Investments - The Independent Media Group

Buying Black Gold

The oil industry has historically been a source of great returns for investors. By Bo Billeaud

The Fallacy of Forecasting

The only sure thing about the economy is this: Past performance does not equal future returns.

By Bo Billeaud
July 26, 2012

Edward Lorenz was a meteorologist who accidently made one of the most important scientific discoveries ever. In 1961, the MIT researcher was testing weather forecasting models on what were then advanced computers.

Add comment (0)

It's the Global Economy, Stupid

Could Europe eventually affect us here in Lafayette, Louisiana? You better believe it could.

Add comment (0)

The Conversion Factor

Wednesday, July 28, 2010
Written by Dave Romagosa

The Conversion Factor

A 2010 legislative change removes income requirements for Roth eligibility, but can we trust Congress to keep its promises?

My wife and I recently had the opportunity to join a group of friends for dinner at Maurizio’s Italian Food Mart on Johnston Street. While enjoying Maurizio’s penne pasta with portobello mushrooms (my favorite) with a glass of Frank Family Pinot Noir, one of the guests mentioned that his CPA suggested he consider converting his traditional IRA accounts into a Roth IRA, and he wanted to know if I agreed with the recommendation.

In previous years, John’s income prevented him from being eligible to make Roth IRA contributions; however, this year taxpayers will be allowed to convert their traditional IRA accounts to Roth IRAs, regardless of their incomes. Prior to 2010, investors with incomes above $100,000 per year were not permitted to contribute, or convert their IRA accounts, to Roth IRAs.
I immediately had a sinking feeling that my pasta would be cold when I finished explaining all of the issues involved in trying to answer John’s question.

As we all know, contributions to traditional IRA accounts are made on a tax-deductible basis. Earnings on those accounts grow tax-deferred, but the entire value of the accounts will be taxed when the funds are withdrawn. An additional 10 percent excise tax is imposed on most account withdrawals before age 59½. On the other hand, Roth IRA account contributions are made with after-tax dollars, but the earnings and growth of those accounts will be tax-free, if certain holding period requirements are met.

When a traditional IRA is converted to a Roth IRA, taxes must be paid on the amount converted. Currently, the IRS is allowing the taxes on traditional-to-Roth conversions to be paid over a two-year period. It is important to pay the income taxes due on Roth conversions with after-tax dollars, in order to avoid the 10 percent excise tax on IRA account withdrawals applied to pay taxes on the sums converted.

A 2010 legislative change removing income requirements for Roth eligibility has caused quite a stir among tax and investment professionals, who are actively discussing the opportunity to convert with their clients. A number of software programs have been developed to generate computerized simulations that illustrate the projected cost and benefits of a traditional-to-Roth conversion.

It is widely believed that Roth conversions will work best for young people, because there will be a long accumulation period over which the Roth IRA can grow tax-free. Conversions could also be appealing to taxpayers in low income tax brackets, who expect their incomes to rise substantially in the future.

Conversions offer some potential advantages to affluent investors. One advantage is that Roth IRA accounts do not have minimum distribution requirements. This feature may appeal to wealthy account owners, who want to avoid taking the minimum required distributions from their traditional IRA accounts, which are mandated to begin at age 70½. Also, income taxes paid on the conversion from a traditional IRA to a Roth can be applied to reduce the account holder’s taxable estate, increasing the after-tax amounts inherited by the account holder’s heirs.
Beginning in 2013, withdrawals from traditional IRA accounts will be subject to the new 3.8 percent “wealth tax” included in the health care bill passed in March of this year. Under the current version of the legislation, withdrawals from Roth IRA accounts will not be exempt from this new tax.

A traditional-to-Roth conversion should definitely be considered by anyone who has made non-deductible IRA contributions in the past. The cost to convert those accounts will be limited to taxes on account earnings, and the benefits of the tax-free growth of converted, non-deductible IRA accounts should be substantial.

Getting back to John’s decision, it is important to remember that each taxpayer is different; no one size fits all. Perhaps, the best way to approach this decision will be for John, and anyone else faced with this decision, to consider the following points.

Many advisors believe that a key reason the Internal Revenue Service is allowing people to convert their traditional IRAs to Roth IRA accounts is that our government needs money to fund its ambitious agenda. People who convert their accounts today will be required to pay taxes currently, in the hope of receiving a future benefit — tax-free account growth and income payments. When giving up a present benefit, you should have confidence that the other party (our government) will keep its end of the deal, a promise that may not be fulfilled for 10, 20, 30 or even 40 years into the future. In other words, you are being asked to pay now, and receive the benefits later.

This brings us to our first question: “Do you trust our government to keep its promises?” After watching Congress craft and pass the recent health care legislation, many taxpayers aren’t sure about the answer. What if the U.S. Treasury has a greater need for revenue when it is time to withdraw funds from the account than it does today? What if our tax laws change in the future? How would taxpayers be affected if our tax code changes to a flat tax, or a VAT (value added tax), in place of our present, progressive income tax system?

The next question: “Are you absolutely certain that you will be in a higher tax bracket in the future, when you expect to withdraw the funds from your account?” This question should be carefully considered, since the taxes you will pay now on the conversion are a certainty; your tax bracket 10-40 years from now is at best a guess. The marginal income tax rate has been changed 36 times, with rates ranging from 7 percent to 94 percent, since 1913. With all of those changes, it is reasonable to assume that our tax code will be amended again, perhaps numerous times, before many taxpayers decide to withdraw funds from their retirement accounts.

So keep in mind the rules are subject to change. In the past, Congress has changed our tax laws, retroactively, to the detriment of taxpayers who acted in good faith, based on the regulations in effect when taxable events occurred. For example, Congress made retroactive changes to our estate tax code in 1993; in 1976, it made retroactive changes to the gift tax exemption outlined in the tax code, changing the tax consequences of gifts made before its enactment.

A more recent example can be found in our new health care bill. Congress has added a Medicare tax to certain types of passive income, including annuity income payments received after Jan. 1, 2013. When those annuities were purchased, the annuitants counted on receiving their payments free of Medicare taxes.

If Congress has retroactively changed the rules in the past, it could do it again in the future.
In the coming months, it is probable that you will be presented with the opportunity to discuss the possible advantages of converting your traditional IRA account to a Roth IRA. As you study your options, it will be important to remember that, while computerized simulations can be helpful, none of them can predict the future with absolute certainty. No simulation can tell you the amount of our national deficit on the date you decide to withdraw funds from your account. No one can predict with certainty how hungry Congress will be for new sources of revenue when IRA withdrawals commence. No software program can predict the number and impact of future changes to our tax code in future decades. No simulation can tell you whether you can count on Congress to keep the promises it makes to you today.

Dave Romagosa is a registered principal with, and offers securities through, LPL Financial, a member of FINRA and SPIC. He is president of Cornerstone Financial Group and has been a financial adviser in Lafayette since 1969. He has a master’s degree in financial services and holds the Certified Financial Planner designation. He is a member of the adjunct faculty at UL Lafayette, where he teaches a course in finance.

Add comment (0)

The Third Deadly Sin

Greed may have marked the upward surge of mankind, but combine it with unbridled innovation and excess leverage and the results can be deadly.

Add comment (0)

<< Start < Prev 1 2 Next > End >>

Page 1 of 2

ABIZ Stock Watch

o Aggreko GBX1,843.24 ▲55.24 (3.09%)

o IberiaBank Corp 51.22 ▼0.42 (-0.81%)

o LHC Group 22.18 ▲0.20 (0.91%)

o MidSouth Bancorp 15.02 ▼0.43 (-2.78%)

o PetroQuest Energy 4.95 ▲0.14 (2.91%)

o PHI Inc 34.14 ▲0.23 (0.68%)

o Superior Energy 28.76 ▼0.10 (-0.35%)

o Stone Energy 23.90 ▼0.28 (-1.16%)

o Teche Holding Corp 42.00 ▲0.96 (2.34%)

Most Read

David Calhoun, ‘EB’ Brooks join Lafayette Central Park

David Calhoun and Elizabeth “EB” Brooks are the first two employees of Lafayette Central Park Inc., the nonprofit charged with turning Lafayette Consolidated Government’s 100-acre Johnston Street Horse Farm property into a passive public park. Calhoun was named executive director, and Brooks is director of planning and design.
Update: PXP creating 600 jobs averaging 100k

At Thursday's State of the Economy luncheon, LEDA President and CEO Gregg Gothreaux said PXP has already quietly hired 180 people for its Broussard expansion.
Remembering Ricky Rees

The veteran police officer remembered by friends for his large and small acts of kindness will be laid to rest Wednesday.
Zachary Barker takes helm of the Opportunity Machine

Zachary Barker continues making waves in Lafayette’s business scene, mostly recently being named director of the Opportunity Machine.
Shakin' at the Shack

There will soon be a whole lot of shakin’ going on at Benny’s Sportshack Supplement Depot, a new concept by Opelousas native Benny Nele. Located at 2002 Johnston St., the supplement shop, smoothie bar and café, featuring hot off the press paninis and wraps, plans to open in late May.

in case you missed it

COOL TOWN 2013

This year’s Cool Town issue is all about people who are not native to South Louisiana but made a conscious decision to be here, to be among us, to participate in our culture and contribute to it.
A curious compact

A shelved ordinance transferring $200,000 from a northside drainage project to a south Lafayette development may not break any laws, but it stinks to high heaven.
Pooyie 2012

It's good, it's bad and it's just plain crazy.
Saving Saturday Night

An effort to restore a shuttered dancehall and document other vacant or razed honky-tonks could serve as a model for saving an endangered species of entertainment.
Posthaste vs. HART FORTENBERY

Lafayette’s gene pool has been host to a long line of eccentric characters who have blurred the lines between crazy, genius, disturbed and curiously entertaining.