Reasons Not To Convert to a Roth IRA

Conversions from traditional to Roth IRAs are way up from previous years, thanks to the elimination of the income limit for those wanting to make the switch. In fact, several brokerage firms saw conversions by their clients quadruple in the first quarter of 2010, compared with the year-earlier quarter.

Conversions are attractive mainly because withdrawals from Roth IRAs, unlike those from traditional IRAs, are tax-free. In addition, Roth IRAs have no withdrawal requirements. In contrast, traditional IRAs require investors to begin making withdrawals at age 70½.

But conversion is not for everyone. Be careful if one of the following apply to your situation:

1. The tax bite is too big.

Convertors will have to pay income tax on any money they move out of a traditional IRA into a Roth account. Yet, converting to a Roth IRA gradually, over a number of years, might spread out the tax impact enough to make it affordable.

2. Retirement is too close.

You should allow 15 to 20 years of tax-free growth for a Roth IRA to make up for the taxes paid at the time of conversion, advisers say.

3. Your savings are too concentrated.

Age is even more of an issue for investors who are looking to their IRAs as their primary source of income in retirement. That's because they will need to take distributions from the fund sooner than investors who have other resources, and in larger installments—leaving less time for investment gains to offset the conversion's initial tax bite. Yet, a partial conversion might make sense for some people. Investors could convert only the portion of their IRA savings that they don't think they will need for a long time, if ever..

4. Your tax bracket might change in retirement.

Interest in conversions is being spurred by anticipation of higher tax rates ahead. Some investors figure they will come out ahead by converting to a Roth IRA now and paying taxes at current rates on the amount they transfer, rather than leaving their money in a traditional IRA and paying taxes at a higher rate when they make withdrawals in the future. The problem is that most people fall into a lower tax bracket when they retire thus eliminating that advantage.

5. The income can change your tax bracket now.

The money being transferred is treated as income and could bump you into a higher tax bracket that year. In fact, if you are receiving Social Security benefits, the spike in income could force you to pay taxes on your Social Security money.

CalSTRS New Real Estate Policy

The California State Teachers’ Retirement System’s (CalSTRS) investment committee has approved a new policy for its $12.7 billion real estate portfolio, including an increase in its core investments to 50% of the portfolio, from 30%. The new policy would make 20% of the portfolio value added investments and 30% opportunistic. Previously, 50% of the portfolio had been opportunistic.

The changes follow a drop in value of more than 40% for the West Sacramento-based system’s real estate investments in 2008-2009 fiscal year.

Delbert Foster Blount Made Off Like Madoff

Delbert Foster Blount, III of Ooltewah, Tennessee, was sentenced by a U.S. District Judge to serve 60 months in prison, followed by 3 years of supervised release. Judge Phillips also ordered Blount to pay $2,726,272.24 in restitution to Ameriprise and $467,169 in restitution to the Internal Revenue Service (IRS).

In April 2009 Blount pled guilty to one count of mail fraud, one count of wire fraud, and five counts of income tax evasion. He had used his position as a financial advisor to encourage people to invest money in various savings and retirement vehicles that included, 401(k) accounts, IRA accounts, and brokerage accounts, but then misappropriated the money for his personal use.

Indiana Not a Tar Heel Farm Team

Shawn Wischmeier’s hiring as North Carolina Retirement Systems’ new chief investment officer makes him the second Hoosier CIO in a row. But, as they say, that doesn’t make the $14.2 billion Indiana Public Employees’ Retirement Fund (PERF) the Tar Heel state’s farm team.

Mr. Wischmeier is scheduled to begin his new job June 23 as a replacement to former Hoosier Patricia Gerrick. Ms. Gerrick had been CIO of Indiana PERF from April 2001 until October 2003.

Additional Wall Street Cops

Congressman Patrick Murphy (D-PA) pressing Congress to pass new legislation to prosecute those on Wall Street who gambled Americans' savings and triggered the economic crisis. This bill is in addition to separate, broader financial regulatory reform that the House is expected to consider later this month.

The legislation authorizes additional investigators at the FBI, forensic accountants at the SEC, and federal prosecutors at the DOJ as additional "Wall Street Cops" to catch and prosecute white collar criminals and prevent their continued criminal activities.

On May 12, 2010, the Wall Street Journal reported that, "Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals." Murphy wants to ensure that agencies have the resources to carry out this important investigation and that the American people have a full understanding of any criminal wrongdoings that occurred in the lead-up to the financial crisis.

When Disaster Strikes

Participants in BP Corporation North America Inc.’s $8 billion 401(k) plan lost an estimated $1.155 billion on their company stock holdings since the Gulf of Mexico well blowout environmental disaster. That represents a 43.8% drop in value. BP PLC American depository shares, which closed at $60.48 on April 20 prior to the oil spill, fell to $33.97 by June 11.

Political Quagmire

Prospects for legislation enhancing 401(k) plan fee-disclosure requirements remain murky because House and Senate Democrats are at loggerheads.

Key to the debate is whether House legislation that includes fee-disclosure provisions for service providers should be approved. Mutual fund executives want lawmakers to drop that legislation and let the Department of Labor set the new disclosure rules on its own. And some Senate leaders are siding with the mutual fund industry.

Yet others argue that the legislation is needed to give teeth to any new disclosure regulations. It all boils down to how best to ensure that providers disclose to plan sponsors enough information on fees and compensation to ensure that plan sponsors can prudently select service providers.

A Bloomberg Turnaround?

New York City Hall, aka the Bloomberg Administration, will explore the possibility of offering early retirement packages as an alternative to layoffs for city employees, but only if the payouts do not increase city pension costs.

This marks a turnaround from Mayor Bloomberg’s position in the past. He had repeatedly made the case that early retirement packages generally cost the city more than keeping veteran workers employed, costs that are compounded if the city hires a replacement employee.

A New Dimension to America’s Medical Crisis

Since the passage of the health-care law in March, much has been said about the millions of retiring baby boomers and the strain they will put on the nation's health-care system.

Nothing has been said about the other side of the problem: the multitudes of doctors and nurses who are ready to retire. Health-care economists and other experts say retirements in that group over the next 10 to 15 years will greatly weaken the health-care workforce and leave many Americans who are newly insured under the new legislation without much hope of finding a doctor or nurse.

Nearly 40 percent of doctors are 55 or older, according to the Center for Workforce Studies of the Association of American Medical Colleges. About a third of the much larger nursing workforce is 50 or older, approximately 55 percent of whom have expressed an intention to retire in the next 10 years, according to a Nursing Management Aging Workforce Survey. The number of new registered nurses graduating from college is insufficient to replace the number planning to leave the profession.

What’s 300/2?

Stephan Meier, assistant business professor at Columbia University, has found that borrowers with poor math skills were three times as likely as others to go into foreclosure.

Meier surveyed 340 borrowers in Connecticut, Massachusetts, and Rhode Island who had taken out subprime loans in 2006 and 2007.

Meier asked them five questions. The first, for example, required borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000. About 16 percent of the respondents answered at least one of the first two questions incorrectly.

Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.