It is very important that as you plan for or reach any of these milestone birthdays, you meet with your advisors to review your specific situation and determine what strategies would be best for you…
Myth #1: By the time I retire, Social Security will be broke.
If you believe this, you are not alone. More and more Americans have become convinced that the Social Security system won’t be there when they need it. In an AARP survey released last year, only 35 percent of adults said they were very or somewhat confident about Social Security’s future.
It’s true that Social Security’s finances need work, because over the long term there will not be enough money to fully cover promised benefits. But radical changes aren’t needed. In 2010 a number of different proposals were put forward that, taken in combination, would put the program back on firm financial ground for the future, including changes such as raising the amount of wages subject to the payroll tax (now capped at $106,800) and benefit changes based on longer life expectancy.
Myth #2: The Social Security Trust Fund Assets are Worthless.
Any surplus payroll taxes not used for current benefits are used to purchase special-issue, interest-paying Treasury bonds. In other words, the surplus in the Social Security trust fund has been loaned to the federal government for its general use — the reserve of $2.6 trillion is not a heap of cash sitting in a vault. These bonds are backed by the full faith and credit of the federal government, just as they are for other Treasury bondholders. However, Treasury will soon need to pay back these bonds. This will put pressure on the federal budget, according to Social Security’s board of trustees. Even without any changes, Social Security can continue paying full benefits through 2037. After that, the revenue from payroll taxes will still cover about 75 percent of promised benefits.
Myth #3: I Could Invest Better on My Own.
Maybe you could, and maybe you couldn’t. But the point of Social Security isn’t to maximize the return on the payroll taxes you’ve contributed. Social Security is designed to be the one guaranteed part of your retirement income that can’t be outlived or lost in the stock market. It’s a secure base of income throughout your working life and retirement. And for many, it’s a lifeline. Social Security provides the majority of income for at least half of Americans over age 65; it is 90 percent or more of income for 43 percent of singles and 22 percent of married couples. You can, and should, invest in a retirement fund like a 401(k) or an individual retirement account. Maybe you’ll enjoy strong returns and avoid the market turmoil we have seen during the past decade. If not, you’ll still have Social Security to fall back on.
There are some BIG changes for taxpayers in the creation of the new 2010 Tax Relief/Job Creation Act. How can you best respond to this law? Take a look at these 5 things all taxpayers can proactively do to best take advantage of the changes:
1. With the money you save on the reduction of your social security tax, you should contribute at least that much additional money to your retirement plan.
2. Contribute to your retirement plan in the following order:
3. Since we have two more years of low tax rates, make Roth IRA conversions. Consider multiple conversions since you can “recharacterize” or undo them. If you do multiple conversions, you can keep the ones that do well and undo the ones that don’t.
4. Review your wills and trusts. Many, if not most of the wills done for taxpayers with estates of $1 million are now outdated. Not only will you not get optimal results, but your existing wills and trusts might be a huge restriction on the surviving spouse.
5. Now that you can either leave or gift $5,000,000 or $10,000,000 if you are married, you should rethink potential gifts to children and grandchildren without tax laws that would otherwise restrict gifts you would like to make.
FOR IMMEDIATE RELEASE
CONTACT: JAMES LANGE, CPA/ATTORNEY
September 27, 2010 – The President signed a new law, effective immediately, that has an enormous impact on millions of retirement plan owners.
The new law will allow employees to convert all, or a portion, of their traditional 401(k) or 403(b) retirement plan to a Roth 401(k) or Roth 403(b). The law is actually part of the Small Business Jobs and Credit Act which has implications for small businesses, but this little known provision also has a profound impact on employees with these retirement plans who will want to make a Roth conversion.
This bill would allow 401(k), 403(b), and governmental 457(b) employees to convert their pre-tax account balances into Roth designated accounts, which is the official title for a Roth 401(k) or Roth 403(b). A Roth 401(k) or Roth 403(b) will enjoy income tax-free growth for the lives of the plan owner, spouse, children and grandchildren. The amount of the conversion, however, would be considered taxable income. If an employer has an existing 401(k) or 403(b) plan, employees could immediately make the conversion to either a Roth 401(k) or Roth 403(b).
This new legislation will be extremely important to people who are still working and have substantial wealth in their employer retirement plan as it will essentially allow them to convert their traditional 401(k) or 403(b) to a Roth designated account that would still be part of their employer retirement plan. Previously, if an employee’s retirement plan was tied up in a 401(k), they would not have been eligible to make a Roth conversion while they were still working. Now, if employers have Roth designated accounts, employees can make a Roth conversion of whatever amount they wish.
Since tax rates are expected to go up in 2011, at least for upper income taxpayers, it will definitely be to their advantage to make a conversion to a Roth 401(k) or Roth 403(b) in 2010 while they can still pay a lower tax on the conversion.
One strategy that would be highly beneficial for middle income taxpayers who are still employed and have limited access to their retirement plan is that they will be able to make a partial conversion of their 401(k) to a Roth 401(k), since it might be too aggressive for them to convert their entire 401(k) and pay income taxes on that conversion. An even better long-term strategy for this middle income group is a series of multiple, partial conversions over a period of years of the pre-tax dollars in a 401(k) to the Roth designated account in the 401(k). Conversely, if a person is a high income employee or will likely always be in the top tax bracket, they should consider a much more substantial Roth conversion.
Another huge benefit of this law is that these new Roth designated accounts will enjoy excellent creditor protection since, for the most part, 401(k) and other retirement plans are controlled by a federal law called ERISA which offers better creditor protection than ordinary IRAs or even Roth IRAs. A good example of this is OJ Simpson, who is collecting substantial income while he is in jail because the judgments against him could not penetrate the ERISA creditor protection on his retirement plan.
Obviously, the law only covers employees who have access to Roth designated accounts at work, but it would be to an employer’s advantage