A Bird In The Hand Blog

A Bird in the Hand…


For years, we have been telling clients that we are not often fans of Roth IRA’s.  It has been a very unpopular stance in many instances but one that we will continue to broadly take.  While there are some instances of benefit, as a whole it’s worrisome to us.


Reading a Wall Street Journal article (Wednesday, January 28, 2015, p. 2 “Obama Withdraws Bid to Tax ‘529’ Plans), reminded me of why we have embraced our position.  From the WSJ’s article on 529’s:  “To pay for his ideas, he proposed several changes to restrict use of tax-advantaged savings accounts.  The administration argued that the accounts disproportionately benefit higher-income families”. At the end of the day, Congress can take away anything they give at any time and without much warning.  While the President’s misguided idea ultimately fell flat on both sides of the aisle, budget concerns or future entitlements could always shift down the road.  The story is easy to sell and was positioned as a “get the rich” notion, much like how Social Security income became taxable in 1984.


Our argument has been, since the introduction of the ROTH IRA, this is exactly what could happen to those accounts.  The rich (couples earning more than $32,000 in 2014), now pay tax on Social Security.  How long before that happens to the tax free benefit of a ROTH…or a 529?  If nothing else, it’s on the table.


When to consider a ROTH or 529.


In the case of a 529, our argument for use has predominately been estate tax based.  For families that have estate tax issues (or are on track to), making a contribution to a 529 removes the asset from the estate.  529’s also allow accelerated gifting. For example, a parent or grandparent has the ability to make a one-time gift equal to 5 years of exemption per person during a single year. This means that a married couple can remove $140,000 from their taxable estate in a single 529 contribution.  Another primary benefit of a 529 program is that it allows separation of college funds specially to benefit a child for school.  In some cases, we use them simply for forced savings towards a future goal.  If there is not an estate reason to embrace a 529, this news may remind us that discipline is more critical than separate accounts.


As for ROTH IRAs, we use them in two instances. One example is the instance in which a client’s business generates little taxable income or even significant tax losses. In this case, converting from a traditional IRA to a ROTH IRA will allow the client to take full advantage of their low or nominal tax bracket as a result of their business’ minimal taxable income or even taxable net loss. Another reason to use a ROTH is when a client expects they will be generating sufficient income during retirement years. In this case, deferring to a ROTH or rolling from traditional IRA to a ROTH IRA will eliminate the requirement to make minimum distributions and the ROTH IRA attributes will pass to the next generation intact.


The above described opportunities are available to be taken advantage of through proper planning and consulting with your financial and tax advisor. For me, I’ll take the deduction today in a traditional IRA or 401k.