roth ira

A Toast to William Roth
Person putting a coin in a piggy bank.

Approaching this season of holiday cheer, we are thinking about William Roth—and may even raise a glass in his honor.

Senator Roth was instrumental in creating something new. It appeared in the Tax Reform Act of 1997. And it has some wonderful features. It’s…

  • A retirement account, but after five years you may withdraw your deposits for any reason without tax or penalty.
  • A retirement account, but it may be used to educate your children or grandchildren without penalty or tax.
  • A retirement account, but there are no income taxes due on withdrawals during retirement.

The Roth IRA, as we know it, is a useful addition to the plans and planning of many people. Contributions may be made by those with earned income (but not too much earned income: there is an upper limit.) Conversions from traditional IRAs may be made by anyone willing to pay tax on the converted amount.

You may be eligible to put up to $6,500 into a Roth IRA for 2023, anytime until tax filing time in 2024. And the limit next year goes to $7,000. And those of us lucky enough to be 50 years old or older could contribute an extra $1,000 beyond that as a catch-up.

If you have traditional retirement accounts, you may be eligible to convert part to a Roth IRA. There are no income limits on conversions; if you believe tax rates may be higher for you in the future, it might make sense to do a conversion. These happen on a calendar year deadline, however, so 2023 conversions must actually be done in 2023.

Although a Roth IRA may not be right for everyone, the concept was and is right for me. I’m getting tax-free capital gains, tax-free dividends on blue chip stocks, and tax-free interest because I have investments inside a Roth IRA.

And I can take funds out and spend them (or give them away), any day, with zero tax.

If this might be right for you, please email us or call.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

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A Toast to William Roth – 228Main.com Presents: The Best of Leibman Financial Services

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Happy Baby, Happy Investor

One of the few childhood pictures of me shows a happy baby. My sister says I’ve always been a happy baby. Optimism has been a lifelong trait, for sure.

I can’t know what delighted me all those decades ago, when the photo was taken. But when I survey my finances these days, I still feel the same way the baby in the photo looks.

I like what I own—percentages of ownership in a couple dozen companies. Iconic names, dominating their sectors. Some companies that are working to sort out the future of their industries, which are in flux. A few enterprises in lines of work that did not exist when I was young. The largest player in a fragmented, but consolidating, industry. Producers of vital materials for the age we are in.

These diverse firms have one thing in common: our research team believes their shares of ownership may be more valuable in the future than they are today. No guarantees, of course.

What I own is only part of it. How I own is another key. With a large fraction in a Roth IRA, gains are free of tax as they compound, when they are taken out and spent in my real life, or when left to people or causes I love. All the income tax freight was paid in advance for all time, on those smaller balances I converted to Roth—not the compounding tax-free wealth I now own.

And really, all of that is the proverbial cherry on top. The greatest source of my joy arises not from what I own nor how I own it: the knowledge that my resources exceed my needs, that’s the big thing. It was not that way when we started out, was it? Now, I have enough.

A dear friend once related to me what Grandma always told her: “I have enough, and enough is as good as a feast.” I love this thought.

Oh, my holdings go up and down too, just like yours. Sometimes a company we own messes up. But we know how this works, don’t we? We believe our principles and persistence will get us through, and knowing that is another source of joy.

Clients, if you would like to talk about what you own, how you own it, or what makes for enough, email us or call.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Play the audio version of this post below:

Happy Baby, Happy Investor – 228Main.com Presents: The Best of Leibman Financial Services

The text for this episode is available at https://228main.com/2023/08/02/happy-baby-happy-investor/.

An IRA for All Seasons

Maybe you’ve heard the phrase “kiddie IRA”: it’s not a technical term. It refers instead to the use of a Roth IRA to help a young person start their investing career. Never too young?

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It Goes Up and Down: Some Questions for a Moment Like This
graphic shows "up" and "down" on a chalkboard with checkmarks next to them

The history of the stock market can be summed up pretty well: it goes up and down. As for the future, we cannot know for certain whether it will continue to go up and down—or on what schedule—but it seems reasonable to take the liberty of guessing this whole “up and down” thing may persist.

When things are down 20% from their most recent peak, and we recognize it goes up and down, this may well be as good a time as any to invest.

We might have a recession, but current lower prices already reflect a lower outlook. You could say sentiment is already in the mix, already baked into prices. And anyway, where there’s a recession, there’s surely a recovery to follow.

Do we know the timing? Nope. But we never do. (That’s where the whole up-down thing comes back into focus.)

There is much we do not know, but we have faith that perhaps our guesses may be good enough to get by. We believe, for example, that in the future there is money to be made by companies that meet our needs. We have a hunch we will continue to eat, shop, entertain ourselves, wear clothes, go places, communicate, create, and do all those other things humans tend to do. And we have an opportunity now to invest in companies that could provide those things then.

Clients, some things to consider at such a moment as this:

  • Is there room to start or add to a Roth or IRA?
  • Should some funds in a stable-but-stagnant form perhaps be invested for long-term growth?
  • Would a Roth conversion make sense given these lower prices?

It goes up and down. And when we invest for the long run, we commit to the ups and the downs both. One never knows when the trend will change, just that it very well may.

If it’s time for you to add to long-term holdings, please email us or call the shop—anytime.

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It Goes Up and Down: Some Questions for a Moment Like This – 228Main.com Presents: The Best of Leibman Financial Services

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Happy Roth Year!

We’ve got Roth IRAs on the brain. Why? How would you like to never, ever pay income tax on investment gains and dividends and interest on some fraction of your money? Oh—and your beneficiaries never would either. Well?

That’s the magic of the Roth IRA, properly used.

Every single person may convert existing IRA or rollover balances into a Roth IRA, by paying income tax on the converted amount. Many believe income taxes will rise in the years ahead, above the scheduled increases in the current law.

Anyone may do a conversion of the amount they choose from existing IRA or rollover accounts, although other factors determine whether you are also eligible to contribute as much as $7,000 for 2021.

Here are some reasons that people are using this technique:

It allows folks to take advantage of the perhaps low tax brackets they are in currently: why leave the 12% or 22% or 24% bracket partly unused if you believe your tax rates will be higher in the future?

It provides a bucket for your most dynamic investments, where gains will never be taxed.

It offers balance to your retirement assets, between traditional “pay tax later” accounts and Roth “pay tax now” accounts. This reduces future RMDs (required minimum distributions) and increases your cash flow flexibility.

Like so much of life, we cannot know the future, so we simply do the best with what we do know. “A little of this, a little of that” may be a prudent way to deal with uncertainty. Future tax rates, future investment results, and your future cash flow needs are all unknown. So it might make sense to take a middle-of-the road approach—and build more flexibility into your retirement situation.

Roth conversions go by calendar year, so if you would like to talk about your options, please call or email us in the next few weeks.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

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Play the audio version of this post below:

Happy Roth Year! – 228Main.com Presents: The Best of Leibman Financial Services

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College Savings Ideas When There’s More Than One Kiddo
photo shows graduation caps in the air against a blue sky

Some things that seem complicated can be made simple. Other things, like college funding accounts for descendants, may get more complicated over time when more than one child is involved.

Consider how disparities may develop across account balances:

  • Imagine that, upon their birth, the first child receives a one-time deposit of $1,000; the second-born receives $100 monthly from birth to age 18; the third on the way is set to receive the same deal as either of the first two. However, this third child will necessarily have less purchasing power from the same amount in contributions. Why? In the years that have passed, inflation will have done its work.
  • One-time deposits may go in at a more advantageous time to invest for one child than another.
  • Equity among children will remain a shifting target as asset values and college costs change over time.

… And all this is before we even consider the differences in children’s needs.

One approach to simplify this reality is to think of college funding as a consolidated endeavor for the group, not as individual accounts. With a 529 plan owned by grandparents or a Roth IRA earmarked for education, this can be done. (We should note: owners of 529 college savings plans may change the beneficiaries among siblings or cousins with no adverse tax consequences.)

Consider this example. If there are seven grandchildren, you can allocate 1/7 of the total college fund balance to the oldest, then 1/6 of what remains to the second-oldest, and so on as each grandchild reaches college age.

In the case 529 college savings accounts are used, transfers may be needed to set up the oldest with the proper balance. If a Roth IRA is used, a withdrawal in the proper amount can be made by the grandparent to meet education expenses, then the “paid” child is removed from the beneficiary (or contingent beneficiary) provision.

Proceeds of a gift via Roth may of course be used for purposes other than education, a house down-payment for example.

Some clients who have 529 accounts for grandchildren make adjustments from time to time among grandchildren’s accounts to reflect each child’s individual needs and to maintain a better sense of equity. Others deposit equal amounts for each grandchild and do not worry about differences that emerge later.

One general rule in college funding: the more removed the funding is from the child, the less impact it may have on college aid formulas. A 529 account owned by the child is 100% available for college expenses, but a Roth IRA balance of a grandparent or parent has little or no impact.

Clients, we talk about options and alternatives; you make decisions. If you would like to talk about strategies for your children or grandchildren, email us or call.

Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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College Funding Ideas When There’s More Than One Kiddo – 228Main.com Presents: The Best of Leibman Financial Services

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Silver Lining Playbook

© Can Stock Photo / AnglianArt

Recent market action featured normal stock market volatility in a remarkably compressed time period. (We all know which direction the volatility took us, don’t we?)

Some clients see a silver lining in stock market downturns. They are able to do Roth IRA conversions on a more favorable basis. These transactions are taxed on the value transferred from traditional IRA or rollover accounts into Roth IRA accounts.

Think about $60,000 invested that temporarily declines to $50,000 before bouncing back to $60,000. If the conversion happens at the low point, tax is paid on $50,000 but the Roth ends up with $60,000 of assets. This is a way to build after-tax wealth over the long term. If the rules are followed, gains in the Roth are never taxed, even when withdrawn.

By intentionally selecting the specific holdings with the most potential to snap back, an additional edge may be gained. (Of course, we have no guarantees on the selections we make.)

Many of you are looking at the lowest tax brackets in years, due to recent tax reform, changes that are scheduled to disappear in the years ahead. And income tax rates may rise anyway, as the government seeks to deal with record borrowing and national debt.

So the silver lining in the stock market decline is a pair of potential advantages in Roth IRA conversions: we may be converting assets at a temporary market value discount, taxed at temporarily low tax rates.

We have a crystal ball. It does not work. We could be wrong about future tax rates, and nobody knows their own specific future tax situation. And there is no guarantee that depressed investments rise again. We just do the best we can with what we know.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

Footwork is Key

canstockphoto701920

A long time ago, a coach told us 80% of success was in the footwork. I can’t remember if it was in reference to playing linebacker, or fielding a baseball, or defending the basket. Certainly, in all those endeavors, one’s position is important.

Add this to the list: how your investments are positioned. Many people have a number of different kinds of accounts, from traditional retirement accounts to Roth IRA’s to regular taxable accounts. Where you own what may make a big difference.

For example, because the gains in Roth IRA accounts will never be taxed even when withdrawn, if the rules are followed, it makes sense to hold the most dynamic investment opportunities inside Roth IRA’s. (Of course, no guarantees – we can’t know the future.) There is little sense in having your most boring investments in your Roth account.

Conversely, investments you might own forever, blue chip stocks for example, might best be owned in taxable accounts. If you don’t sell in your lifetime, you will not owe tax on gains. And heirs get a stepped-up cost basis, a big tax break if there are large unrealized gains.

The key to this idea is managing your investments on a household basis. If you are thinking about the big picture, you do not need to have each individual account be balanced and diversified, nor do you need to make sure you are making transactions in each individual account every year. It could benefit you to have just a few high-potential holdings inside your Roth, and ‘buy and hold’ stocks in your taxable account, as part of a coherent household strategy.

Later in 2020, LPL Financial will start performing investment advisory account supervision on a household basis, rather than an account by account basis. This will make it easier for us to maintain the positioning strategy, with fewer conversations behind the scenes to be sure we can do our best work for you.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Hammer or Pliers?

canstockphoto14054970

Recently a client asked us a common question. With a little room in the budget, should more money be added to retirement savings, or a regular investment account? Which one is better?

Of course, the answer depends on the situation. In the early and middle career stages, one might not put funds to be used before retirement into a retirement account. Saving for intermediate term goals like buying or trading homes, or buying a boat or camper, perhaps should be done outside of a retirement account.

But getting it down to fine points, some retirement plans have provisions for using money before retirement without penalty. We believe you can gain an edge by paying attention to the fine points. We like to outline all the alternatives so you can make a good decision.

On the other hand, money to be devoted to growing the orchard – a pool of capital that you may someday live on – should almost always be sheltered from taxes, if possible. This typically means into some form of retirement plan. The tax advantages may make a big difference over the years and decades ahead.

And retirement plans come in different flavors. Individual retirement accounts, employer plans of various kinds, Roth… there are many options.

Just as one cannot know whether the better tool is a hammer or a pair of pliers, one cannot know the best way to invest without understanding the job the money is supposed to do for you. That’s why we talk back and forth! You ask us things about our area of expertise, we ask you things about yours. A meeting of the minds is just the thing to make progress, with a collaborative process.

Clients, if you would like to talk about this (or anything else), please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.