Dec 31

Last Day to Convert to a Roth IRA

That day is finally here…December 31, 2012.  This is your last chance to convert your traditional IRA into a Roth IRA before we go off the “fiscal cliff” tomorrow.  Here’s one final look to see if a conversion is your best course of action.

When you convert, you have to pay the taxes on all pre-tax contributions as well as any earnings.  It’s best to have cash on hand to pay off these taxes and not money from your IRA.  If you do, you’ll pay a 10% penalty and that’s less money in your retirement account working for you.  Moreover, you will owe taxes no matter what.  You can’t simply roll over your after-tax contributions.

Will the rollover disqualify you from certain tax benefits?  The conversion income might put you into a higher tax bracket and therefore disqualify you from tax benefits like the child tax credit and higher education tax credits.

Are you young enough to make the conversion worthwhile?  If you are nearing retirement, you don’t have as much time to make up for the taxes you pay when you convert.  However, if you plan on leaving your IRA to an heir, it makes sense for an older person to convert as well.  The main reason being that there are no required minimum distributions to make with a Roth IRA.  You can let all the money grow in the Roth leaving more to your heir(s).  Also, the income tax you pay when you convert will reduce your taxable estate thus reducing taxes for your heir(s).

One last thing to consider is what tax bracket you will be in when you retire.  If you’re bracket will drop significantly (say from 35% to 25%) then it doesn’t make sense to convert now and pay higher taxes than you’ll owe when you retire.

Check out the IRA to Roth IRA conversion calculator at

If you need help with anything IRA related, contact the tax experts at the IRA Financial Group ASAP!  Don’t forget to follow us on Twitter as well!  @BergmanIRA

Dec 27

Converting an After-Tax IRA to a Roth IRA

A reader posed a question to which, in part, asks: “I was participating in two retirement savings plans: one pre-tax and one after-tax. In 2005, I transferred the two accounts to separate accounts at a brokerage. When the accounts were transferred, they were both categorized as traditional IRAs. The after tax-account has never had any other contributions to it. Can I get the after-tax account recategorized as a Roth IRA?”

The simple answer is no, you cannot recategorize the after-tax IRA into a Roth IRA since any earnings on the account after you transferred it to an IRA is taxable upon distribution.  “Back in 2005 when you did the conversion to an IRA, you should have filed Form 8606 to establish your non-taxable basis,” Gail Rosen, CPA said. “The IRS assumes that if you did not file Form 8606, then all IRA contributions are presumed to have been deductible, and, thus, are taxable upon withdrawal from the IRA.”

There are three distinct groups of money: a traditional IRA with pre-tax contributions and earnings which are fully taxable upon withdrawal, a traditional IRA with after-tax contributions, which will NOT be taxed upon distribution and earnings within this IRA that will be taxable at distribution.  Since there are both pre- and after-tax contributions, you will need a pro-rata calculation.

“The calculation requires you to aggregate all your IRAs to determine how much income tax you owe when you convert,” says Michael Gibney, a certified financial planner.

Let’s say you have $100,000 in the pre-tax IRA and $100,000 in the after-tax IRA, $80,000 of which is after-tax contributions and $20,000 is taxable earnings.

“If you convert the after-tax IRA, it will be 60 percent taxable, not 20 percent taxable because of the aggregation of all IRAs,” Gibney said “That is, $120,000/$200,000, where the $120,000 is pre-tax IRA and taxable portion of after-tax IRA.”

For more info in how to convert to a Roth IRA and any questions you might have, contact a tax expert at the IRA Financial Group today!

Dec 26

Convert to Multiple Roth IRAs

The tax pundits have been saying it all year: Now is the time for a Roth IRA conversion. With the prospect of higher taxes in 2013, plus the imposition of the new 3.8% Medicare surtax on investment income, it makes more sense than ever for well-off individuals to convert a traditional IRA to a Roth.

Strategy: Don’t put all your eggs in one basket. Rather than using one account, set up multiple Roth IRAs based on the asset classes of the current investments in your traditional IRA. You could end up with a half-dozen or more Roth accounts.

The reason for this technique is to provide flexibility in case you want to re-characterize Roth funds at a later date. It’s like giving yourself a “get out of jail” card in Monopoly.

Here’s the whole story: When traditional IRA distributions are received, you’re taxed at ordinary income rates on the portion of the payout representing deductible contributions and earnings. Beginning in 2013, these rates are scheduled to increase, with the top tax rate reaching 39.6% (as opposed to 35% in 2012).

Conversely, qualified distributions from a Roth at least five years old are 100% tax-free. (Prior distributions are taxed under special “ordering rules.”) For this purpose, “qualified distributions” are payments made after age 59½; on account of death or disability; or used for first-time home buyer expenses (up to a lifetime limit of $10,000). Thus, the main tax attraction of Roth IRAs is on the back end.

Of course, you must pay tax on a conversion, which is why wealthy individuals are being advised to convert before 2013. When you add the upcoming 3.8% Medicare surtax on top of the maximum 39.6% federal income tax rate scheduled for 2013, the effective federal tax hit on a 2013 conversion could be as high as 43.4%, not even counting state income tax.

The tax liability is based on the value of the traditional IRA funds on the day of the conversion.

Note, however, that you can re-characterize a Roth back into a traditional IRA if it suits your purposes. For instance, if the value of your new Roth IRA’s investments declines after the conversion, you will have “overpaid” the tax.

For example, you might allocate large-cap stocks to one Roth, mid-cap stocks to a second, small-caps stock to a third and bonds to a fourth. Then, if the value of one or more of the four Roth accounts drops after the conversion, you have until Oct. 15 to re-characterize that account (or those accounts) back to traditional IRA status. Leave the other accounts alone.

Example: Dividing your assets

Suppose you set up four Roths in 2012 as stated above. Say that the value of each Roth on the conversion date is $250,000 and you’re in the 35% tax bracket. So you pay $87,500 in tax (35% of $250,000) on each conversion.

Next year, the value of Roth IRA #1 drops to $150,000, Roth IRA #2 increases to $300,000 and Roth IRAs #3 and #4 are still worth $250,000. Accordingly, you can re-characterize Roth IRA #1 back into traditional IRA status. That means you won’t owe the $87,500 of 2012 federal income tax that would otherwise be due from converting that account to Roth status.

This information is proudly provided by Business Management

If you’re looking to converting to a Roth IRA and/or need help starting from scratch, contact the tax experts at the IRA Financial Group today.  Give us a call before it’s too late @ 800.472.0646!

Dec 25

Happy Holidays

Just wanted to take a minute to wish everyone a very happy and joyous holiday season from the Bergman IRA Report.  Hope everyone had a Happy Hanukkah, a Merry Christmas and a Happy Kwanzaa.  Check back in tomorrow and the rest of the year to help get your retirement goals set for the end of 2012 and the start of 2013.

Contact the IRA Financial Group now to get off on the right foot for a prosperous new year!

Dec 20

Be Careful with Real Estate in Your IRA

Now that the housing market is finally on the rise, more and more investors are using their retirement plans to invest in real estate.  “Done properly, such a strategy can generate good income with modest volatility. But before you dive in, take heed: It’s a time-consuming proposition, and you’ll need to proceed carefully not just to avoid investment losses but also to stay clear of some nasty tax pitfalls,” says Fortune contributor Janice Revell.

Before you can purchase real estate, you need to open a self-directed IRA.  Once done, you can use that plan to buy anything from single and multi-family homes, commercial properties, condos and virtually any other type of real estate.

The most common mistake people make is using the property to directly benefit themselves.  For example, you can buy a multi-family house and rent it out to others, but you cannot live there yourself.  This is true for close family members as well, so if you bought an apartment building, you cannot hire your father to be the manager.  You’re also not allowed to buy real estate for the IRA that you (and other close family members) already own.  If your IRA is disqualified from such action, the IRS will tax you on the full property value and hit you with a 10% penalty.

To avoid that, all income generated must be paid directly to the IRA.  You can’t touch it until retirement.  If you sell the property, that money must also stay in the plan.  Moreover, any expenses (such as improvements and property taxes) must be paid from the IRA and not from personal funds.  Therefore, you need to have enough cash in the IRA to cover these costs.  In 2013, you can contribute up to $5,500 into an IRA ($1,000 more if you are at least age 50).

You will get taxed at distribution at ordinary income tax rates unless you open a Roth self-directed IRA.  the Roth is funded with already-taxed dollars and therefore distributions are tax-free so long as certain stipulations are met.

If you’re looking to invest in real estate, the IRA Financial Group is the country’s leading facilitator of self-directed IRAs.  Check out our website or give us a call today at 800.472.0646 to get started.

Dec 18

Don’t Contribute Too Much to Your Roth IRA

One of the biggest rules not to break when concerning any of your IRA plans is not to contribute too much.  If you have a traditional IRA, you may contribute up to $5,000 in 2012 plus an extra $1,000 if you are at least 50 years old.  Anyone can contribute the max amount provided your earned income is at least this much.  However, if you have a Roth IRA, there are specific income limitations.  If you make too much money, than you cannot contribute the max to your plan (or not at all).

If you are a single filer that makes at least $110,000 per year, then the amount you may contribute is reduced.  Moreover, if you make at least $125,000 you may not contribute to a Roth IRA at all.  As for joint filers, those numbers are $173,000 and $183,000 respectively.  Some people contribute to their Roth earlier in the year, before knowing what their income will be.  If you contribute too much, the IRS will come for you…but there are ways to fix it.

The first fix is to take out the excess contribution to the Roth as well as any earnings that money generated while in the account.  You have until the final due date (October 15 including extensions of the following year) to do this.  If not, you’ll be hit with a 6% penalty for excess IRA contributions.

The other method is to re-characterize your Roth account.  You need to do a direct transfer from the Roth into a traditional IRA.  It’ll be like you never contributed to the Roth and anyone can have a traditional IRA regardless of their income.  Though you may not be able to take a deduction if your income is too high.

Need help fixing a mistake concerning your IRA?  Looking to open one up?  Contact a tax expert at the IRA Financial Group who can walk you through the process.

Dec 14

Greed is Bad with Your IRA

Many people are using their retirement plans as money pots to invest in start-up businesses, gold speculation and private equity investments.  They’re missing the point that 401k plans and IRAs are for their retirement, not some get rich quick scheme.  Sure there are big tax advantages to such moves, but more often than not, these plans fail and you’re screwed in retirement!

There are many advisers out there charging a fee to help you use your retirement plan to start businesses.  The gist is that they will roll your funds into a plan that you can invest in a small business or franchise inside your retirement plan penalty free.  The main strategy is to start a business and adopt a 401k plan.  The existing plan is rolled into the new one, which is invested in the new business.

Often these are called Rollovers as Business Start-Ups plan or ROBS.  An IRS study in 2009 found that many of these businesses fail, leaving you with nothing at retirement.

Another plan people tend to abuse is the self-directed IRA.  These plans allow you to invest in so much more than your regular IRA.  You can invest in precious metals, rental properties, oil and loans.  The fastest growing investment is commodities, particularly gold bullion.  Taxes are deferred for many years and if it’s a Roth IRA, the distributions are tax-free!

The basic principle of this article is to not be greedy with your retirement funds.  You need a trusted financial adviser that’s looking out for you and not his or her own bottom line.  The tax experts at the IRA Financial Group are here for you.  Give them a call at 800.472.0646 or visit our website at for a free consultation.

Dec 13

Warning About Roth IRA Conversions

I ran across a good article over at about bad advice being given concerning converting a Traditional IRA to a Roth IRA.  Many people are converting to Roth IRA this year because of the pending higher taxes for 2013.  The biggest concern is for those trying to circumnavigate the income limits of the Roth IRA.  Anyone can convert from a traditional to a Roth IRA but the assumption is that since you would be converting the same amount you contributed to the traditional IRA and therefore would owe no taxes on the amount converted to the Roth.  Herein lies the confusion.

From the article: “The IRS does not allow converters to specify which dollars are being converted as they can with shares of stock being sold; for the purposes of determining taxes on conversions the IRS considers a person’s non-Roth IRA money to be a single, co-mingled sum.  Hence, if a person has any funds in any non-Roth IRA accounts, it is impossible to contribute to a Traditional IRA and then “convert that account” to a Roth IRA as suggested by various pundits… – conversions must be performed on a pro-rata basis of all IRA money, not on specific dollars or accounts.”

Many people started their working lives before Roth IRAs were even available and have non-Roth IRAs.  Moreover, many rolled over old 401k plans into IRAs and others have had SEP or SIMPLE IRAs.  All of these situations require pro-rata calculations when converting.  Therefore, many people will run into this problem when trying to convert non-deductible portions of their traditional IRA balances into Roth IRAs.

Conversions are complex and with the end of the year drawing ever closer, it’s best to speak with a professional about any Roth conversion.  Contact the tax experts at the IRA Financial Group now so you don’t fall into this trap!

Dec 12

Prohibited Transactions Using a Self-Directed IRA

Pursuant to Internal Revenue Code Section 4975, a Self Directed IRA is prohibited from engaging in certain types of transactions. The types of prohibited transactions can be best understood by dividing them into three categories: Direct Prohibited Transactions, Self-Dealing Prohibited Transactions, and Conflict of Interest Prohibited Transactions.

Direct Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Direct Prohibited Transaction” generally involves one of the following:

4975(c)(1)(A): The direct or indirect Sale, exchange, or leasing of property between an IRA and a “disqualified person”

Example: Jack sells an interest in a piece of property owned by his IRA to his son.

4975(c)(1)(B): The direct or indirect lending of money or other extension of credit between an IRA and a “disqualified person”

Example: Peter uses IRA funds to lend an entity owned and controlled by his mother $60,000.

4975(c)(1)(C): The direct or indirect furnishing of goods, services, or facilities between an IRA and a “disqualified person”

Example: Sara owns an apartment building with her IRA and hires her father to manage the property.

4975(c)(1)(D): The direct or indirect transfer to a “disqualified person” of income or assets of an IRA

Example: Steve uses his IRA to purchase a rental property and hires his friend to manage the property. The friend then enters into a contract with Steve and transfers those funds back to Steve.

Self-Dealing Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Self-Dealing Prohibited Transaction” generally involves one of the following:

4975(c)(1)(E): The direct or indirect act by a “Disqualified Person” who is a fiduciary whereby he/she deals with income or assets of the IRA in his/her own interest or for his/her own account

Example: Jessica who is a real estate agent uses her IRA funds to buy a home and earns a commission from the sale.

Conflict of Interest Prohibited Transactions

Subject to the exemptions under Internal Revenue Code Section 4975(d), a “Conflict of Interest Prohibited Transaction” generally involves one of the following:

4975(c)(i)(F): Receipt of any consideration by a “Disqualified Person” who is a fiduciary for his/her own account from any party dealing with the IRA in connection with a transaction involving income or assets of the IRA

Example: Michelle uses her IRA to lend money to a business that she works for in order to secure a promotion.

Statutory Exemptions

Under Internal Revenue Code Section 4975(d), Congress created certain statutory exemptions from the prohibited transaction rules outlined under Internal Revenue Code Section 4975(c). For these certain transaction, Congress believed there is a legitimate reason to permit them. For these transactions, Congress has issued a blanket statutory exemptions permitting these transactions assuming that certain requirements specified are satisfied. Below is a list of some of the statutory exemptions found in Internal Revenue Code Section 4975(d) that apply to IRAs:

  • Any contract with a disqualified person for office space, legal, accounting or other services necessary for the operation of the IRA as long as reasonable compensation is paid.Note – this exemption does not apply to an IRA fiduciary (the IRA holder) as per Treasury Regulation Section 54.4975-6(a)(5).
  • The provision of ancillary services to an IRA by a bank trustee
    • Receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries;

Life Insurance and Certain Collectibles

In general, an IRA cannot Invest in life insurance contracts or collectibles defined below:

  • Any work of art
  • Any metal or gem
  • Any alcoholic beverage
  • Any rug or antique
  • Any stamp
  • Most coins

Types of Collectibles That may be Purchased Using IRA Funds

  • one, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure);
  • one ounce silver coins minted by the Treasury Department;
  • any coin issued under the laws of any state;
  • a platinum coin described in 31 USCS 5112(k) ; and
  • gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).

S Corporation Stock

Because of the shareholder restrictions imposed on “S” Corporations, an IRA cannot own stock in an S Corporation. Note – an IRA can own stock in a “C” Corporation

In general, an IRA can generally make any investment other than the following categories:

  • Collectibles
  • Stock of an S Corporation
  • Life Insurance
  • Any investment involving a “disqualified person”

For more information and to set up your own self-directed IRA, contact the IRA Financial Group now!





Dec 11

5 Things to Know About an Inherited IRA

When you set up an IRA, you should always choose a primary beneficiary (such as a spouse) and a secondary beneficiary (such as a child).  The spouse can always choose to disclaim the account and pass it directly to a child.  Also, since setting up an Inherited IRA is a complicated process, always seek professional advice to walk you through it.

Here are five useful tips when it comes to Inherited IRAs:

1. Spouse v. Non-Spouse – The rules are different for a spouse than for everybody else.  The spouse can elect to be treated as the owner of the IRA as opposed to the beneficiary.  They can continue to contribute to the IRA and required distributions are different.  Check out IRS Publication 590 for more info.

2. The 60-day Rule – This rule allows you to take money out of an IRA penalty and tax-free so long as you put it back in the same type of IRA within 60 days.  However, this does not apply to an Inherited IRA.  If you want to move the account, it must be via direct transfer.

3. Distribution Options – For non-spouse beneficiaries, there are two ways to take distributions.  You can withdraw money each year based on your life expectancy (also known as the “stretch option”) or you can choose to withdraw all the money within five years of the original owner’s death.  There are no early withdrawal penalties but they are subject to income tax.

4. Make Up Your Mind – If you opt for the stretch option, you have until December 31 in the year following the original owner’s death to make your first required minimum distribution.  Failure to do so will result in having to follow the five year rule.

5. Remember Mandatory Distributions – If the original owner was at least 70 1/2, he/she needed to make required minimum distributions.  You need to find out of he/she made the RMD in the year they passed.


Contact a tax expert at the IRA Financial Group to help with all your IRA needs including Inherited IRAs.  Follow us on Twitter! @BergmanIRA