Dear Tax Talk,
I rolled over my traditional individual retirement account into a Roth IRA in 2010. It was $19,000. Do I have to pay taxes on that, or can I get around not paying taxes? Can I change it back? I am 59 and do not need this money. I did not pay taxes in 2010 or 2011. Thanks!
– Jim

Dear Jim,
Why would you think that you don’t have to pay tax on a Roth IRA conversion? Special rules allow you to spread out the tax for 2010 conversions, but you still have to pay the tax. if you converted amounts from a traditional IRA in 2010 to a Roth IRA, any amount you have to include in income as a result of the conversion is generally allocated in equal amounts in 2011 and 2012. if you already filed your 2011 tax return, you’ll need to amend it to include half of the conversion in income. if you extended your return to the October deadline, you’ll need to include that amount when you do file. The balance would go on your 2012 tax return.

Although you can recharacterize prior rollovers, this would have had to be done by the due date of the 2010 tax return, including extensions. a special relief provision would give you an additional six months beyond the extended due date to have made the recharacterization. however, even if you filed for an extension of your 2010 tax return, it is too late to make that recharacterization.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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With the debt deal behind us, it’s time to pick up the pieces and ask the question: “What happened?”? as it turns out, very little was accomplished, at least as it pertains to the specifics of future changes.? while most of the hard work has been delayed a short while, certain decisions were made. One clear line in the sand was the carving out of Social Security from any automatic reduction in spending. (The same cannot be said for Medicare).? still, as I discuss in Should your Retirement Planning Change Due to the New Debt Deal? you can expect major changes in the near term to Social Security.

The New Debt Deal and Social Security ? Should your Retirement Planning Change Due to the New Debt Deal? originally appeared on About.com Retirement Planning on Thursday, August 11th, 2011 at 13:00:34.

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The New Debt Deal and Social Security ? Should Your Retirement Planning Change Due to the New Debt Deal?

How can you beat the odds if you want to join the boomerpreneur boom and start your own company after 50? MONEY put that question to small-business experts and dozens of fiftysomething entrepreneurs for their best advice.

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Q: Last week you answered my question about doing a rollover from my 401(k) plan to an IRA. You said that if I am under 59½ and withdraw money from my retirement plan I would pay a penalty in addition to taxes unless I meet certain exceptions. What are those exceptions?

A: the penalty for taking an early distribution from your retirement account if you are under age 59½ is an additional income tax of 10percent added to the regular tax you would pay on the distribution. the 10percent additional tax does not apply to the following payments from your retirement plan:

1. Payments made after you separate from your job if you will be at least 55 in the year of your separation.

2. Payments that start after you separate from your job if they are paid at least annually in equal or close to equal amounts over your life or life expectancy or the joint lives or joint life expectancy of you and your beneficiary.

3. Payments from a government defined benefit pension plan made after you leave your job if you are a public safety employee and you are at least 50 in the year you separate from service

4. Payments made due to disability.

5. Payments of Employee Stock Ownership Plan dividends.

6. Corrective distributions of contributions that exceed tax law limitations.

7. Cost of insurance paid by your retirement plan.

8. Withdrawals of contributions made under special automatic enrollment rules pursuant to your request within 90 days of

enrollment.

9. Payments made directly to the government to satisfy a federal tax levy.

10. Payments made to a former spouse under a qualified domestic relations order (QDRO).

11. Payments up to the amount of your deductible medical expenses.

12. certain payments made while you are on active duty if you were a member of a reserve component of the Armed Forces called to duty after Sept. 11, 2001 for more than 179 days.

13. Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first contributions.

Q: if I roll over my retirement plan to an IRA and then withdraw money before I reach age 59½, will the 10 percent penalty apply?

A: yes, unless an exception applies. the exceptions for an IRA are the same as those listed above except as follows:

1. there is no exception for payments after separation from sevice that are made after age 55.

2. the exception for a QDRO does not apply. there is a special exception for IRAs that allows you to make a tax-free transfer directly to an IRA of a spouse or former spouse as part of a divorce or separation agreement.

3. the exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from your job.

4. there are additional exceptions for payments for qualified educational expenses, payments of up to $10,000 that you use to make a qualified first-time home purchase, and payments after you have received unemployment compensation for 12 consecutive weeks (or if you are were self-employed and otherwise would have been eligible to receive unemployment compensation).

Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth, inc., in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or ken@montereypw.com.

<a href="http://www.montereyherald.com/business/ci_20583454/kenneth-petersen-401-k-plan-early-distributionstag:news.google.com,2005:cluster=http://www.montereyherald.com/business/ci_20583454/kenneth-petersen-401-k-plan-early-distributionsWed, 09 May 2012 17:22:54 GMT”>Kenneth Petersen: 401(k) plan early distributions

SEP-IRAs (Simplified Employee Pensions) are an excellent retirement planning opportunity for the self-employed. With high contribution limits and late deadlines, they provide for great flexibility and savings.

Is a SEP-IRA for You?

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You have many options here in creating the low risk investments. you don’t to create assets in high risk endeavors or futures. you can make assets in lots of ways that are most risk-free and which will provide you with good dividends during a period of time. Precious metals signify the actual forms of safe [...]

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Something that I haven’t quite got my head around is how so many (thousands per month) people can seemingly ‘afford’ to purchase homes in the Vancouver area considering the prices at which local homes seem to be sold at. Greater Vancouver benchmark for all dwelling types is just about $520,000 as of June 2009.

Let’s look at a sample first time home buyer.

Let’s imagine John and Jenny want to get started on the property ladder after getting married last year. they have saved $10,000 over the past couple years and they have about $25,000 in their RRSP accounts which they intend to use toward a property purchase under the Home Buyer’s Plan. Jenny’s parents have offered to help them purchase their first home as well with an extra $20,000 ‘loan’ to be used toward a down payment that may never need to be paid back. they don’t have any credit card debt but are making payments of a combined $900 per month on two car loans which have 3 years left on them. Combined down payment = $55,000.

John makes $60,000 per year working in the technology field and his job prospects are very good given his education and work experience. Jenny works in sales and her income has averaged $50,000 per year over the past two years. although she does okay at work, her job prospects are sketchy as the company she works for has seen business drop off considerably and has laid off a few people in the last few months. gross Annual Income = $110,000. Net Monthly Cashflow = $6,000.

They are wondering what they are able to afford (apparently they don’t have a budget) so they go talk to a mortgage broker about their situation. The mortgage broker punches some numbers into the computer and comes up with a preapproval amount of $430,000. John and Jenny are amazed, they wonder what they have done to make the bank love them so much! this pre-approval emboldens them.

They call up a realtor and begin looking at homes in the $400,000 to $500,000 price range. The realtor shows them several condos and a few townhouses which meet their criteria and they settle on a nice townhouse and make an offer for $450,000 which is accepted and the deal is drawn up.

John and Jenny put $45,000 down by using the parent’s money and withdrawing from their RRSP accounts under the Home Buyer’s Plan. they have paid CMHC and legal fees of $9,000 which gets added to their mortgage so they owe a total of $414,000 and they have decided to amortize over 35 years (they will be 65 when it is finally paid off if they stick to the original plan with the original rate) with a 5 year term and a rate of 4.5%. they will be making principal and interest payment of $1,950 per month, they have added life insurance to the mortgage ($50) and are paying property tax monthly with their mortgage payment ($200). they now get to pay strata fees of $200 per month as well.

Let’s have a look at John and Jenny’s monthly budget.

John and Jenny’s total monthly obligations are:
Mortgage – $1,950
Life Insurance – $50
Taxes – $200
Strata – $200
Car Payments – $900
Food – $600
Fuel – $400
Home and Auto Insurance – $400
Telephone/Internet/Cable – $300
Clothing/Other/Misc – $300
Entertainment/Vacations – $500
RRSP contributions – $200
Total = $6,000

This couple can have a ‘reasonable’ lifestyle based on these numbers but let’s look a little closer.
Let’s test this for several common risks:

Death – The mortgage is life insured, the survivor would be financially okay so long as the life insurance remains in place.

Divorce – they are in bad financial shape if this happens. Neither one of the two could afford the townhouse if they split up and the townhouse would need to be sold quickly.

Children – they are in bad financial shape if they have kids. Not only would they have extra monthly expenses, which they don’t have room for in the budget, they would also have less income for a period of time as it is typical for the mother to take some time off work after giving birth. Even if mom went back to work there are daycare costs, which are not small.

Job Loss – they are a financial disaster if one of the two loses employment of any extended period of time. they would be forced to make some significant life changes and likely sell the home.

Interest Rate Rise at Renewal – If interest rates rise by 100-200 basis points they would be extremely rough financial shape. Unless they had an increase in income, they would likely be forced to re-amortize the mortgage and/or make other lifestyle changes. If rates increased more than 200 basis points, they would not be able to maintain their current lifestyle in any shape or form.
1) 100 basis point rise to 5.5%, maintain original amortization, payments rise to $2180 / month
2) 200 basis point rise to 6.5%, maintain original amortization, payments rise to $2420 / month
3) 300 basis point rise to 7.5%, maintain original amortization, payments rise to $2670 / month

Time – this is the most insidious risk of all and the least recognized. As a financial planner, I see many people who have put themselves into this type of scenario and they manage to muddle through life, manage to pay off a modest home by retirement and save a very modest sum of money. they retire at 65 and have a fairly low standard of living since they have no real significant savings and no pensions. If none of the above risks occured and they both managed to work a full career, get regular raises, contribute to CPP, receive OAS and have some modest RRIF withdrawals, they would make it through life without severe financial hardship but as a debt slave. The bank would have made over $400,000 from them in interest payments and they would have never saved much. they would live month to month their entire life and financial freedom would be a mere dream as they play the lottery each week hoping their number is drawn.

The reality is that the risks noted above are very real and for John and Jenny’s situation to work out they need everything to work perfect, with no hitches, glitches or problems. this seems unlikely to me. It would be far better for them financially to leave themselves more room in their monthly budget so that they could:
1) Live / survive with only one income
2) Maintain mortgage amortization if interest rates rise
3) Speed up mortgage pay down by making extra payments as they receive raises if things work out well.
4) Increase their personal savings to RRSP and/or TFSA to ensure they have money for the unexpected and for retirement.

There are only two ways for John and Jenny to make the above work in a sustainable manner:
1) Continue renting and saving aggressively
2) Buy a much cheaper home and aggressively pay down the mortgage

What are your thoughts? do you know John and Jenny? I do.

Personal Finance and Home Purchasing