Paul Ferraresi

I have written many times in this blog about the special Roth conversions available in 2010. My summary of all the long-winded blogs was that a conversion will probably cost you more in taxes than you think, and you will still have strings attached with the Roth. There are far better alternatives for you.

An article in Baron’s magazine may have found other reasons why people are not converting. A Fidelity study found only 7% of investors will convert to a Roth IRA. Also, even with all the media hype, education, and bank/brokerage flyers, more than 88% are unaware of the opportunity. Another reason why people are holding back, the survey found, was government mistrust. A TD Ameritrade survey found that 36% of those who are most ideal for conversion suspect that Washington will change the rules later. Thus, rule changes will mean that the money coming out of Roth will be taxed to reduce the national debt. (This is exactly what happened to Social Security benefits…that is, up to 85% of your benefits can be taxable. Hmmm…taxed once when you earned the money and then taxed again when you receive it. Are you screaming yet?)

There are far better alternatives than IRAs, 401(k)s, and Roth IRAs. Contact us at 713-871-5919 and we will be glad to present them to you. If what you always thought to be true…turned out not to be true…when would you want to learn about it?

Popular wisdom tells you the best way to build a nest egg is to maximize your company’s 401(k) plan. Popular wisdom also held that the sun rotated around the earth, the Titanic could not sink, and the Berlin Wall would never crumble. That’s my way of saying that I think you can construct a stronger nest egg if you funnel money into a personal non qualified retirement plan versus a 401(k) program.

Many people feel that by placing the maximum amount into their 401(k) plan and IRAs they will have great benefits, but these qualified plans are also time bombs.

Assume a couple is making contributions of $4,000/year into their IRA or 401(k) for 30 years. Their total 30 year contributions would amount to $120,000. That is, their…

1) Annual IRA/401(k) Contribution = $4,000 x 30 yrs = $120K Total contributions

Assume they are 34% combined marginal tax bracket for state and federal taxes.

2) Tax Bracket (Income > $67,000) = 34% (Fed + State)

Then, their tax savings would be $1,360 per year, or, $40,800 over the 30 years.

3) Tax Savings = $1,360/yr x 30 years = $40,800 Total

Now, assume they invested the $4,000 per year and obtained a hypothetical 10% annual rate of return for 30 years. They would amass a nest egg of $727,773.

4) $4,000 @ 10% for 30 yrs = $727,773

Let’s assume in retirement they could still earn 10% annual return. Then, without touching the principal they could withdraw $72,700 of annual income per year.

$727,773 X 10% = $72,700 per year withdrawal

Since they are retired, the kids have moved on so they have lost those exemptions; they mistakenly paid their home off so they lost those deductions; They will also be receiving Social Security benefits, maybe they have a pension or are working part-time, which will now place them in as high or higher tax bracket as they were in prior to retirement. Let us assume they are in the original combined state and federal rate of 34%. Their tax bill on the $72,700 withdrawal from their IRA/401(k) would be:

$72,700 income from IRA/401(k) X 34% tax bracket = $24,700 Tax bill

So, in the first two (2) years of retirement they will pay $49,400 in taxes. This $49,400 is far in excess of the $40,800 they saved in taxes during the accumulation years (see Section 3 above). Additionally, they will pay the $49,400 in taxes every two years for the rest of their life. Also, they will have to pay income tax on the $727,773 nest egg when it is withdrawn, plus possible estate tax of 45%. Hmmm! Whose retirement were they planning? Theirs or Uncle Sam’s?

In the first 20 months of retirement, every dollar of taxes saved during 30 years of deductions will be paid back. In fact, a person living a normal life expectancy will pay back over 10 times in taxes, on a qualified retirement plan, during the retirement years than the taxes saved during the contribution years.

For an average couple, they will pay over $500,000 in taxes from their IRA/401(k) from age 65 to 85½ for the privilege of saving $40,800 in taxes while they were working.

Why didn’t someone tell me the rest of the story?

Like many aspects of life, most people close the barn door after the horse has left. The same thing takes place with Long-Term Care planning. All statistics show that one out of two people (50 percent) will need some Long-Term care, yet most people want to buy the insurance moments before entering the assisted living facility. At that point, it is too late and too expensive. Funny, you have less than ¼ of 1 percent chance your house will burn down, but you buy fire insurance coverage. Long-Term care can average $72,000 to $100,000 per year and you have a 50 percent chance of needing it; yet, very few people protect against this risk.

One way to minimize the costs is by setting up a side business as a “C” corporation. The C corporation can establish a long-term care benefit plan for the owners and chosen employees. Due to the government’s interest in having people covered privately for long-term care needs, the normal rules that prevent discrimination in benefit plans have been waived. This means that the business owner can provide a long-term care benefit for himself and his family (who are either employees or directors of the company), and deduct the entire premium for the long-term care policy without regard to the IRS discrimination rules.

Obtaining a tax deduction on the long-term care premium lowers the cost of having this coverage, thus making the choice of acquiring long-term care insurance that much more attractive.

Over the past year as the economic meltdown hit, it forced many people to change their economic priorities. Too many individuals were programmed to “spend” money in order to “buy happiness.”

Now with their income levels down because of a layoff, or due to a psychological shift in spending patterns promoted by the media … people are spending less. They are feeling “deprived” since they can not “buy their happiness” anymore. This is wrong!

How many times in your life have you visited a foreign country, or even here in the United States, where people live in abject poverty, but have a happy attitude toward life?

So, we find most Americans overspending to “buy happiness.” At the same time, those unable to “buy happiness” – are happy.

I need your help … here is a list of activities anyone, or any family can do that will be frugal, yet provide a fulfilling time. When done reading this list, please send me what you or your family have been doing to “enjoy” life so I can add it to this list …

• Walk a dog … even if you have to borrow one.
• Write someone an “old fashioned” letter.
• Watch a thunderstorm.
• Donate blood.
• Hug someone.
• Call a senior citizen neighbor to say hello.
• Start a gratitude journal–every morning or evening, write down five things for which you are grateful.
• Read all those books you’ve been collecting while drinking all that tea that has accumulated in your cupboard.
• Get Skype and call friends all over the world.
• Write a poem, or at least read one.
• Continue to make charitable contributions.
• Watch It’s A Wonderful Life or Love Actually or some other super feel-good movie.
• Make a game out of cooking dinner for a week using only ingredients found in your pantry or freezer (adding fresh vegetables).
• Have a book swap party.
• Write a letter to a soldier.
• Exercise.
• Join Netflix and watch hundreds of movies.
• Teach a teenager how to balance a checkbook.
• Listen to music.
• Make a hobby out of finding free weekend activities and planning outings with family friends.
• Feed someone’s parking meter.
• Pay a true compliment to someone who annoys you.
• Visit monuments and museums in your area.
• Discover a new park. Go for a hike.
• Teach a young child how to hit a baseball.
• Your ideas??

Motivation books are filled with definitions of what makes up success in a person’s life.

Individuals often pick a specific dollar amount of income or funds accumulated that determines one being “successful.”

Something that hit home with me as a child on the concept of success was when a reporter interviewed a prominent restaurateur. The reporter asked …”When did you become successful?” The response by the restaurateur was…”I was successful when I was sleeping on park benches because I knew what I wanted to do.” So, my definition of success was setting goals, having a definite purpose in life and doing the most for others.

More recently, I have adopted the following statement of success and blended it into what my childhood definition was.

…When morning arrives and you want to jump out of bed to start each day. When you go down to your office, or wherever you spend your day, and, by going there it gives you a great sense of joy and gratitude. In fact, you get so much enjoyment out of what you do that you feel like you are walking on air. What you do not only energizes you, but in some way contributes to a greater good. Actually, what you do brings a greater good to a greater community.

There are even times when you feel like going down on your knees in voluntary gratitude for the tremendous good fortune that has been bestowed on you.

And, if this is true for you, then you are a success…

In summary, it does not have to be a paying job that defines success. It can be anything you love doing. So from this day forward…”climb every mountain” until you find your dream.

Wishing you “success” in the new year and for your lifetime.