Is a Roth IRA Conversion Right For Me?
If you have a traditional IRA, you may have already considered converting to a Roth IRA. A Roth IRA conversion refers to taking all or part of the balance of an existing traditional IRA and transferring it into a Roth IRA account. During this transfer, you would pay taxes on the funds at ordinary federal and state income tax rates, but then the account would grow tax-free and could be withdrawn tax-free as long as it has been 5 years since the conversion and the account owner is 59 1/2 years or older. A Roth conversion is a great tax planning strategy, but it is not right for everyone.
Questions to consider when deciding if a Roth IRA conversion makes sense for you:
Will You Need The Money In Five Years Or Less?As a conversion must be held in the account for 5 years to enjoy the tax benefits, you must be certain that you won’t need the money for at least 5 years. If you do need the money in 5 years or less, the discussion should focus on investment strategies to preserve the account as much as possible so you ensure it is there when needed and accessible.
Will Your Tax Bracket Be Higher In Retirement?If you think that your tax bracket will be higher in retirement, or that tax rates will increase, you may want to consider a Roth conversion to pay taxes at a lower rate and enjoy tax-free income in retirement. If your taxes rise because of increases from the government—or because you earn more, putting you in a higher tax bracket—a Roth IRA conversion can save you considerable money in taxes over the long term.
Do You Have Funds Set Aside To Pay The Income Taxes?Ideally, the money to pay the taxes should not come from your retirement savings. If you have to use the IRA to pay the taxes, it may be better to defer the conversion. Why? For one, the money you use from the traditional IRA to pay the taxes is no longer in the account to benefit from long-term growth. In addition, if you are under 59 1/2, the funds you used to pay the conversion tax would be treated as an early distribution. For example, if you want to convert $60,000 to a Roth IRA and are in the 25% federal tax bracket, setting aside state income taxes, you would owe the IRS $15,000. The penalty tax is 10%, meaning you’ll need to pay an additional $1,500 in taxes you may not have anticipated.
Recent Volatility In The Market
With the election passed, and retail investors buying into highly shorted stocks, should we be concerned about ongoing market volatility? With the Covid-19 pandemic continuing, we may see some additional market volatility, but we do not believe this is a sign of an overall unhealthy market.
As the coronavirus vaccine is being distributed nationwide, business restrictions should be lifted resulting in workers getting back to work. As a result, we should see continued economic momentum throughout 2021. However, we cannot rule out a correction as valuations appear to be high.
We are not recommending any significant changes currently with your portfolios, but as always, if you have any questions, please do not hesitate to call our office.
The Importance of Age 18 in Special Needs Financial Planning
Although special needs financial planning is a lifelong endeavor that must be reviewed often, age 18 is a milestone for many families as their child is now legally considered an adult. For families that did not qualify for Supplemental Security Income (SSI) due to excess income and/or assets while their child was a minor, age 18 is generally the age families start to file for SSI. The SSI rules change at age 18 as the parents income and assets are no longer factored, or “deemed”, to the child. As a result, only the child’s assets and income are factored from a financial eligibility standpoint after age 18. Once your child turns 18, if they have less than $2,000 of countable assets and no significant income, they should consider filing for SSI.
Another important strategy to consider is filing for guardianship. At age 18, all individuals are legally adults and will have to make their own financial and medical decisions. If they cannot sign a health care proxy and durable power of attorney, or cannot otherwise make these decisions on their own, the family should consider filing for guardianship. Guardianship must be discussed very carefully and all less restrictive options considered, but sometimes guardianship is the most appropriate option to ensure your child’s needs are met.
Pros and Cons of the ABLE Account
After receiving a few calls regarding the ABLE Account, I thought I might draft a quick summary of the benefits and drawbacks of the ABLE account. First, the ABLE account is a relatively new planning strategy that allows individuals receiving means-tested benefits, such as Supplemental Security Income (SSI) to shelter some of their income and/or assets from the $2,000 asset limit. These funds can be used for qualified expenses such as basic living expenses, health & wellness, housing, transportation, education & training, and legal and accounting fees. The ABLE account is a very important strategy in special needs financial planning.
There are several advantages of using the ABLE account. As noted above, the funds in the ABLE account are excluded from the asset limit common with means-tested programs such as SSI and Medicaid. Also, the use of the ABLE account can foster independence for the beneficiary as they may be able to manage the account, if appropriate.
As with most planning strategies, there are usually drawbacks to consider before moving forward. You must be aware that any funds left in the account at the death of the beneficiary may be subject to estate recovery for Medicaid benefits. Therefore, ABLE accounts should be used with other strategies to limit exposure to estate recovery.
IRS Issues Final Regulations For ABLE Accounts
The Internal Revenue Service finalized two previously issued proposed regulations. Eligible individuals may now put more money into their ABLE accounts and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. Also, certain contributions made to ABLE accounts by low- and moderate-income workers may now qualify for the Saver’s Credit. Also, before January 1, 2026, funds are allowed to be rolled over from a designated beneficiary’s 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account cannot exceed the annual ABLE contribution limit. For the full release from the IRS, see here.
A Letter of Intent Will Be an Important Part of Your Special Needs Plan
Once you receive the initial diagnosis and start receiving services, this may be the ideal time to begin financial planning. A good first step is the letter of intent. The goal of a letter of intent is to memorialize your knowledge of your child’s needs so that you may guide future caregivers, guardians and trustees in providing the best possible care to your child. A letter of intent is one of the most important estate planning documents a parent can prepare, although it is not a formal legal document that must be created by an attorney. Simply put, a thoughtful letter of intent ensures that those who may care for your child will be best prepared to care for your child.
Some areas to address in your letter of intent may include:
Medical history
Medications
Daily schedule
Living arrangements/residential housing
Social activities
Life skills
Family history
Dietary restrictions
Education
Religion
Government benefits
Behavioral issues
First Steps In Special Needs Financial Planning
It all begins with an idea.
Where Do I Begin?
The Special needs planning process involves multiple legal and financial strategies that sometimes overlap. Benefits programs such as SSI and Medicaid should be considered. These strategies may need to be reviewed as your child grows. There are a few questions you should discuss before meeting with your advisor.
Who should be named as guardian for our child?
Will our family need a special needs trust?
How will we pay for the care my child will need when we are gone?
Will my child qualify for disability benefits now, or in the future?
What will happen to our special needs plan if I become disabled or require long-term care?
Where will my child live when I am gone?
If you have not created a household budget, that may be a great first step in your planning. If you have a budget in place, begin to look for areas that have increased due to caring for your special needs child. Whether you child requires services such as ABA (applied behavioral analysis) therapy, speech therapy or occupational therapy, these expenses can add up. Determine if there are ways you can adjust your saving or spending to accommodate these additional expenses.