Tom's Blog

This is the question on a lot of high-income earners minds this year. Because this is the year that you can convert your regular IRA to a Roth IRA regardless of your income. And there is no penalty for converting. You just have to pay the tax as if you had taken a normal distribution of the IRA (no early distribution penalty tax).

Corey, one of our School of Tax Strategy students, has been very patiently waiting for an answer to the following questions about Roth IRA conversions:

Q: We have traditional IRA's(after tax contributions) that we are planning on converting to Roth IRA's this year. My Wife has a current Simple IRA from her work. Does she need to include the amount of the Simple IRA in the "total of all IRA's" for the pro-rata basis to figure the taxable amount of the conversion. Thanks

A: You only have to include the IRA's that you are converting. If you have a Simple IRA at work, you will have to ask your employer if there is a way to convert this to a Roth separately.

Q: For high income earners, I wanted to know if you thought it better to used saved money to contribute to a traditional IRA (with thoughts of conversion to a Roth IRA in 2010 and beyond) or to use the money for a down payment on real estate to use as a rental. Thank you. Corey

A: The answer to this question really depends on your wealth strategy. Everyone needs to create their own personal wealth strategy. This strategy should focus on a particular type of investing so you can become an expert in that type of investing. You could be focusing on real estate, paper assets (e.g., the stock market), commodities or business. Your focus will determine the answer to this question.

If you decide to invest in real estate, then definitely stay out of the IRA, Roth or otherwise, as it will diminish your ability to leverage your real estate and you will lose all of the tax benefits that real estate has to offer.

If you decide to invest in business, then stay out of the IRA since business income is taxed to IRA's just as if you had earned it outside of the IRA.

If you decide to invest in paper assets, using a Roth IRA can be very beneficial, as the income and gain will never be taxed.

Commodities, such as oil and gas and gold and silver, can be good or bad in an IRA. Oil and gas has tremendous tax benefits right now, so I would not use an IRA for this investment. But a Roth IRA can be a great place to invest in gold and silver, since you will never be taxed on the gains.

So start by determining your wealth strategy. If you would like help with this, please contact our office at 866.467.5809 and ask for Wendy, or email us at cs@provisionwealth.com.

Warmest regards,

Tom