Roth IRA’s have long offered investors a great opportunity to grow their wealth in a tax free environment.  But, because Roth IRA contributions are subject to strict income limitations, not everyone gets to benefit from its features.  Investors with traditional IRA’s have also historically been constrained to income limits when converting their IRA into a Roth.  The good news is, as of January 2010, there will no longer be income limitations on eligibility for converting a traditional IRA to a Roth IRA.  Should you consider this, and if so why?

Background

As a refresher, traditional IRAs are funded with pre-tax dollars and defer taxes on investment gains until the day you withdraw the funds. When funds are withdrawn from the traditional IRA, they are taxed as ordinary income (your highest tax bracket). Conversely, Roth IRAs, are funded with post-tax dollars but all of the investment earnings grow tax free and avoid taxes when they are withdrawn (assuming it’s a qualified distribution).  Roth IRAs can’t be opened by taxpayers
making more than $176,000 (joint returns) and $120,000 for single taxpayers. Furthermore, conversions of traditional retirement funds into Roth IRAs have not been permitted for households with annual incomes above $100,000.

The Conversion Process

A Roth Conversion is a distribution of assets out of a tax-deferred IRA, such as a Traditional or Rollover IRA, which is transferred into a Roth IRA.  If the converted assets are held in the Roth for the five-year holding period, qualified withdrawals are tax-free. The conversion from the traditional IRA into the Roth IRA is considered a taxable event, and the account holder will generally owe taxes on the distribution in the current year. However, in 2010 only, IRA account holders have the option of applying 50% of the conversion amount to the 2011 tax year and 50% to the 2012 tax year, or applying 100% of the conversion amount to the 2010 tax year. Steep investment losses in many retirement accounts may make that tax hit easier to take, and will guarantee that any market rebound in investment values will never be taxed if funds are switched into a Roth account. Finally, conversions must be fully completed by December 31st to qualify for current year
tax treatment.

Why Bother?

So, what makes a Roth IRA so great?  If you believe that your tax rates will be higher in retirement than they are now, Roth IRA’s can save you loads of future taxes—that can translate into greater wealth for you.  
Let’s use the following example.  You are age 40 and have a $200,000 traditional IRA.  Your plan is to retire at 65.  Your current tax bracket is 25% and you anticipate that you will be in (at least) a 30% tax bracket upon retirement.  We suppose that the tax due upon the Roth conversion is $50,000, is paid with funds available outside of the IRA being converted. Let us also assume an investment tax rate of 15% capital gains rate now and in the future.  Using an 8% expected return on your investments, the after tax net return from your Traditional IRA (with tax savings) would be worth $1,186,411, while the after tax net return from your Roth IRA would be $1,369,695.  That’s a difference of $183,284 by converting to the Roth.

Other Considerations
       
It is always wise to check with your tax or financial advisor before making a conversion.  This is particularly true because executing a conversion may actually bump you into a higher tax bracket.  Because converted assets will be considered taxable income, perhaps a partial conversion may be the answer. Converting only a portion of the assets may allow you to stay in a lower tax bracket, allowing you the flexibility to convert additional assets in future years. Ideally, individuals considering a Roth conversion should have the cash on hand to pay the income tax on converted assets. A partial conversion could help limit the conversion taxes to an amount your client can pay without dipping into IRA assets.
      
Does a Conversion Make Sense for You?

Clearly, everyone’s circumstances are unique and there is no one-size-fits-all answer here.  After all, the decision to convert to a Roth can be influenced by a number of factors including:

•        Your age and longevity
•        Your income tax bracket now and in the future
•        Your expected rate of return
•        Your investment tax rate (ie. capital gains rate)

The decision to convert can be complicated.  If you want to learn more, Morningstar, has written an informative overview of the conversion decision, and also provides a useful conversion calculator to help determine if conversion makes sense.   For many, there is no better moment to consider this.  The time is right for a Roth conversion.  

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

The third Real Life Retirement quarterly pulse survey by Charles Schwab shows the recent economic downturn has not spurred Americans to change behaviors regarding retirement preparation. Almost four in 10 Americans (39 percent) are not currently saving for retirement and, despite market losses, six in 10 Americans (62 percent) have not adjusted their thinking about what age they will retire – nearly unchanged from the first pulse survey in September 2008, months before the recession was officially declared.

“Americans may be feeling a lack of control over their retirement which has led to inaction, when in fact this is an ideal time to act,” said Mark Jamison, vice president at Charles Schwab. “Now is the time to reevaluate your financial circumstances. Whether that means delaying retirement or adjusting how much you save for retirement, making changes now can lead to a significant difference in the future.”

Survey respondents estimate they will need just over $1.2 million to comfortably retire, yet those currently saving for retirement have put away an average of $194,000. Despite this awareness, 41 percent of Americans feel positively about their retirement preparedness and another 22 percent feel indifferent.

For More Information

Do you know if you are on track for retirement? Are you aware of how expensive funding your retirement can actually be? To learn more, click on this recent article on our website.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

As I began preparing for my upcoming Earn What you Deserve workshop, I began reflecting back to when I began my journey towards earning a 6-figure income in corporate America. I remember spending  a lot of time in blame mode.   First, I blamed the system for not paying teachers enough. When I left teaching to join the dark side of the corporate world, I blamed my job for not paying me enough money and my boss for not offering me a raise when I was clearly performing above and beyond expectations.

Chances are if you’re dissatisfied with your income you’ve played the blame game, perhaps with different contestants  like your spouse, family, education, background, the economy, or whatever else comes to mind. Regardless of what or who you have been blaming, the truth is you have more control than you think when it comes to what you earn. And more importantly you have exclusive control over how to make what you earn work for you instead of against you.

If you are stuck in a place of consistently underearning, being paid less than what you are worth from an employer or client here are three reasons you are not having the financial success you desire (and deserve):

1. You base your salary requirements on your current expenses instead of what your skills and experiences are worth. How do you answer the question, “What kind of salary are you looking for?” What are you you using to come up with that number. Just because your budget only requires $40, 000 a year, doesn’t mean that should be the limit for your salary.

2. You have no clearly defined financial plan. Wanting to make more money so you can have more things is not a financial plan. When people don’t have a clearly defined plan, it usually means that their job is their only source of short term and long term income. Your plan should provide for your needs, wants, and goals for now and for the future) and include means for investing on others.

3. You are in conflict how what you feel about money and wealth. If you grew up in a home where there was myth and misinformation about how to acquire, manage and grow money, it can be a challenge to develop the habits or mind and wallet that lead to financial wealth. Until you address negative associations you have about money you will always find a way to sabotage the progress you make towards successfully reaching your financial goals. This includes any judgments you have about wealthy people as well.

4. You question your value. The issue of not asking for a raise has less to do with how your boss thinks about you and more to do with how you think about you. It’s the same thing if you are an entrepreneur or business owner:  it’s not that your people can’t afford your services – you don’t have the confidence to go after customers who will pay what you deserve for your product or service.

Ready to get out of this rut? Join me for  the next Earn What You Deserve workshop where you can learn 5 steps to overcome your fears about money and earn what you deserve. Click here for registration details.

As “The Career Makeover Coach”, Tai Goodwin is on a mission to help ambitious individuals reinvent their professional lives by centering on their passion and purpose. Holding as a core belief that we are all called to divine purpose and gifted with a unique passion, Tai uses a results driven, spiritually grounded approach to help clients create career paths to support the lifestyle they desire. Whether it’s helping people go from embittered to empowered professionals or making the transition from employee to entrepreneur, Tai is committed to helping clients tap into their own potential for brilliance. Tai has been empowering others through teaching and coaching for over 14 years. A gifted and insightful communicator, Tai holds a Bachelor of Science in Elementary Education from Drexel University and a Master of Science in Education from Capella University. She has completed ASTD’s (American Society for Training and Development) Coaching Certificate program and is pursuing professional coaching certification through the International Coach Academy. Originally from Philadelphia, Tai currently lives in Delaware with her daughter. She is currently working on her first book: Reclaiming Your Brilliance: Seven Ways to Take Your Life from Bright to Brilliant.

Web site: http://www.careermakeovercoach.com

Divorce can be one of the most stressful times of your life- it’s painful finishing your relationship, it can get messy and when children are involved it gets even more emotionally complicated. You have to deal with your own pain, and try your best to help your children through it, too. Kids all react to divorce differently. You’ll need to be both strong emotionally and patient with them, because children tend to cope with divorce by acting out in some ways. A few steps you can take to help make the change for your kids as painless as possible:

1. Talk to them. They’ll need to know exactly what changes will happen, in the most straight-forward language as possible. This means no playing the blame-game or pointing fingers at your almost-ex. You should both show your children a united front, letting them know that it has nothing to do with them. That you still love them unconditionally, even if your relationship with your partner has changed. Also watch what and how you say things to other people when your children are around. They’ll be listening closely and any additional negativity will be picked up on.
2. Make the change gradually. Try to keep things as normal as possible. Small changes over a period of time helps children adjust to the divorce. You should also include them in the process, or explaining as you go why these changes are happening. The more honest you are, without judgment, the better off your kids will be in understanding and coping.
3. Let them express themselves. They’ll be adjusting just as much as you are to the divorce. Keep tabs on their emotions, and pay attention to any changes or mood swings. Let them tell you how they’re feeling openly. They might not say what you want to hear but they need to know their feelings are just as important as yours. They shouldn’t feel like they’re walking on eggshells, and if they think they have to hold things in they’ll be reactive later.
4. Be supportive. Helping your children cope with your divorce involves a lot of security issues. They need full knowledge that they’ll have some changes, but that they’ll still be loved and taken care of by both of you. This doesn’t mean that you should shower them with toys, but give them emotional affection. Remember that each child reacts differently: some will be much quieter, some will act as if nothing happened or that there aren’t any changes and some will have behavior issues, even months after the divorce.
5. Give yourself time for you. You’ll need to be strong enough for both you and your children, which means keeping to the same schedules they’re used to, eating right and taking care of yourself. You’ll have your own emotional needs to take care of- it’s a long process. The best way you can help your children with the divorce is by making sure you’re OK.

It will be difficult getting you and your family through the divorce. But you can do it. Realizing how to help your children cope can help you put the pieces back together. Giving you all the ability to move forward in a positive way.

Buying a home may seem like a dauntingly complex proposition, perhaps because you’ve never done it before or never understood all the details of financing and closing a sale.

However, once you know what steps are involved, understand the purpose of each step, and learn how each is accomplished, buying a home will be revealed for what it is–a series of simple steps that lead toward a substantial emotional and financial commitment.

Prepare to Buy

1. Clarify your reasons to buy. Because it is such a weighty commitment, buying a home shouldn’t come with regret or second thoughts. Before you buy or even begin the process, make sure that your reasons and resolve to buy a home are clear and firm.

2. Get your financial house in order. It’s hard to have any idea about how much home you can afford if you don’t know how much of your money you want to devote toward housing. If you haven’t done so already, thinking about buying a home is a perfect reason to get your finances in order.
3. Check your credit history. Even if you aren’t going to buy a house, this is a good idea. If your credit report has mistakes or other blemishes, your credit rating will suffer. As a result, you will hurt your chances of securing financing and will probably pay higher interest rates or possibly not be able to secure financing.
4. Figure out how much home you can afford. Getting an accurate estimate of what priced home you can afford will make your search more realistic and efficient. It may even give you cause to reconsider buying altogether.
5. Buy vs. rent. Depending on your situation, renting a home instead of buying may make more sense (financially or otherwise). It’s a possibility that’s worth considering.

Buy a Home

1. Get prequalified. When preparing to buy a home, you estimate how much home you can afford. Now it’s the lender’s turn. Using financial information that you provide, prequalification is a lender’s analysis of your general position as a borrower, or in other words, an estimate of what you can afford. Getting prequalified gives you an even clearer understanding of what home you will be able to afford, and a prequalification letter from your lender helps strengthen your position with sellers in the early stages of negotiation.
2. Shop for loans. Finding a good loan is probably the most confusing part of the process (and definitely the dullest), but since it will dictate how much your monthly payment will be, it deserves your full attention. To simplify, your job is to decide what kind of loan you want, whom you want to get it from, and how long you want the term to be (most are either for 15 or 30 years).
3. Get preapproved. When you get preapproved, a lender gives a firm commitment to loan you up to a set amount without knowing the specific property. It’s particularly useful because when you make an offer on a home, waiting for financing won’t jeopardize your offer. Once you are preapproved, closing the loan is quick, depending only on a satisfactory appraisal and title report of the home. To get preapproved you apply for a certain purchase price, loan amount, and loan program, but these assumptions can change after you’re preapproved.
4. Find a home. Finding the perfect home can be challenging, especially if you are moving to a new area. Regardless of where you’re moving, the Internet offers powerful tools to research neighborhoods and find available homes.
5. Close the deal. Once you’ve found the home you want, you still must get it inspected, have it appraised, get a report on the title (to make sure the history of the house is clean), negotiate the price, and close your financing.
6. Move in. If you’ve made it this far, you’re close to the finish line, but the race isn’t over. Moving presents its own challenges, and there’s a litany of things to be mindful of, such as changing your address and more.

Tiffany Bass Bukow is the CEO & Founder of the #1 Personal Finance Website for Women and Families – www.msmoney.com. My life mission is to help people and the world thrive through creating companies that provide money, career and life skills education.

BY NIRVI SHAH
nshah@MiamiHerald.com

Laptops ready? Take notes: Congress wants it to be harder for the under-21 set to accrue a mountain of credit card debt.

A new federal law affects credit card holders — and those who want cards — of all ages. But because several provisions don’t take effect until February, this could be the last semester of truly easy credit for many college students.

“I don’t want to say credit cards are evil,” said Cathy Pareto, a certified financial planner in Coral Gables. “But targeting that demographic has long been an abusive practice. [Credit card companies] take advantage of the naïvete of teenagers.”

Read the whole article here.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

Want to land on your feet post-layoff? You might want to take the “lessons learned” approach to some new sobering statistics. According to new research discussed in this New York Times article, many laid off workers take years to recover and get back to their previous salary and most, on average, will not return to their pre-layoff incomes.

This new working paper by Columbia University economist Till von Wachter and two other economists found that from 1984 to 2004:

• most workers do not return to their pre-layoff salary within 15 to 20 years;
• starting over with a new employer and/or a new industry reduces your salary;
• largest long-term income losses happened to those with the longest tenures at their previous employers;
• stability at a company may lead to over-specialization of skills, making it less likely those skills can transfer to another company;
• workers who are laid off are more likely to be laid off again;
• older workers suffer more income decline than younger workers;
• workers with college degrees do slightly better than those without them.

These statistics don’t apply to everyone – the research was done with companies laying off at least 30% of their workforce and the laid-off workers had been with the employer at least 3 years. And most employees were men. I would also say that this research included more of the old style, cradle to grave type of career paths that no longer exist (except in government, perhaps).

What can we learn? It’s a reminder that getting too comfortable in your career can damage your ability to survive a layoff with your income level intact.

Our article “The Free Agent Outlook on Work” has a number of suggestions on how to avoid, when possible, the outcomes described in this research. I also wrote a blog series earlier this year on each of the 6 principles guiding the Free Agent Worker. And finally, a few more ideas:

• avoid too much specialization, locking yourself into work with one employer;
• continue updating your education throughout your career; even if it’s part-time; and
• take advantage of employer-provided training.

This blog post was graciously submitted to BizzyWomen by The Career Key Blog, run by Juliet Wehr Jones, J.D.  The Career Key™ gives you expert help with your career search and career choices  career change, career planning, job skills, and choosing a college major. Our career assessment helps you find a career by matching your personality with careers and providing you complete and accurate information about each career you choose to explore.

(from “Busy but Balanced”)
By Mimi Doe, Author of: “Busy but Balanced” and founder of http://www.SpiritualParenting.com

The University of Michigan recently conducted a survey. They wanted to study what effect money had on people’s lives. Three of their findings:

What do people worry about most? Money! What makes people the happiest? Money! What makes people the unhappiest? Money!

Money, and our issues around money, are full and deep and intense and often impenetrable. We all have a story to tell about our money dance.

Mary, a single mother of two, was brought up by her grandmother because her own single mother couldn’t support them. She lives with the fear of losing her daughters as a result of her unsteady income. One father of three battles his demons with money–demons passed along to him by his father. When he was thirteen-years-old his father went bankrupt and lost the farm that had been in the family for generations. As this boy grew up, he had anxiety around money issues and avoided risks of any kind.

We may not inherit money but we do inherit an approach to money from our family of origin. Let’s take responsibility for our prosperity consciousness, our money mentality, so we can blast away the wall that’s keeping abundance from us. When we are alert to our old money programming we can rewrite the script. Not only will our kids get a healthier example but, by becoming aware of money’s role in our childhoods, we can tame old images and fears. We can choose, today, to allow and accept prosperity into our lives.

Balancing Tips

• Be aware of how you speak about money to your children: “We can’t afford this” or “I’ll never have enough.” Is there guilt associated with spending? “I’ve spent a lot of money on your piano lessons, so keep practicing.”
• Give your kids responsibility for using their own money early on. It helps them maintain a balanced perspective on value. My daughter loved special frozen drinks from a local coffee shop. I began to feel the expense wasn’t worth the treat and suggested she use her own money. “It’s totally not worth $3.50″ was her wise response. We concocted our own drink at home.
• Take a look at what you might be trading for money–time with your kids, self nurturing, pursuing a dream. Is there a way you could scale back your expenses to spend time on what you value now?
• Money is a balance buster for many of us. We don’t know the best way to manage the money we earn and haven’t made the time to learn. Get a grip on family finances by setting up a system for paying bills on time (I like the Quicken software program), saving for college and retirement (automatic savings plans are pure magic), handling debt (find a professional to help you create a plan), and meeting your financial goals (you’ve got to make these goals before you can meet them). Once you are in control of your money, you won’t feel thrown off balance.
• Are you avoiding taking responsibility for money because it illicits feelings of fear, stress, scarcity? Schedule a time each month when you and your partner can review your current financial situation. Create goals and strategies. Is saving for your child’s college tuition just a dream? Even if it’s an old coffee can for collecting change, just making the dream concrete opens the way for the flow of money.
• Eliminate debt and find exhilarating freedom. Debt can be an anchor around our “financial psyche”–dragging us down in all areas of our lives. Create a debt repayment plan and move on with your life.
• Prosperity is more than just money – it’s a way of thinking. Open your mind and heart to receive all the abundance the universe is waiting to shower upon you today.

Who is Mimi Doe

Ladies Home Journal called Mimi Doe “a parenting guru” and she has appeared on Oprah. She holds a Master’s Degree in Education from Harvard.

Mimi is the author of the just released, “Busy but Balanced: Practical and Inspirational Ways to Create a Calmer, Closer Family” (St. Martins Press)

Link: http://www.amazon.com/exec/obidos/ASIN/0312272219/qid=1012258913/sr=1-2/ref=sr_1_10_2/104-7406789-8620740

Sign up for her free newsletter at: http://www.SpiritualParenting.com

This week’s browseworthy links:

1. I’m a fan of any message that encourages people to pursue their passion. Steve Job’s commencement speech to Stanford University graduates this year delivers an inspiring message. Click here for the full text. My favorite quote:

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

2. Mind over matter…Love this post on how mental chaos keeps us from having the success we dream of. The article Can Chaos Lead to Success suggest that we create chaos when we allow contradictory thoughts to have a tug of war, example: I will get my dream job vs. I should just be happy where I am. Great notes on the importance of shooting down negative thoughts before they take root and spread like weeds in our minds.

3. I stumbled across a great blog this week for anyone considering transitioning from employee to entrepreneur: Under 30 CEO. Top reads: 10 Do’s and Don’ts for Aspiring Entrepreneurs and How to Become a Fearless and Successful Entrepreneur.

4. If you are a new manager  or need to sharpen your management skills, check out Management Craft. I stumbled onto this site following a link to  a post on How to Handle Complaints (for managers). Great places to start – try these two categories: Podcasts and Webcasts and Breakthroughs. I found myself wishing for more of the Ask Lisa category. Be sure to scan this blog’s blogroll for other great sites to add to your browsing list.

5. One of my pet peeves is unnecessary unproductive meetings. Before you complain about the next meeting, take a look at these tips from Seth Godin in his post Getting Serious About Your Meeting Problem. My favorite tip #8:

Create a public space (either a big piece of poster board or a simple online page) that allows attendees to rate meetings and their organizers on a scale of 1 to 5 in terms of usefulness. Just a simple box where everyone can write a number. Watch what happens.

As “The Career Makeover Coach”, Tai Goodwin is on a mission to help ambitious individuals reinvent their professional lives by centering on their passion and purpose. Holding as a core belief that we are all called to divine purpose and gifted with a unique passion, Tai uses a results driven, spiritually grounded approach to help clients create career paths to support the lifestyle they desire. Whether it’s helping people go from embittered to empowered professionals or making the transition from employee to entrepreneur, Tai is committed to helping clients tap into their own potential for brilliance. Tai has been empowering others through teaching and coaching for over 14 years. A gifted and insightful communicator, Tai holds a Bachelor of Science in Elementary Education from Drexel University and a Master of Science in Education from Capella University. She has completed ASTD’s (American Society for Training and Development) Coaching Certificate program and is pursuing professional coaching certification through the International Coach Academy. Originally from Philadelphia, Tai currently lives in Delaware with her daughter. She is currently working on her first book: Reclaiming Your Brilliance: Seven Ways to Take Your Life from Bright to Brilliant.

Web site: http://www.careermakeovercoach.com