They say that
optimism is catching. The performance of markets across the globe last week
certainly supported the idea.
During the
second week of January, there was reason for optimism about the housing market as data showed that
housing starts exceeded economists’ expectations and home construction appeared
to be on the rebound. Last week, the National Association of Realtors disclosed
that very low mortgage rates, falling unemployment, and one of the most
affordable housing markets on record helped make 2011 the best year for home
sales since 2007.
In addition,
earnings season – the period of each quarter during which public corporations
announce their quarterly earnings to the public – moved into high gear.
Generally solid corporate earnings drive markets higher. This helped the
Standard & Poor’s 500 Index close above 1,500 for the first time in more
than five years.
Across the
pond, the European Central Bank announced that banks plan to repay 137 billion
Euros next week much earlier than many had expected. Markets interpreted the
news as a sign that European financial systems may be on the mend. Global stock
markets gained strength and the Euro reached its highest level in nearly a year against
the U.S. dollar. Interest
rates in Italy and Spain, some of the weaker links in the Eurozone economy in
recent years, fell significantly during the week offering further evidence that
investors’ optimism and appetite for risk was on the rise.
Traditional or roth retirement plan contributions? A provision of
the American Taxpayer Relief Act of 2012 (ATRA) allows many people with savings
in workplace retirement plans to make “in-plan Roth conversions.” They can move
savings from traditional, before-tax 401(k), 403(b), or 457 plan accounts to
Roth plan accounts without a distributable event (such as death, disability, or
reaching age 59½) as long as the employer offers both options.
Traditional
contributions
In general, traditional contributions to
retirement plan accounts are made with before-tax dollars so they reduce
current income. Any earnings in these accounts grow tax-deferred until assets
are withdrawn. Generally, that’s at retirement. Distributions from Traditional
accounts generally are taxed as ordinary income.
Roth
contributions
Contributions to Roth retirement plan
accounts are different. They are made with after-tax dollars so they do not
reduce taxable income today. Any earnings in Roth accounts grow tax-free. Distributions
from a Roth account are tax-free and penalty-free as long as the five-year participation
period requirement is met and the distribution is taken for a qualified
purpose, such as reaching age 59½ or becoming disabled.
How
do I decide whether a conversion is right for me?
The decision about whether to convert a
Traditional workplace retirement plan account to a Roth workplace retirement
plan account should be based on criteria that are similar to the criteria used
when deciding whether to convert a Traditional IRA to a Roth IRA. These
include:
·
Tax brackets now
and in the future:
If you think you’ll be in a higher tax bracket during retirement than you’re in
today, then a Roth conversion may make sense.
·
Assets available
to pay the taxes due:
When you convert from a Traditional to a Roth plan account, you will owe taxes
on the assets you convert. If you have non-retirement savings available to pay
these taxes, a Roth conversion may be a good choice.
·
Legacy and estate
planning goals: If
a Roth 401(k) account offers estate
planning opportunities that suit your needs, conversion may be a good choice.
·
Income needs
during retirement: If
having a source of tax-free income to supplement taxable income during
retirement could boost retirement income, then a Roth conversion may make
sense.
Source: Investment News
It’s
important to recognize a retirement plan conversion is different from an IRA
conversion. Plan conversions do not allow a do-over while IRA conversions can
be revoked for a certain period of time. If you have any questions about this
topic, please give us a call.
Weekly Focus – Think About It
Optimism is the faith that leads to achievement. Nothing can be
done without hope and confidence.
--Helen Keller, the first deaf and blind
person to earn a Bachelor of Arts degree
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