Outside Economics

Traditional IRA vs. Roth IRA

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 26, 2013

A Traditional IRA is generally tax-deductible. There are some limitations; for example if you are an active participant in a qualified employer plan those limitations are more restrictive than if you’re not covered by an employer plan. These limitations are called “phase-outs” because the amount you can deduct from your taxes phases out as your income iIRA imagesncreases on an IRS-set range. 

Contributions to a Roth IRA are not tax deductible like with a Traditional IRA. Money earned in a Roth IRA can be withdrawn income-tax-free on a few conditions: you must have had the account for at least five years, if you're at least 59½, death, disability or a qualified first time home purchase. 

5 Reasons converting to a Roth IRA is not the best option
1.      Lower tax bracket after retirement
·         After retiring many people drop to a lower tax bracket. It is suggested if your tax rate will drop 10% or more it is not a good option to convert right now.
·         Also if you plan to move to a state with a lower tax rate it is better to wait.

2.      Nearing retirement and will spend your IRA
·         If you will be in the same tax bracket after retirement the question to ask is when will you need to use the money in your IRA. One of the benefits of a Roth IRA is you don’t need to take required minimum distributions starting at age 70 ½. If you are near retirement and will be using money soon from your IRA it dose not make sense to convert to a Roth IRA.

3.      Don’t have money to pay conversion taxes
·         If you have to use money from your IRA to pay the conversion taxes it may not be ideal to convert, its best to pay the tax from other sources.

4.      You plan to leave a substantial amount to charity
·         The most tax-effective way to leave money to charity is through a traditional IRA. Money given to charities from traditional IRA’s is typically not taxed.

5.      You need asset protection
·         If you are in a position where you might be sued, such as a physician or retired engineer it is best to consult a lawyer before making the move to convert to a Roth IRA.

Check back next week for the top reasons converting to a Roth IRA will be the best move for you.

Topics: IRS, Roth IRA, Traditional IRA, Tax Bracket

401(K) Borrowing – Not a Good Idea

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 12, 2013

For years as a financial adviser I have recommended to people not to borrow from their 401(K)’s and other retirement plans. However, as this Great Recession lumbers on, which I know has passed, but many people are still suffering from its effects, the number of people who are borrowing from their 401K is growing. The effects of which will not be felt by the borrowers for years to come. Here are t
Egg Buildinghe problems.

When borrowing from one’s 401K many people don’t consider it a “real loan”. After all, they are borrowing from themselves, right? Yes you may be borrowing from yourself, but it’s the wrong attitude. It is a real loan and must be paid back or penalties will be incurred.  Those penalties are very costly.

The penalties on the unpaid loan balance are income taxes and a 10 percent penalty tax (if you are under 59 ½ ). If you are in the 28% tax bracket, and your unpaid loan is $20,000 that means the cost of not paying back the loan will be approximately $7,600 or 38 percent – this does not include any state income taxes that may be due. If you are in California the amount could easily reach 50 percent or more in combined taxes and penalties.
You may say, "I am one of the 96 percent of borrowers as reported by Fidelity who pay the loan back faithfully, so what is the problem then"? Those who borrow typically reduce their 401K contributions during the years that the loan is being repaid – so they are saving less. If the loan is paid back over 
the typical three years this lower savings rate has an impact on long term retirement savings. If the savings reduction is only two percent for three years for a 40 year old person that can be a cumulative loss of thousands of dollars at age 65.

Another problem is when repaying the loan it is with after tax dollars. So repaying the loan with after tax dollars means that those dollars will be taxed twice. For example: a $20,000 loan paid back with after tax dollars means that you will have to pay taxes on that $20,000 again when it is withdrawn for living expenses during retirement. So you paid taxes to earn the 20,000 to repay the loan and then again when it is withdrawn from the account at some point in the future.

Job cuts can cause you to either pay the loan back within 60 days or it becomes a distribution, subject to the taxes and penalties. This is especially hard when people have lost their jobs and are required to pay extra taxes on what is now income they were not expecting (Distributions are considered income). Or they are required to pay back a loan of any size in 60 days, chances are if they could do that they would not have borrowed the money in the first place.

Some employers, to discourage borrowing, charge loan fees, thus increasing the cost of the loan. Or employers are only allowing one loan at a time and after the loan is paid back they have a six month waiting period to borrow again. Employers are getting wise to the problems of borrowing, so they are limiting loan amounts to only employee contributions – thus keeping their contributions off the table.
There is also a trend that Fidelity has noticed, serial borrowing. Constantly going back to the 401K to borrow money is much a kin to keeping balances on your credit cards. This can be especially bad when trying to develop retirement security. This is what the government does, borrows against future tax revenue; we all know what a mess the government finances are. The idea should be to build a retirement nest egg, and get out of debt and stay out of debt.

A loan of any kind can be trouble, the best thing to do is build the emergency fund and stay out of debt. Remember we create our own emergencies – we are the ones who determine what an emergency is. A broken arm of a child is part of life, the emergency is getting them safely where they can receive proper care. The financial expense is just a part of life we need to plan for, that is why we save money. I have found that when we save for emergencies, we tend to have fewer of them.

Bottom line – be very careful about borrowing from a 401K. Do your best to do without borrowing for any reason and you will have a more prosperous life. I know there are times and circumstances where we as people feel stuck, but really what are they? Can’t the problem be solved some other way?

Topics: 401K, 401K Borrowing, 401K Loans, Great Recession

Free Enterprise and America

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 05, 2013

The United States Constitution and the Declaration of Independence are perhaps the most important documents next to tUS Constitutionhe scriptures ever penned by man. When you think about what has transpired since those two documents were written, it is truly amazing. For one thing they brought about a free enterprise economy that allowed the common man to develop an idea and own the profits from that idea. Real industry was born, where people worked collectively to produce goods and services for the betterment of mankind. The ideas and industry replaced many “old ways of thinking” and ushered in the “industrial revolution” and later a “Cultural Revolution” the likes of which the world has never seen before. 

The God of Heaven, who I believe inspired our independence and the writing of our constitution, I also believe inspired so many of the things we have today which we take for granted. If we would stop and remember how merciful the Lord has been to us, and ponder on the great inventions that have blessed our lives since the founding of our nation, things that have truly benefited mankind, we would see His hand in so many areas of these things. 

When we take time to remember and ponder on these things we develop a sense of gratitude for the things or blessings we have been given. I know we are all busy people – life is like that – but take the time to remember and ponder and you will feel gratitude for the wonderful blessings in your life. It has been said that gratitude is one of the greatest virtues one can obtain. 

Are there faults or evil things that have occurred, absolutely, but that is simply because evil is real, and the author of evil, Satan, also inspires men to do bad things with things that were invented for the good of mankind. And in spite of all the evil in the world there is still more good than bad.
Founding Fathers
So, I hope this season as we celebrate the birth of our nation, and the declaration that “all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness”, that you will stop and ponder the blessings we enjoy from our free enterprise or capitalist system upon which our economy is based, for we are truly blessed in so many ways. And may God continue to bless America.

Topics: United States Constitution, Declaration of Independence, Free enterprise


Wendell W. Brock, MBA, ChFC

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