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Financial Planning > Tax Planning

The Tax-Free Investing Opportunity

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How many of your clients could benefit from tax-free investing?

Since we’re talking about a one-time only Roth IRA opportunity, the answer depends on several client-specific factors and variables. But what is certain is that you’ll have the opportunity to help those clients who can benefit, starting in 2010 when the Roth IRA earnings cap vanishes, so that everyone, regardless of income, will be able to convert funds from a traditional IRA to a Roth IRA. The added benefit? Investors who make the conversion in 2010 will get two years instead of one to pay the income tax bill on the conversion. The opportunity to create and significantly fund a Roth using accrued plan assets can be a tremendous one for a healthy portion of advisors’ clients, especially those who are still a decade or more away from retirement age.

While this major tax-savings opportunity has flown under the radar for many, the point to remember is that maximizing the tax benefits of this golden opportunity will take advanced planning beginning now.

But what if a client’s assets are locked in a previous employer’s sponsored 401(k) plan, a SEP-IRA, a profit-sharing plan or even a defined benefit plan? Advisors can still help clients access these funds for conversion to a Roth. Self-directed accounts serve as an approved, tax-advantaged wrapper that the IRS allows investors to use to free themselves of some of the constraints traditional retirement plan sponsors have imposed. By creating a self-directed Roth IRA, or an individual(k) plan with a Roth component (for the self-employed), advisors and their clients get the advantage of being able to choose from a wider universe of investments, which goes beyond mutual funds, stocks, bonds, and money markets to include real estate, private equity, joint ventures, and even business ventures in their self-directed portfolio.

Qualified administrators of self-directed IRAs work readily with advisors and their clients, even when investment sums and account sizes fall well below private banking levels. The job of a self-directed IRA administrator (like us) is to handle all the paperwork required by investors and the IRS, leaving you to the business of doing what you do best–planning and investing for clients’ financial well-being.

In the case of the 2010 Roth IRA window of opportunity, self-directed IRAs allow people to convert their traditional IRA or other tax-advantaged retirement plan into this account that has greater investment flexibility than any other tax-advantaged vehicle on record.

When all is said and done, what makes the Roth IRA such a wonderful wealth accumulation device is not just the tax-free nature of accumulation and distributions. The added power of the Roth is that it has the potential to add additional decades of tax-free investing beyond what is offered by an ordinary IRA. With Roths, minimum distribution rules do not kick in when the participant turns age 701?,,2, as they do by law for regular IRAs and other tax-deferred vehicles; there are no required minimum distributions for Roths until after the death of the participant. If your client lives until age 85 and doesn’t need the money, you will have helped her maximize the beauty of tax-free investing for another 15 years. Now that’s what we call an opportunity.

Jaime J. Raskulinecz, CPM

Entrust Northeast, LLC

Verona, New Jersey


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