Considering a Roth IRA? Check state taxes first

11:30 AM Check, considering, first, State, taxes No Comments

| By Scott Hanson, CNBC.com

If you live in a high-tax state such as New York but plan to retire to an income-tax haven like Florida, a Roth IRA may not make sense.

Just about every article I've read on Roth IRA conversions discusses their benefits for people who might be in a high tax bracket once they retire.

What these articles invariably fail to mention is the negative impact that state income taxes could have and why, depending on where you plan to live, a Roth conversion might actually not be the best decision for everyone.

When you convert a 401k plan account or traditional IRA to a Roth IRA, you're making the conscious decision to pay income taxes today for the promise of a tax-free income tomorrow. This can be a wise choice if you are fairly confident that a) you'll be in a higher tax bracket during retirement, and b) Congress won't dramatically change the tax rules on Roth IRA withdrawals.

Those with high incomes who are saving and investing successfully—and who believe they'll continue to have a high income once they retire—seem prone to a certain line of reasoning: Because the promise of tax-free income from a Roth IRA is so appealing, why not just take some retirement savings today, pay the tax at current levels and then sit back and enjoy tax-free income during retirement? After all, just about "everyone" thinks that taxes will be higher in the future, right?

But converting money from a 401k or IRA to a Roth IRA triggers not only federal income taxes but also taxable income in the state in which you currently reside. While there are seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming -- with no state income tax, many others have prohibitively high rates.

The top income-tax rate in New York, for example, is around 9 percent, while California's top rate is north of 13 percent.

If you reside in a state with high income-tax rates and convert money to a Roth IRA, you'll not only be forced to pay Uncle Sam, you'll also find yourself writing a check for thousands of dollars to help fund your state government.

This is obviously one reason so many people, once retired, flee high tax-burden states for states with lower taxation rates.

You must consider that because retirement withdrawals are taxed based on the rates of the state in which you reside when you actually take those withdrawals, a traditional 401k or IRA withdrawal will be state tax–free if you live in a state with no income tax. Again, it makes no difference if the withdrawal is coming from a traditional IRA or a Roth IRA -- the withdrawals are taxed the same (0 percent) in places with no state income tax.

If you plan on moving out of your current high-taxed state to retire in a location with no state income tax, why would you want to convert anything to a Roth IRA? By doing so, you would be taking money that would be state income tax–free during retirement and making those dollars taxable today.

Simply put: If your current primary residence has high state income taxes, you could be forking over a considerable amount of money today for absolutely zero benefit during your golden years.

There are some circumstances where a Roth conversion still might make sense, such as during a period of prolonged unemployment, but for those who are confident they'll be leaving their state when they retire, a Roth conversion is simply a bad idea the vast majority of the time.

This same logic applies to contributions to Roth 401k plans. Again, using the traditional plans may have greater benefit if you leave your high-taxed state once you retire.

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Considering a lump sum from Social Security?

3:30 PM considering, security, Social No Comments

| By Dan Rafter, MoneyRates.com

Here are the pros and cons of taking a large Social Security payout.

If you wait until after your full retirement age to claim your Social Security retirement benefits, there is a little-known rule that could entitle you to a large chunk of cash all at once. This provision enables retirees who meet this requirement to receive up to six months of retroactive benefits in one lump sum.

Sound appealing? While this option may be a great choice for some, there are several things to consider before you go for it -- namely its impact on your future benefits.

The rule is a bit complicated, but Kia Anderson, a spokesperson for Social Security Administration, illustrates a possible scenario: Say a retiree reached full retirement age in November 2012, but then waited to file an application for Social Security benefits until November 2013. In this example, the retiree might be entitled to retroactive benefits -- paid in a lump sum -- beginning from May 2013, or six months before he or she finally filed for benefits.

Because of the six-month limitation on this rule, the first six months of benefits would effectively be gone for a retiree in this situation. But for those who need a large chunk of cash for an emergency or for those who are in bad health and don't expect to live long, the six months of benefits that are still available may be much appreciated.

Still, there is a major drawback to claiming retroactive benefits in a lump sum: It will reduce your ongoing monthly Social Security benefits for the rest of your life. That means that retirees should examine their circumstances before choosing this option, says Anderson.

"It depends on a person's individual situation as to whether they would like to file for retroactive retirement benefits," she says.

Russ Settle, founding partner with Social Security Choices in Elkton, Md., says that it makes sense to claim the retroactive payment if you've received bad news about your health or if you face a financial crisis that requires an immediate infusion of cash. But in most other situations, it's a bad move because claiming the retroactive benefits locks you into an earlier "official" retirement date, even if you waited until after your full retirement age to claim your benefits.

In other words, if you take six months of retroactive benefits in a lump sum payment at age 67 when your full retirement age is 66, your monthly Social Security payments going forward will be calculated as if you started taking payments at age 66 and a half.

"There are many situations where taking the benefits in a lump sum would not be advisable because you are lowering your monthly benefits for the rest of your life," Settle says. "But if you expect a relatively short life expectancy, it makes sense. Giving up the money now and gaining it later assumes that you'll be around later to get it, which might not be the case if you don't expect to live long."

You might think that you'll be able to invest the six months of retroactive benefits wisely, and that this makes taking the lump sum payment a sound financial move, even if you don't face a financial emergency or serious health problem.

But Robin Brewton, vice president of client services with Overland Park, Kan.-based Social Security Solutions, said that clients all too often spend the money they plan to invest. She's seen it with clients who take their Social Security benefits before they reach full retirement age and doubts that those who take the lump sum payment are any more likely to invest their sudden bundle of cash.

There are tax implications to consider too. As much as 50 percent of your Social Security benefits are taxable if your total annual provisional income -- which includes your adjusted gross income, tax-exempt interest and one-half of your Social Security benefits -- comes to $25,000 or more if you are single or $32,000 or more if you are married and filing jointly.

Up to 85 percent of your Social Security benefits are taxable if your total provisional income is higher than $34,000 if you're single or $44,000 if you're married and filing jointly.

Taking the lump-sum payment, then, might boost your provisional income enough to cost you at tax time.

Settle says that for most retirees, taking the lump sum payment instead of the higher monthly payments for life simply doesn't make sense.

"In this low-interest-rate environment, getting any rate of return that would be close to the rate of return that delaying Social Security benefits would offer you is really impossible," he says. "That assumes, of course, that you expect to live long enough to take advantage of those higher monthly benefits."

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Are you considering a franchise? Be careful when

1:00 PM careful, considering, franchise No Comments

| By Liz Weston, MSN Money

Ready concepts make it easy, start your own business, but you can easily lose your shirt. And many rub under the rules and restrictions.

Mary Pelach had a pretty good idea of the risks if they their first batteries plus franchise in Sioux Falls, S.D.. 20 years, ago $175,000 invested. She and her husband, Gary, used savings and money from his mother, a loan of $100,000 small business administration gifted.

"Their only shake hands when you log on document after document," recalls Mary Pelach. "It is getting worse than a mortgage."

Buying a franchise means buying a concept together with training, marketing support and often delivers. Start instead of forward, franchisees get a head-start. Some people make a decent living. Some get even rich.

Then again, many people fail.

Those who come to buy into an idea, the lousy on the shorter or is dated. They are paralyzed by corporate policies, over which they have no control. Rather than become rich, they lose their investment and then some. Some failed franchise owners have even by the companies, the it business for "Penalties"-a percentage of revenue, which they should be sold to earn, sued have been but not.

"People lose their money, they lose their homes," franchise marketer Sean Kelly, a former marketing Director said the aunt Anne pretzel chain, FranBest and unhappy franchisee websites published. "It was that franchises are a safe route in the business, and it is simply not true this myth...."

Mary Pelach was 41 and ready to leave a corporate telecommunications job, after her Department through three brutal rounds of layoffs. If it was a job to keep this uncertain, she would might be better employed.

Liz Weston

But she wanted to go alone. She liked offer "reinventing the wheel" and support the idea of someone else.

The pair explores different franchise options quickly to avoid fast food. "You have to throw your inventory every 11 or 12 minutes!" Perlach said. She liked the idea of a one-stop shop for batteries, but Gary, then to a 47 year old aircraft pilot, initially rejected the idea.

"My husband thought it was absolute hooey," reminded Mary. "I said, ' think for a minute: how many battery-powered equipment we have in our home?'"

The couple have made the leap. Gary worked as a pilot, while Mary set up and ran the business. She could even a salary to be paid within six months.

Two decades later, the couple has four battery plus stores in two States, and Gary has been withdrawn. Her son and daughter-in-law work with Mary, to learn the business. You assume will be when Mary is ready to retire.

"run it," said Mary. "We continue a cheque for him to pull."

Franchise works Mary good for them, but warned that the model would be a good fit for someone that wants to call all the shots. They must be entrepreneurial enough to take the risk, she said but not so free-spirited, that would rub under many limitations of the franchisor.

"Make sure that a franchise is what you want," said Mary. "With a franchise have you their rules and processes to follow."

10% Of all employer firms make issued franchise one according to the Census Bureau, 7.9 million employees and accounting of every six dollars, to a company.

The possibilities go far beyond fast-food outlets, gas stations and convenience stores. Franchisee offer massages, dog poo scoop, check for bugs, sex toy sale, tutor children and clean houses a.

Investing in a franchise is not cheap. The initial total investment, franchise fee, costs, accessories and equipment, including usually leads $200,000 to $300,000, said Alisa Harrison, a spokeswoman for the International Franchise Association, a trade group. Creditworthy applicants can SBA loans, but franchisees are usually required for a piece of their own Kapitals--often 20% to 25% of the total amount needed help.

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Report: Japan is considering nationalizing Tokyo Electric

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TOKYO - the Japanese Government could discuss a possible nationalization of Tokyo electric power, among other things to deal with the operator of the facility in the middle of the country's nuclear disaster, a senior Minister said on Tuesday. Japan plug nuclear power plant leak children to school in Japan Nuke crisis cosmic log back: how radiation will change Japan expats lend a hand in Japan, company offers "Guerrilla style" Japan Nuke ' condolence money ' 74 minutes updated on 4/6/2011 2: 39: 09 PM + 00: 00 Radiation leak stopped at Fukushima plant motion of aftershocks images of chaos, destruction

The future of Asia's largest utility was made earthquake in question since 11 March and tsunami hit its Fukushima Daiichi nuclear complex, so it emitted radiation. Its shares are decreased by 70 percent and the costs for the insurance of his debt against default rose 10 times.

National strategy Minister Koichiro Hemba said a discussion on rescue operations for Tokyo Electric in response to a Yomiuri newspaper report it was possible to temporarily nationalize floated some members of the Japanese Government that a plan, the company was has.

"Of course it is possible that electric is it various debates about the State of Tokyo" Hemba was quoted Agency the question of Kyodo news after the possibility of nationalisation.

The Yomiuri reported that some members of the Government had proposed a plan for the State to take a majority stake in electric Tokyo, also known as TEPCO, and help him to pay for damage from the accident.

The crisis seemed over the last few days with plutonium found in the ground on Tuesday, rattling escalate already shaky financial markets.

Story: Japanese nuclear utility apologizes again and again

Heavy debt burden
Chief Cabinet Secretary Yukio Edano had earlier on Tuesday said that the Government was not currently checked nationalization of utility.

"At this point, it is my understanding that not such a move are considering State institutions." The Government will be directed by will do these things TEPCO, to resolve this situation and those who are affected, "he said."

Tokyo Electric spokesman Hajime Motojuku has a plan for the nationalization unaware stated: "our first and greatest priority at present is the nuclear power plant accident to prevent further deterioration," he said.

Shares were untraded due to a flood of sell orders to 566 Yen to 19 percent from the close on Monday Tokyo Electric. The company has lost $30 billion in the market value since the March 11 disaster.

To a record high of 475 basis points on Monday on Markit, expanded the dissemination on Tokyo Electric 5-year credit default swaps against only 40 points before the crisis.

Hajime Nakajima, a distributor of Cosmo securities, said that investors by the nationalization were terrified to talk.

"Although as can be seen exactly the Government details to nationalize the company, as long as there is concern that Tepco may be nationalized, investors want to hold the stock not." "Passive funds sell to."

In a step to its finance based launched Tokyo electric power talks Japan's largest banks for emergency loans of up to $25 billion, sources told of Reuters last week.

The utility that provides about one-third of the Japanese population had 432 billion yen in cash and cash equivalents and the end of December and 7.5 trillion yen in the outstanding debt, according to its conclusion.

Of the roughly $64 billion in outstanding bonds, the company is due to repay $4.8 billion this year, and another $5.6 billion in the year 2012, emphasises the importance of the refinancing of its funding must comply with this. ($ 1 = 81.705 Yen)

Copyright 2011 Thomson Reuters.

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