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Articles: Social Security: Fact or fiction?

With all the buzz about Roth IRA conversions in 2010, you may have taken the plunge. But now you want to “undo” the conversion. Is it possible? Yes. This technique is called the Roth IRA recharacterization.

The deadline for recharacterizing a Roth is your tax return due date plus extensions. So you effectively have until October 17, 2011, to recharacterize a 2010 conversion.

Background: When you convert a traditional IRA to a Roth IRA, you are taxed on the amount transferred.  But qualified distributions (e.g., distributions after age 59 1/2) from a Roth in existence at least five years are completely tax-free.

Plus, unlike a traditional IRA, you don’t have to take required distributions after age 70 1/2.

Prior to 2010, you could not convert a traditional IRA to a Roth in a year in which your modified adjusted gross income (MAGI) exceeded $100,000. But this rule no longer applies. Also, for a conversion occurring in 2010, you can split the taxable income evenly over 2011 and 2012.

However, if you converted to a Roth in 2010, you may find that paying the tax bill dilutes much of the tax benefit of the conversion.  Or maybe you didn’t count on state income tax liability.  Perhaps you did not consider the possibility of rising tax rates. Finally, if the value of the assets has declined since the conversion date, you could face a higher tax bill than you expected.

If it suits your needs, you can convert a recharacterized Roth back into a Roth before the later date of:

  • the beginning of the tax year following the tax year of the conversion
  • the end of the 30-day period beginning the day of the reconversion (regardless of whether the reconversion falls in the year of the conversion or the following year)

For example, if you converted a traditional IRA to a Roth on December 15, 2010, and recharacterized it on January 1, 2011, you cannot reconvert before January 14, 2011.

Finally, be aware that you don’t have to recharacterize the entire amount.  You can undo part of the conversion and keep the rest in the Roth.

As you work your way toward retirement, you may be relying on Social Security benefits to help sustain a comfortable lifestyle.  But there are numerous misconceptions about the Social Security system. Here are the “facts” dispelling some common “fictions” about Social Security.

Fiction:  The Social Security program has never been cut.

Fact: Not exactly. In 1977 Congress effectively made a cut when it adjusted the formula for paying Social Security benefits.  Further modifications in the system occurred in 1980,
1984, 1989 and 1990. And in 1993, Congress increased the maximum amount of Social Security retirement benefits subject to income tax from 50% to 85% of the benefits received

Fiction: You have a legal right to collect Social Security benefits when you retire.

Fact:  Unlike participants in funded private pension plans, Social Security participants have no property right in their benefits.  If it chooses, Congress is free to amend the rules regarding payouts and eligibility to meet changing economic needs.  In fact, some commentators believe that changes are inevitable.

Fiction:  If you retire at age 65, you will get the full amount of Social Security retirement benefits that you are entitled to.

Fact: This is true only if you were born before 1938. Otherwise, you must work past age 65 in order to get full benefits.   The “magic age” for individuals born between
1943 and 1954 the majority of the “Baby Boomers” is 66 years old.  It is 67 years old for someone born in 1960 or later.

Fiction:  The total amount of benefits you receive is based solely on your contributions to the system.

Fact:  There is a connection between your contributions to the system and the benefits you ultimately receive.  But two other important factors affecting the size of benefits are often overlooked: the age when you retire and apply for benefits, and how long you live.

Fiction:  When you retire, you don’t need as much money to live on as you did before.

Fact: Perhaps that was true at one time. But there’s no historical precedent in this country for so many 65 to 75-year- olds having living parents.  The National Center for Health Statistics (NCHS) says that the number of people 75 and older has doubled from 3% to 6% since 1950.  By 2060, NCHS estimates that one out of eight Americans will be 75 or older.   About 22.4 million households already provide care to a family member 50 or older, according to the American Association for Retired Persons (AARP).  The “sandwich generation” of new retirees may face unusual economic burdens in the coming years.

This article points out the importance of generating income from investments, qualified retirement plans and other sources to help pick up the slack in retirement.  It is unlikely you will be able to maintain your current lifestyle on Social Security benefits alone.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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