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The Virtus View is a weekly to bi-weekly e-mail publication that Brian authors in order to keep you updated on the current market situation.
VIRTUS VIEW 12.03.08
12/3/2008
Please feel free to forward these e-mails to any friends you have who you believe will benefit from learning more about finances and investments.
I want to discuss a tax planning tip, Roth IRA conversions, that many of you should consider and the reason it may be beneficial to you at this point considering the current market turmoil.
First, let’s review the difference between Roth IRAs and Traditional IRAs. Unlike a Traditional IRA, a Roth IRA is an IRA that provides no tax savings the year the contribution takes place; however, they grow tax free and distributions are tax free. As you know, distributions from Traditional IRAs are taxable, except in a few instances. Furthermore, Roth IRAs are more favorable in current estate tax laws and are not subject to required minimum distributions (RMDs) at the age of 70 1/2.
Current tax law allows you to convert Traditional IRAs to Roth IRAs if your modified adjusted gross income is under $100k in the year of the conversion. You must pay taxes on the amount converted to an IRA, but as stated above, you will not be taxed on the gains or distributions going forward. So, if fears of higher tax rates are realized than one will pay fewer taxes now and all else being equal.
Another reason to consider Roth IRA conversions at this point is, with the market being down approximately 40% over the last year, you will be converting the IRA while stocks are at a low. If you believe at some point stocks will recover you will be moving taxable gains to tax free gains.
For example, take a Traditional IRA that started the year at $50,000 and is now down to $30,000. If you convert all of it now you would owe taxes on the $30,000, assuming a 20% marginal tax rate, the tax liability would be $6,000. When the market does rebound you have now turned the new gains into tax free dollars. Thus, when your account rebounds to $50,000; you now have paid just $6,000 on the IRA, an effective rate of just 12%, instead of $10,000 assuming the same 20% marginal tax rate. Obviously, if tax rates are higher then it will be an even greater savings.
There is a disadvantage to keep in mind when considering converting to a Roth IRA and that is you may not take distributions on the converted Roth IRA for 5 years following the conversion. This is why a partial conversion is more favorable.
Roth conversions should be considered for those under the AGI limits and those who think tax rates will be higher in the future; or those who do not want to be required to take distributions when turning 70 ½.
Conversions should not take place without diligent tax planning. Tax law is subject to change and every individual has different circumstances. You should consult a tax-adviser before implementing any suggestions. Please feel free to give me a call if you would like additional information.
Brian Tillotson
Wealth Manager
Virtus Wealth Management
2435 E. Southlake Blvd
Suite 120
Southlake, TX 76092
817-717-3812
866-407-4320
Fax: 817-416-6585
www.virtuswealth.com
Securities and Advisory Services offered through VSR Financial Services, Inc. Member FINRA / SIPC
To opt out of this weekly e-mail, please just reply to this e-mail with “Opt Out” in the subject line.
Please feel free to forward this to any friends you believe will benefit from this information.
To learn more about Virtus Wealth Management and how we may be able to help you, please visit our website or give us a call. http://virtuswealth.com
THE VIRTUS VIEW
Good afternoon to all.
This communication is intended to add value to your life by helping you separate the real news from the white noise, understand the critical economic events that you read about every day and outlining alternative investments which might be advantageous to you in these times. We send this weekly e-mail to both clients as well as individuals we hope become future clients. Thus, to my valued clients, since we use many alternative investments in your portfolio currently, some of the e-mails might discuss assets that you already understand. It never hurts to review your knowledge of those investments.Please feel free to forward these e-mails to any friends you have who you believe will benefit from learning more about finances and investments.
I want to discuss a tax planning tip, Roth IRA conversions, that many of you should consider and the reason it may be beneficial to you at this point considering the current market turmoil.
First, let’s review the difference between Roth IRAs and Traditional IRAs. Unlike a Traditional IRA, a Roth IRA is an IRA that provides no tax savings the year the contribution takes place; however, they grow tax free and distributions are tax free. As you know, distributions from Traditional IRAs are taxable, except in a few instances. Furthermore, Roth IRAs are more favorable in current estate tax laws and are not subject to required minimum distributions (RMDs) at the age of 70 1/2.
Current tax law allows you to convert Traditional IRAs to Roth IRAs if your modified adjusted gross income is under $100k in the year of the conversion. You must pay taxes on the amount converted to an IRA, but as stated above, you will not be taxed on the gains or distributions going forward. So, if fears of higher tax rates are realized than one will pay fewer taxes now and all else being equal.
Another reason to consider Roth IRA conversions at this point is, with the market being down approximately 40% over the last year, you will be converting the IRA while stocks are at a low. If you believe at some point stocks will recover you will be moving taxable gains to tax free gains.
For example, take a Traditional IRA that started the year at $50,000 and is now down to $30,000. If you convert all of it now you would owe taxes on the $30,000, assuming a 20% marginal tax rate, the tax liability would be $6,000. When the market does rebound you have now turned the new gains into tax free dollars. Thus, when your account rebounds to $50,000; you now have paid just $6,000 on the IRA, an effective rate of just 12%, instead of $10,000 assuming the same 20% marginal tax rate. Obviously, if tax rates are higher then it will be an even greater savings.
There is a disadvantage to keep in mind when considering converting to a Roth IRA and that is you may not take distributions on the converted Roth IRA for 5 years following the conversion. This is why a partial conversion is more favorable.
Roth conversions should be considered for those under the AGI limits and those who think tax rates will be higher in the future; or those who do not want to be required to take distributions when turning 70 ½.
Conversions should not take place without diligent tax planning. Tax law is subject to change and every individual has different circumstances. You should consult a tax-adviser before implementing any suggestions. Please feel free to give me a call if you would like additional information.
Brian Tillotson
Wealth Manager
Virtus Wealth Management
2435 E. Southlake Blvd
Suite 120
Southlake, TX 76092
817-717-3812
866-407-4320
Fax: 817-416-6585
www.virtuswealth.com
Securities and Advisory Services offered through VSR Financial Services, Inc. Member FINRA / SIPC
To opt out of this weekly e-mail, please just reply to this e-mail with “Opt Out” in the subject line.
Please feel free to forward this to any friends you believe will benefit from this information.
To learn more about Virtus Wealth Management and how we may be able to help you, please visit our website or give us a call. http://virtuswealth.com
CONTACT US: 2435 E. Southlake Blvd • Suite 120, Southlake, TX 76092 • (817) 717-3812
Toll Free (866) 407-4320 • Fax (817) 416-6585 • BTillotson@VirtusWealth.com
Toll Free (866) 407-4320 • Fax (817) 416-6585 • BTillotson@VirtusWealth.com
Securities & Advisory services offered through VSR Financial Services, Inc., a Registered Investment
Adviser and Member FINRA & SIPC. Virtus Wealth Management is independent of VSR.
Adviser and Member FINRA & SIPC. Virtus Wealth Management is independent of VSR.
