A continuation from last weeks article answering common questions about IRAs.

Nine Frequently Asked Questions About IRAs

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Question: I am 74-year-old single male. I currently have a traditional IRA that is worth approximately $170,000. My main purpose is to give this to my children upon my death. Would it be better to leave it in the traditional IRA or convert it to a Roth IRA?
Answer: Converting to a Roth is probably the way to go. You will no longer have to take mandatory distributions. You will save your children the trouble of paying federal income tax on your IRA after your death. And you will reduce your taxable estate by the amount of the tax bill on your Roth conversion. (Because you are over 59 1/2, you can use your IRA assets to pay the tax, penalty-free. Or you can pay the tax from your other assets, preserving the value of your IRA.)

Once you die, a Roth IRA is treated like any other IRA. That means that if your spouse is your beneficiary, she can treat the Roth IRA as her own. So no minimum withdrawals are required as long as she lives. If your beneficiary is not your spouse, the following rules apply.

If your children are named as your IRA beneficiaries, they can start to liquidate the IRA beginning on Dec. 31 following the year of your death. That liquidation must be completed over a period based on their life expectancies. Your children would also have the option to leave the money in the account, and liquidate it by December 31 of the fifth year after your death.

Another thing to keep in mind is that earnings must be in the Roth for at least five years before they can be withdrawn tax-free. So, if the Roth IRA is not five years old, beneficiaries taking withdrawals need to follow the ordering rules for Roth IRAs. That means the first withdrawals will come from annual after-tax contributions. The next layer comes from contributions of converted traditional IRA money first the taxable amount, then from the nontaxable amount (if any). The last layer comes from Roth IRA earnings.

Question: Can I roll over only the nondeductible contribution portion of my traditional IRA to a Roth IRA and thereby avoid the taxes that would be due on a rollover of my IRA earnings?
Answer: No. “You can’t just take out the cream,” says Ed Slott, a CPA in Rockville Centre, N.Y., and publisher of the newsletter. If you choose to do a partial conversion, every dollar you convert will be treated as a “blended” dollar. For example, if 20% of your current IRA assets consists of nondeductible contributions and the remainder is deductible contributions and earnings, you will owe income tax on 80 cents of each dollar you convert to Roth IRA status. Note: If you have multiple IRAs, you must add the assets together when calculating what portion of your partial conversion will be taxable.

Question: My spouse and I are both self-employed and have each been contributing to a SEP IRA. Can we convert this SEP IRA to a Roth IRA?
Answer:Yes. The tax regulations allow you to directly convert a SEP account into a Roth IRA. However, after the conversion, you can’t continue making deductible SEP contributions to what is now a Roth IRA. So, you’ll have to set up a new SEP account if you want to make further deductible pay-ins.

Question: If I convert from a traditional IRA to a Roth, is the gain considered ordinary income or a long-term capital gain?
Answer: The gain in your IRA is taxed as ordinary income. So, your federal income tax rate can be as high as 35%.

Question: I am single and retired with an AGI well under $110,000 but no earned income for 2012. Can I contribute to a Roth IRA for this year?
Answer: Unfortunately not. Annual contributions to Roth IRAs, just like traditional IRAs, can only be made for years when you have earned income. However, you can convert your traditional IRA into a Roth if you are willing to pay the upfront tax hit. There is no earned income requirement for conversions, there is no longer any restriction on Roth conversions for those with high incomes.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

There are so many questions surrounding retirement savings that it can be difficult to determine the right answer for your specific situation. The following article outlines some commonly asked questions about IRAs.

Nine Frequently Asked Questions About IRAs

visit SmartMoney to view the complete article

Question: How do I figure out the tax owed on an early withdrawal from a Roth IRA?
Answer: If you do a conversion, your Roth IRA can include money from (1) your annual after-tax contributions (2) contributions from one or more converted regular IRAs, and (3) earnings on both types of contributions. To figure out what happens when you later take Roth account withdrawals, you need “ordering rules.”

Withdrawals are treated as coming first from your annual after-tax contributions. As advertised, this layer of money can always be taken out tax-free at any time. Beyond this easy-to-understand rule, be careful.

The next layer comes from contributions of converted traditional IRA money. Withdrawals come first from the taxable amount, then from the nontaxable amount (if any).

You’ll generally owe a 10% penalty if you withdraw the taxable part of a conversion contribution within five years of the conversion. Withdrawals after age 59 1/2 are excepted, and the other exceptions to the 10% premature withdrawal penalty (death, disability, etc.) apply as well. The good news: After five years, this penalty no longer poses a threat. After you’ve yanked out the taxable part of the conversion contribution, you can withdraw the nontaxable part at any time without any tax or penalty.

To sum up, you don’t have to worry about any adverse tax consequences if you wait at least five years before withdrawing any funds from conversion contributions. After all contributions are withdrawn, you are obviously dipping into Roth account earnings. This money comes out tax-free as long as (1) the account has been open more than five years and (2) you are at least age 59 1/2, disabled, or dead. Withdrawals of up to $10,000 for qualified home purchase costs can also be taken tax-free after five years. Withdrawals of earnings that don’t meet these rules are hit with income tax and, in most cases, the 10% premature withdrawal penalty tax as well.

Question: Can a nonworking wife make a deductible contribution to her spousal IRA for 2012, assuming that the husband’s earned income is $150,000, he is an active participant in an employer’s retirement plan, and the couple file a joint return?
Answer: Yes. A spouse who is not covered by a qualified retirement plan can make a $5,000 deductible IRA contribution for 2012 ($6,000 if the nonworking spouse is age 50 or older at yearend) as long as the couple’s adjusted gross income doesn’t exceed $173,000. However, advises New York financial planner Joel Isaacson, it may be wiser for the wife to open a Roth IRA instead. The contribution is not deductible, but withdrawals from Roth IRAs are tax free. Traditional IRA withdrawals, on the other hand, are taxed as income. So, if retirement is still years away and you don’t anticipate being in a much lower tax bracket after retirement, a Roth IRA is probably the better choice.

Deductible IRA Eligibility
Question: I am single and work two jobs. At one, I am covered by a pension plan. At the other, I am not. With regards to IRA deductibility, am I covered by a pension plan or not?
Answer: “Participation in a company plan at any time during the year triggers the deduction phase-out rules,” says CPA Ed Slott, editor of the IRA Advisor newsletter. That might make you ineligible because IRA deductibility for singles phases out between $58,000 and $68,000 for 2012.

Question: Should I convert to a Roth IRA? Here’s my situation. I have about $329,000 in my IRAs. I figure the tax bill on the rollover would be about $107,000, which I can pay from the $150,000 I have in taxable mutual fund accounts. I am 60 years old, semiretired and don’t contribute anything to the IRAs. My dilemma: Would I still benefit from a conversion in the long run, considering the money the $107,000 is currently earning? I had planned to use the taxable funds during retirement if needed, and not the IRA money. All the programs and worksheets don’t make allowances for calculating lost gains on the money used to pay taxes on the rollover.
Answer: You’re on to something here. The tax bill on a Roth IRA rollover is actually larger than it seems at first because you pay the bill with money that would otherwise be invested. So to fairly evaluate the benefit of a rollover, you should compare the after-tax value of your traditional IRA at retirement to the following: the value of your converted Roth account on the same date, minus the future value of the money you would pay in income taxes on the conversion. Sound confusing? Don’t worry. We built a Roth IRA Conversion Calculator (inspired by your question) to help you figure it out.

To be continued…

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

For 2012, you can contribute up to $5,000 annually to your IRAs ($6,000 if you are 50 or older by the end of the year), assuming you have at least $5,000 ($6,000) in earned income for the year. The following articles provides additional information on the contribution limits for your IRA.

visit Investing For Beginners to view the complete article

Regardless of the type of IRA you choose, the Federal government imposes annual contribution limits. The chart below shows the maximum dollar amount individuals are allowed to deposit into their IRA each year. After 2010, the contribution limit will raise in increments of $500 depending upon the level of inflation.

Deposits into your IRA do not have to be made at the same time. (For example: a 35 year old woman could deposit $416.67 into her IRA each month. At the end of the year, it would add up to the maximum $5,000.)

Due to the tax advantages of investing through an IRA, it is normally best to try and make the maximum annual contribution. The use-it-or-lose-it nature of contributions makes this all the more important (e.g., If you deposit $3,000 in 2009, you can’t deposit $7,000 in 2010 [the $5,000 + the $2,000 you didn't deposit the prior year]. You cannot contribute more than the total allowable amount during any fiscal year.)

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Questions about contributing to a retirement account are common. The following information provided from the Internal Revenue Service outlines some of the basics about the rules of traditional or Roth IRAs.

visit irs.gov to view the the complete article and additional information

Can I contribute to a traditional or Roth IRA if I’m covered by a retirement plan at work?

Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan.

For 2011 and 2012, you can contribute up to $5,000 annually to your IRAs ($6,000 if you are 50 or older by the end of the year), assuming you have at least $5,000 ($6,000) in earned income for the year.

Traditional IRAs
If you or your spouse is covered by an employer-sponsored retirement plan, and your income exceeds certain levels, you may not be able to deduct your entire contribution. See the discussion of IRA deduction limits. See Publication 590, Individual Retirement Arrangements (IRAs), for the rules on who can contribute, what compensation to use, and when and how to make IRA contributions.

Roth IRAs
Your allowable contribution may be reduced or even eliminated depending on your MAGI and your filing status.

If married filing jointly - maximum Roth IRA contribution is allowed if modified adjusted gross income is:

• 2011 – under $169,000
• 2012 – under $173,000

Contributing to both traditional and Roth IRAs
There is no limit on the number of Roth and traditional IRAs you can own; however, your combined annual contributions to all of them cannot exceed the maximum annual contribution limit ($5,000; $6,000 if 50 or older).

If you are in a SEP or SIMPLE IRA plan
In most cases you can make a regular IRA contribution ($5,000/$6,000) to your SEP IRA in addition to your employer’s contribution. You cannot make regular IRA contributions to a SIMPLE IRA. A Roth IRA cannot be used to hold contributions made under a SEP or SIMPLE IRA plan.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.