Archive for month: February, 2011

Recharacterize Now!

Categories: Retirement Strategies

Large Roth IRA owners who converted from Traditional IRAs in 2010 should look at undoing those conversions through a recharacterization right away.

Many large IRAs were converted in calendar year 2010 to lock in the 35% federal tax bracket before the jump to 39.6% in 2011.  A Roth conversion at 35% is better than one at 39.6%, generally speaking.  The passage of the new tax legislation in December allows large IRA owners to get the benefit of the 35% bracket in 2011 and 2012.

Clients that did not utilize a valuation adjustment strategy prior to doing their conversion in 2010 now have the opportunity to take advantage of the significant tax savings potential therein by undoing those conversions now.  Assuming a 30% valuation adjustment, the effective tax bracket on large Roth conversions is reduced from 35% to less than 25%.

The deadline for recharacterization of a 2010 conversion is October 15, 2011.  Clients that recharacterize now may reconvert the same assets back to a Roth IRA after thirty days.  The rule is that a reconversion cannot be done until the later of thirty days post recharacterization or until the next tax year.

For example, a Roth conversion done in July 2010 that was recharacterized in October 2010 would have to wait until January 1, 2011 (the next tax year) to reconvert.  Conversions from 2010 that are recharacterized in 2011 before the October 15th deadline can reconvert after meeting the thirty day wait since they are already in the next tax year after the conversion date.

By recharacterizing now and reconverting thirty days later, clients start a new clock ticking where they have all the way until October 15, 2012, to watch the account and determine if the conversion should remain in place.  Prior to the new tax bill that kept the 35% top federal bracket, this strategy was generally off the table because clients would be reconverting in a higher tax environment.

Some cases may not warrant a recharacterization if the Roth assets have gone up significantly in value.  However, in most instances large IRA clients will be better off recharacterizing, applying a valuation adjustment strategy and reconverting.  The tax savings per million dollars of IRA value can easily exceed $100,000.  That’s real money and worth taking a moment to review those client cases!

© 2010  Jagen™ Investments, LLC

Where Conservative Investors Should Go as the Rally Continues

Categories: Investment Strategies

As seen on, February 2011
Article By: Joe Luby, CFP®

Speaking at the TD Ameritrade Institutional National Conference in San Diego last week, Wharton finance professor Jeremy Siegel said that the stock market is not ahead of itself. With stocks at 20% below trend line, the current rally will continue, at least for a while. Siegel looks at a 209-year trend line, going back to 1802, which shows a 6.7% annualized real return over that period.

“This market is not overvalued,” said Siegel, adding that, “it’s not too late to get in.” If advisors have clients who’ve been sitting on the sidelines, he suggests encouraging them to get back in while there’s still time.

Bonds, however, are another story. The bond bubble, which Siegel said he predicted six weeks early, is not done yet. Treasury bonds offering thin yields and short-term bonds, paying almost nothing, could result in capital losses if interest rates start to rise.

Where should conservative investors go? Siegel recommends dividend-paying stocks. While the recent big drop in such stocks was due to the financial sector, all of the other nine sectors were doing fine. Stocks are historically cheap according to Siegel. Corporate earnings growth has been strong and he expects this trend to continue. During periods when interest rates remain at 8% or below, the average P/E of the S&P 500 rises to 19. This multiple, combined with estimated earnings for the index topping the 2007 record, shows there is still much upside in the market.

And what about gold? Not so much. Short of a collapse in the global economy or hyperinflation – neither of which are likely, according to Siegel, people who buy gold today will be disappointed in five years.

I’ve seen Dr. Siegel speak at other industry conferences, and while he’s known for his “stocks for the long-run” mantra, I’ve never seen him quite so animated and adamant. His speech was well received, as attendees dined on steak, asparagus and polenta before heading to their afternoon breakout session choices. The main lunch room was filled to capacity and late comers had to settle for the overflow room, with Dr. Seigel’s presentation piped in. Glad I made it into the main room on time!

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