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The Financial Guy: Roth IRA Conversions - Planning for New Opportunities

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you're a high-income taxpayer, chances are you haven't been able to participate in the Roth revolution. Well, that's about to change.

What are the current rules?

There are currently three ways to fund a Roth IRA--you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later.)

In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2008 and 2009. If you're age 50 or older, you can contribute up to $6,000 in 2008 and 2009. (Note, though, that your contributions can't exceed your earned income for the year.)

But your ability to contribute directly to a Roth IRA depends on your income level ("modified adjusted gross income," or MAGI), as shown in the chart below:

If your federal filing status is:	Your 2009 Roth IRA contribution is reduced if your MAGI is:	You can't contribute to a Roth IRA for 2009 if your MAGI is:
Single or head of household	More than $105,000 but less than $120,000	$120,000 or more
Married filing jointly or qualifying widow(er)	More than $166,000 but less than $176,000	$176,000 or more
Married filing separately	More than $0 but less than $10,000	$10,000 or more

 

Regardless of whether you contribute directly to a Roth IRA, if your MAGI is $100,000 or less, and you're single or married filing jointly, you can convert an existing traditional IRA to a Roth IRA. (You'll have to pay income tax on the taxable portion of your traditional IRA at the time of conversion.) But if you're married filing separately, or your MAGI exceeds $100,000, you aren't allowed to convert a traditional IRA to a Roth IRA.

What's changing?

In 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. TIPRA repeals the $100,000 income limit for conversions, and also allows conversions by taxpayers who are married filing separately. What this means is that, regardless of your filing status or how much you earn, you'll be able to convert a traditional IRA to a Roth IRA. The bad news? This provision of the new law doesn't take effect until 2010.

So why concern yourself with this now?

Even though the new rules don't take effect until 2010, there are steps you can take now if you want to maximize the amount you can convert at that time. If you aren't doing so already, you can simply start making the maximum annual contribution to a traditional IRA, and then convert that traditional IRA to a Roth in 2010.

Your ability to make deductible contributions to a traditional IRA may be limited if you (or your spouse) is covered by an employer retirement plan and your income exceeds certain limits. But any taxpayer, regardless of income level or retirement plan participation, can make nondeductible contributions to a traditional IRA until age 70½. And because nondeductible contributions aren't subject to income tax when you convert your traditional IRA to a Roth IRA, they make sense for taxpayers contemplating a 2010 conversion even if they're eligible to make deductible contributions.

And don't forget that SEP IRAs and SIMPLE IRAs (after two years of participation) can also be converted to Roth IRAs. You may want to consider maximizing your contributions to these IRAs now, and then converting them to Roth IRAs in 2010. (You'll need to set up a new IRA to receive any additional SEP or SIMPLE contributions after you convert.)

The Financial Guy

But there's a taxing problem ...

If you've made only nondeductible contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth.

But if you've made both deductible and nondeductible IRA contributions to your traditional IRA, and you don't plan on converting the entire amount, things can get complicated.

That's because under IRS rules, you can't just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist of a pro-rata portion of the taxable and nontaxable dollars in the IRA.

For example, assume that in 2010 your traditional IRA that contains $350,000 of taxable (deductible) contributions, $100,000 of taxable earnings, and $50,000 of nontaxable (nondeductible) contributions. You can't convert only the $50,000 nondeductible (nontaxable) contributions to a Roth. Instead, you'll need to prorate the taxable and nontaxable portions of the account. So in the example above, 90% ($450,000/$500,000) of each distribution from the IRA in 2010 (including any conversion) will be taxable, and 10% will be nontaxable.

You can't escape this result by using separate IRAs. The IRS makes you aggregate all your traditional IRAs (including SEPs and SIMPLEs) when calculating the taxes due whenever you take a distribution from (or convert) any of the IRAs.

But for every glitch, there's a potential workaround. In this case, one way to avoid the prorating requirement, and to ensure you convert only nontaxable dollars, is to first roll over all of your taxable IRA money (that is, your deductible contributions and earnings) to an employer retirement plan like a 401(k) (assuming you have access to an employer plan that accepts rollovers). This will leave only the nontaxable money in your traditional IRA, which you can then convert to a Roth IRA tax free. (You can leave the taxable IRA money in the employer plan, or roll it back over to an IRA at a later date.)

But even if you have to pay tax at conversion, TIPRA contains more good news--if you make a conversion in 2010, you'll be able to report half the income from the conversion on your 2011 tax return and the other half on your 2012 return.

For example, if your only traditional IRA contains $250,000 of taxable dollars (your deductible contributions and earnings) and $175,000 of nontaxable dollars (your nondeductible contributions), and you convert the entire amount to a Roth IRA in 2010, you'll report half of the income ($125,000) in 2011, and the other half ($125,000) in 2012.

And speaking of employer retirement plans ...

Before 2008, you couldn't roll funds over from a 401(k) or other eligible employer plan directly to a Roth IRA unless the dollars came from a Roth 401(k) account or a Roth 403(b) account. In order to get a distribution of non-Roth dollars from your employer plan into a Roth IRA you needed to first roll the funds over to a traditional IRA and then (if you met the income limits and other requirements) convert the traditional IRA to a Roth IRA. And, as described earlier, you needed to aggregate all your traditional IRAs to determine how much income tax you owed when you converted the traditional IRA.

The Pension Protection Act of 2006 streamlined this process. Now, you can simply roll over a distribution of non-Roth dollars from a 401(k) or other eligible plan directly (or indirectly in a 60-day rollover) to a Roth IRA. You'll still need to meet the $100,000 income limit for 2008 and 2009. And you'll still need to pay income tax on any taxable dollars rolled over.

One benefit of this new procedure is that you can avoid the proration rule, since you're not converting a traditional IRA to a Roth IRA. This can be helpful if you have nontaxable money in the employer plan and your goal is to minimize the taxes you'll pay when you convert.

For example, assume you receive a $100,000 distribution from your 401(k) plan, and $40,000 is nontaxable because you've made after-tax contributions. You can roll the $60,000 over tax free to a traditional IRA, and then roll the after-tax balance ($40,000) over to a Roth IRA. Since only after-tax dollars are contributed to the Roth IRA, this rollover is also tax free. (Both your plan's terms, and the order in which you make the rollovers, may be important, so be sure to consult a qualified professional.)

Is a Roth conversion right for you?

The answer to this question depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state's tax laws, and how you'll pay the income taxes due at the time of the conversion. And don't forget--if you make a Roth conversion and it turns out not to be advantageous, IRS rules allow you to "undo" the conversion (within certain time limits).

A financial professional can help you decide whether a Roth conversion is right for you, and help you plan for this exciting new retirement savings opportunity.

If you have questions or feedback, you can contact the Financial Guy at rgustavis@wradvisors.com.

The accompanying pages have been developed by an independent third party. Forefield's content and information is provided for informational and educational purposes only. Neither Forefield Inc. nor Forefield Advisor provides legal, tax, insurance, investment or other advice and should not be relied upon for such purposes. Waddell & Reed does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific financial planning and investment needs, please discuss your individual circumstances with your Financial Advisor.

The accompanying pages may include information regarding retirement plans, estate planning, business planning or a variety of other topics that involve tax and legal issues beyond the scope of Waddell & Reed's area of practice and expertise. Such information is intended to explain or illustrate planning topics, options or strategies that you may wish to consider in advance of, or at the time of, seeking the assistance of legal and/or tax advisors in implementing your plans and should not be considered as an authoritative or comprehensive explanation of any of the particular planning topics, options or strategies described. The information in the accompanying pages describes the general aspects of various planning topics, options or strategies but does not necessarily address all the pertinent facts and issues of your personal situation.

Waddell & Reed does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice or may be relied on for the purpose of avoiding any federal tax penalties. The selection of appropriate planning options or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. It is important that you retain the services of legal counsel to plan and implement any legal documents that you may require and that you consult a tax advisor for an explanation of the tax effects of any particular planning options or strategies on your personal financial situation.

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Black People in the Valley of Sun More Open to a Greener Way of Living

Submitted by DaVaun Sanders

International climate talks concluded in Copenhagen on Dec. 19, but it remains doubtful whether the efforts will impact Valley African Americans in the immediate future.

The summit lasted for two weeks and included delegates from 193 nations.

“We have the foundation for the first truly global agreement that will limit and reduce greenhouse gas emissions, support adaptation for the most vulnerable [countries], and launch a new era of green growth,” said United Nations Secretary General Ban Ki-moon during his closing remarks. Ban Ki-moon also stated the world's nations must “make the agreement into a legally binding treaty,” “launch a Copenhagen green climate fund,” and “pursue the road of higher ambition.”

International response to the Copenhagen Accord remains mixed, with critics questioning whether the talks accomplished any tangible goals. Disagreement between rich and developing countries over the best financial approach to climate change solutions was a problematic theme throughout the talks.

The financial ramifications of a green lifestyle also merit consideration for many Valley African Americans. Respondents for this story cited many eco-friendly decisions they already engage in, such as choosing energy efficient light bulbs, reusing goods, and recycling. African Americans expressed their environmental concerns when interviewed, but various factors sometimes limit their application of a greener lifestyle.

“Ninety percent of my trash is recyclable, but the apartment complex I live in doesn't recycle,” says Miouo Spear, a downtown Phoenix resident. “As a citizen of the planet I think most people believe it's a good idea. Actual followthrough doesn't seem to be happening.”

Some African Americans in the Valley are seeing signs of progress.

“I think people are catching on. But it's more so dialogue and education than action,” says Maya Daniels, who lives and works in Glendale. Her workplace consumes substantial amounts of paper and other recyclables, but offers no recycling initiative. The employees responded by creating their own voluntary program, where people take turns delivering recyclables to bins themselves. Daniels is optimistic over the green movement's potential to bring people together, but also observed that environmental issues are often a secondary concern to other priorities among African Americans. “Our mindset is often in a check-by-check mentality—our scope of interest doesn't go beyond that.”

This mentality works against larger green commitments such as buying hybrid cars, installing solar panels, or purchasing energy efficient appliances. Taking such steps were definite considerations for several respondents, but often as a distant future goal. “I would love to have solar panels on my house,” says Shawna Tarboro, a Maricopa resident. “But the cost is prohibitive, and my area doesn't get the write-off.”

Green advocates are aware of these potential drawbacks, but believe the community also suffers from a lack of perspective. “We tend to see green [practices] as something not connected with keeping our children alive, or serving our business customers,” explains Dr. George Brooks Jr., a subject matter expert on integrating sustainable practices into communities. He is confident that once enough people grasp green concepts as simply a new tool to achieve their goals, eco-friendly ideas will be fully embraced. “It is really an old way of thinking that we are reintroducing to people.”

While the outcome of the global talks in Copenhagen appears doubtful, one encouraging sentiment that surfaced repeatedly during interviews for this article was an interest in further conversation.

“There are small groups of us that gather periodically for various reasons, and environmental issues should be addressed at every opportunity,” says Jumoké Farrow, a Glendale resident. “Not to beat each other up, but to encourage each other to take the small steps within our own worlds. The little things that we can do will make major differences.”

BlackAtlas.com - African American Travel Website Takes Flight @BlackAtlas

Have you been wanting to travel the world but needed reviews and advice about the African American experience in your desired destinations?

Well, Nelson George and American Airlines have teamed up to create BlackAtlas.com, a Website that features information that African American travelers should enjoy because much of the content is written by African Americans! George is the host of VH1 Soul Cities (amazing TV show) and he is an award-winning author, filmmaker and TV show producer.

You can read about the black experience in dozens of international and U.S. cities such as London, Barcelona, Paris, Rome, Montego Bay, San Francisco, Charlotte, Las Vegas, Los Angeles, Atlanta, Miami, Dallas and Chicago!

BlackAtlas.com, which was launched in October 2009, is an interactive Website, meaning that you can submit your own stories about places you have visited and make Comments about the content that others have contributed. The Website features videos, exclusive memberships and the ability for you to make flight reservations.

PhxSoul.com and Mimi Ahmed Photography partnered with the BlackAtlas.com staff to provide the majority of the content about Phoenix. Unfortunately we weren't credited on the Website, but please believe that most of the writings and photos came from us!

If you love traveling and want a black outlook on places near and far away, visit BlackAtlas.com today.

Counting Young Men Poses Great Challenge for Census

New America Media, News Report, Jacob Simas

As organizing efforts for the 2010 census shift into high gear, the U.S. Census Bureau is paying particular attention to what they say is one of the hardest-to-count segments of the national populace: 18 to 25 year-old people of color, especially young men.

Bureau research published in 2008 and based on census response rates 10 years ago reveals that the populations least likely to be counted are: 1) Economically Disadvantaged, 2) Unattached/Single and 3) Living in High-Density Ethnic Enclaves.

“We are dealing with a national phenomenon in terms of which groups are consistently undercounted,” says Sonny Le, media specialist at the Seattle Regional Census Center. “We’re talking primarily about young adults in the African-American, Latino, Southeast Asian and Pacific Islander communities.”

For Le and his colleagues, understanding why youth in the country’s ethnic communities are consistently undercounted is crucial as they plan ways to increase response rates to the 2010 census questionnaire, which will be mailed out to every residence in the United States and Puerto Rico this March.

Since 1790, the federal government has been constitutionally mandated to conduct the census -- a complete enumeration of the U.S. population -- every 10 years.

One reason for the low response rates, says Le, is perhaps the most obvious: 18 to 25 year-olds now were only children when the last census was conducted. This is their first real experience of the census. They may not know what the census is, let alone how it impacts their communities.

Also, he says, most young adults tend to be unattached, mobile and less likely to have an established home address – in essence, placing them somewhere in between dependency and emancipation – decreasing their chance of being counted.

“These are grown men and women now but many still live at home, although unofficially,” explains Le. “So when the census arrives in the mailbox, their family might not count them as part of the household anymore.”

Making matters worse, he says, is a general mistrust of government that is fostered in part by the negative experiences of a growing number of young people who are involved – or have friends or family involved – in the criminal justice system.

If Le is correct, the problem presents a larger challenge to census enumerators than at any previous time in U.S. history. According to a well-publicized 2008 Pew Center report, one in 30 men between the ages of 20 and 34 are behind bars. The number jumps to one in nine for African-Americans in the same age group, and Latino men are now the fastest-growing segment of the prison population.

“Unfortunately a big percentage of our young men have been part of the system, and once they’re out they don’t want to be known, for fear of being racially profiled,” says Le. “Or perhaps for fear that Uncle Sam might be keeping tabs on them.”

It’s an issue that Le says is particularly acute among young men living in public housing, where they may live with partners and children but are legally not supposed to be there, resulting in family members being disinclined to report them on a government questionnaire.

These challenges are amplified in California, where more than 30 percent of the population has been deemed Hard to Count (HTC), a designation derived by the Census Bureau from demographic indicators such as poverty, educational attainment, unemployment, language and housing indicators such as rentals, crowded housing and multi-unit buildings.

By comparison, the percentage of HTC areas across the national population is 17.7 percent.

The dual task confronting Sonny Le and his colleagues within the Census Bureau, then, is convincing communities that the census is not only safe but worth their while.

More than $400 billion in federal funding for health, education, housing, employment and other programs is allocated to regions based on information culled directly from the census. These incentives, however, can be less obvious to young adults who tend to not access services.

“The money may not come to you, but the services may go to your family members, your grandmother, your sisters,” says Le. “They have to look beyond themselves, to the greater society.”

According to a Brookings Institute study, every Californian counted in the census represents roughly $1,600 in federal assistance programs for the state.

“If you miss 2 million people, it may not seem like a big deal, but in dollars that’s a huge amount,” says Le. “If you missed 10,000 African-Americans in San Francisco, that’s a lot of money lost.”

To avoid such a scenario, Census Bureau strategists are employing a multi-faceted approach of targeted advertising, outreach to schools and grassroots community organizing to reach the 18 to 25 year-old demographic.

Shannon Lawrence, a former union organizer in Los Angeles and now a partnership specialist at the Los Angeles Regional Census Center, is an example of how the Census Bureau is utilizing existing grassroots leadership.

“For years my job was to organize and create partnerships with our membership and the community-based organizations, the ecumenical community and government officials,” says Lawrence. “Now it’s my job to get them engaged in the census. They trust me. They trust my voice.”

Lawrence is one of about 100 partnership specialists working for the Los Angeles region, which serves 25 million people in 19 counties across southern and central California as well as Hawaii. Their job is to facilitate outreach to the communities they come from and know best.

“That is actually the strength of the census itself,” says Bernard Pendergrass, a media specialist and a colleague of Lawrence at the Bureau. “These are people who have amazing backgrounds, who know their communities and how to reach them.”

Le says the strategy of tapping into the “trusted voice” has also been used successfully in past census advertising campaigns. In 2000, the bureau enlisted help from entertainers like Sean Combs and Russell Simmons, as well as regional personalities like Dr. Joseph Marshall and his Street Soldier program in the San Francisco Bay Area to reach a young, multicultural demographic.

Hip hop, says Le, will again be one of the tools used to reach youth and young adults in 2010, and he believes it could even be more effective considering the growth of the culture.

“The hip hop generation 10 years ago is much different than it is today,” says Le. “For example, in San Francisco we have a lot of Vietnamese and Cambodians in neighborhoods like the Tenderloin, Sunnydale and Bayview Hunters Point, and they’re all about hip hop. The hip hop generation is multicultural.”

Lawrence believes the campaign will be fruitful.

“Those young people who would not traditionally turn in the forms will understand the impact is much bigger than their own personal fear,” says Lawrence. “It’s important they see that the people they trust, trust the census.”

Living Word Bible Church Hosting Weekly Singles Service on Saturday Nights in Mesa

L.I.V.E. (Love Inspired Victory Expectation), is a new weekly service just for singles that takes place every Saturday at 6:30 PM.

This power-packed service will include great praise and worship, along with a life-changing word from Pastor Carolyn Smith. She will speak on relevant topics that singles want to hear. Our desire is for singles to realize that they are valuable and not forgotten in the body of Christ. God wants them to know they have a purpose and boldly move forward in fulfilling their destiny.

After each service, there will be either a dance or some other L.I.V.E. activity. Childcare will be provided for those attending the service. L.I.V.E. provides an opportunity to become stronger in Christ, make new friends, and have fun each week.

The Living Word Bible Church is located at 3520 E. Brown Road in Mesa. For more information, please visit www.livingwordonline.org or call 480-964-4GOD.

Paint By Numbers Event Drawing African Americans Closer to Art

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Click HERE to view the Paint By Numbers photo slideshow!

Written by DaVaun Sanders; Photos by Mimi Ahmed Photography

A lively spirit is flourishing in Greater Phoenix's African American community, and was fully evident at Paint By Numbers, an innovative art show that took place at Devil's Martini in Scottsdale on December 5.

Organized by Erica Rosette and Andre Hollingsworth, Paint By Numbers offered an interactive experience where artists not only showcased their own work, but offered participants the chance to employ their own creativity upon a large mural. Rosette's and Hollingsworth’s passion for their work infused the event with warm, readily apparent enthusiasm. Rosette energetically shared her inspiration for her acrylics, which boasted a vibrant selection of colors, and provided fresh depth to the subjects her canvas explored. Hollingsworth's pieces displayed sensuous charcoals and earthtones, offering original renderings of iconic imagery such as Sade's instantly recognizable portrait. Another piece of his artwork challenged the viewer with an aggressive declaration, 'Hip Hop is Dead: 2009' emblazoned on a simply painted green mixtape.

Rosette explains how our past inspired the duo's vision.

“Our art is reminiscent of the Black Arts Movement, where Black people are coming together and using our talent to spread messages ... whether it be about somebody doing well in the community, or handling an issue in the community that we need to come together as a group to deal with.”

After taking in the individual work, people inevitably approach the highlight of the event itself. The group canvas is unassuming at first, blank with pre-drawn art penciled in by the two artists.

“We're doing something different,” Hollingsworth says. “No one's doing anything like this in town.”

The true magic of this event unfolded as people choose a color that corresponds with a numbered section on the group canvas.

Brushstrokes soon multiplied regardless of whether the attendee proved artist or curious; bold or timid. A freeform line of ebony and ivory keys took shape, swirling across the middle. Above the keys, desert mountains began to sprout cacti, joined by an emerging line of skyscrapers resplendent in Suns' purple and orange. Bold red notes, a dapper-suited sax player, and dancing silhouettes also materialized, while more musical instruments and motifs asserted themselves throughout the budding masterpiece.

The group of people who clustered before the canvas may not be considered artists, but their collective effort was no less mesmerizing. The palette of ages incorporates gray hair to black, auburn, and blonde. The hues of skin tones was equally diverse. Such a gathering on a Saturday evening in downtown Scottsdale demonstrates the beauty of art, and the passion of these two inspired creators.

“At museums, you've got to be extra quiet, and can't get too close to the art pieces. We wanted this to be more of a social networking, fun event where people can feel involved and actually meet the artists,” Rosette says. “They learn how we did our pieces by doing it themselves.”

While the Phoenix metro area boasts a considerable number of artistic souls, Hollingsworth concedes that African Americans are not always highly visible.

“The artists are hard to find. I've been to the First Fridays [Artwalk in downtown Phoenix] and we'll see one or two. We like having events like this because it can bring us together.”

Indeed the participants walk the space in the manner of people who have chanced upon an undiscovered treasure.

Brittany Rayford is an Arizona State University graduate who purchased a print of Hollingsworth's, and also contributed to the group canvas.

“It's nice to have something different to do,” Rayford said as she watched her friend meticulously paint a red treble clef. “I think more people would come if they knew—the ASU students too.”

Paint By Numbers will continue to grow if this initial showcase is any indicator. The two artists envision live music and spoken word in their future shows, where painters can interpret the performers. “Art can go with anything,” Rosette says. The first ever mural for this event, nearing completion and brushed by so many different people, is quite easily proving her right.

For artists interested in future collaborations, Andre Hollingsworth and Erica Rosette are both reachable through Facebook. If you are an artist or art enthusiast, please use the Comments section below to tell our readers about Valley shows and artists you have enjoyed!