, many of them are losing hope. Men who have been productive all their lives are finding themselves unemployed for more than 2 years now. With spirits low, confusion great, some are on the brink of nervous breakdowns (or even suicide) while these BANKERS, EXECUTIVES, MARKET MAKERS and FLIPPERS of CDOs are getting big bonuses to the tune of $100 Million ! I am beyond furious !




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Which is better Tradtional IRA or Roth IRA ?

During my radio show, I received a question from a 61 year listener. He asked "which is better IRA or Roth"? He was laid off last May, 2009 so his AGI (adjusted gross income) will be the lowest in years. He has enough savings to last him 2 years should he remain unemployed for that long. But he has extra money to contribute in either a Traditional or ROTH.

After doing the MATH, it is almost certain that he will end up in the lowest tax bracket. Thus, ROTH IRA is the better choice. While for some taxpayers, their eligibility to deduct Traditional IRA contributions is the main deciding factor in choosing between a Roth and Traditional IRA. However, being eligible to deduct your contribution does not mean that the Traditional IRA is your better choice. Consider whether the benefits of the Roth IRA - tax deffered growth, penalty-free distributions, and more importantly the Required Minimum distribution rule is completely eliminated during your lifetime - outweigh the benefits of a deduction.

Remember, always do the MATH. MATH is always compelling.


Finally, you may split your contribution between both types of IRAs and enjoy the benefits of both.

Whatever you decide, be sure to consult with your tax professional, as there are usually other factors that could determine which choices are most suitable to meet your financial needs.



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RETIRE WITHOUT TAXES

With 2010 Tax Law Changes creating a ONCE- in - a- Lifetime Opportunity for Retirees and those planning for retirement. The new law lets everyone enjoy the tax free benefits of a ROTH

IRA account even if you are earning more than $100,000 a year. Effective January 01, 2010 everyone can convert their Traditional IRA or other Qualified retirement plan to a ROTH IRA - regardless of income. The ROTH IRA is your "ace-in-the-hole" because it minimizes the exposure of your money to the taxing arm of the IRS.

These are the benefits of a ROTH IRA:

* Your retirement account grow TAX-FREE.

* Your distributions is TAX-FREE. ( Please note the 5 year rule and the 59 1/2 rule).

* Pass on a lifeime of TAX-FREE distributions to your children and/or grandchildren.

* You are in control because there is no Required Minimum Distributions.

CAUTION!!! Before you jump on the ROTH Conversion bandwagon, get the facts you need to make an informed decision. Consult a reliable, knowledgeable IRA specialist. This is a tremendous opportunity ALRIGHT ! only if done correctly. This could prove to be a costly mistake for others when not done properly.

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Converting to Roth ? DO the MATH.

First, let me clarify one important point because bloggers, media experts, & financial advisors often times use the term "Conversion Tax" when describing the income taxes that are created when converting to Roth IRA. No, its not an extra tax, there is no extra tax. It's simply the tax that you owe. Remember the money in the traditional IRA has not yet been taxed. Therefore, if you convert to a ROTH you simply take the portion of the traditional IRA
that has not yet been taxed and include it as taxable income in the year of conversion. (You
do not include the portion of any non-deductible contributions that may have been made to a
traditional IRA.)


Lets say you have $95,000 of taxable income from regular income sources and you convert a $50,000 traditional IRA to a Roth in 2009 then, in effect, the total taxable income that year would be $155,000. If you convert in 2010, half of the $50,000 will be added to your taxable income and the other half will be added to your 2011 taxable income. This only applies if you convert in 2010.

My advice is to seek the guidance of a knowledgeable advisor who is going to do the math for you to really determine whether it makes sense for you to convert or not. Please note you don't have to convert all your traditional IRA to ROTH. You can do it in staggered basis or you can
convert just a portion of it. That way, you have money that is taxable, money that is tax free and money in a tax advantaged account.








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Opportunities of Roth

As a Financial Adviser, I see the Roth IRA as an opportunity to establish tax-free income for clients while passing the remainder of their Roth account to their beneficiaries at death. Come to think of it "RETIRE without TAXES" makes the conversion attractive. Having said that, the decision must be carefully analyzed. You can start by running some numbers on some of the online calculators. I suggest using the Motley Fool conversion calculator here. However, the subject of conversion is more than just numbers. It's so personal that you must take a hard look at your entire situation. You have to weigh the tax pros and cons and understand that there may be other non-tax and or non-financial reasons to convert or not to convert.

A Few pointers, consider conversion if:

• You won't tap into the Roth IRA within five years and expect to be in a higher tax bracket in the future. Paying the taxes now while you're in a lower tax bracket will save you income taxes later.

• If you want to build an estate for heirs, this could be a great way to minimize the overall income tax burden to your family. Heirs would get the proceeds free of income taxes and in the interim the proceeds could continue growing free of taxes.

• If you have extra funds to pay the income taxes due on the conversion without tapping into the traditional IRA money.
  

• If you don't anticipate needing the IRA money to live on, and you wish to avoid the annual mandatory distributions required from a traditional IRA when you reach age 70½. Paying the taxes now will allow the money to grow tax-deferred through the years ultimately to be received by heirs tax-free later.

As you can see from this discussion, there's no easy answer to the Roth IRA conversion question. Examine this issue using your own set of circumstances to determine the pros and cons as they pertain to your particular situation. That's the only way you can make the decision that's best for you and for your family. Given that the tax year is fast coming to a close, now is the time to act. Seek help from a Roth Conversion Specialist or IRA Specialist.

For more information, see the IRS publication 590 here

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Consider ROTH

As 2009 is quickly passing, we may wish to seriously consider converting Traditional IRA to a Roth IRA. You may want to convert a part of it before December 31st. Then convert
the remaining in 2010. Here's why:

Number one - Due to economic crisis, Congress has passed H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008." This new law allows an account holder avoid what would otherwise be a Required Minimum Distribution (called "RMDs") in 2009. So, why not convert the amount you should have taken as RMD it to ROTH. Hey, you are already used to paying taxes on that amount. Ask your Financial Adviser to do the Math for you. This might make good sense.

Number two - If you are in a high tax bracket now and you think your tax rate will go up tomorrow, converting to a Roth may make sense. Taxes are expected to rise in the next few years, so even if you expect your income to remain the same at retirement you're still better off converting now.

Number three- Do you want to leave a loving legacy to your beneficiary by passing along a non taxable asset? Though, your beneficiaries may have to pay estate taxes on the value of the ROTH IRA, no part of the ROTH IRA will be subject to income tax.


Starting in 2010, the income limit (MAGI- Modified Adjusted Gross Income) on Roth conversion will dissappear thus, providing a backdoor way for IRA account holders to convert to ROTH. Moreover, account holders who convert in 2010 will be allowed to pay part of the tax bill in 2011 and the remaining in 2012.






Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog

Ask Arlene
Welcome to Arlene Brown's
Roth IRA Conversion
Educational Blog