Yesterday I talked about how Roth conversion features are considered a revenue raiser by Congress.

Today they released proof of the fact in the form of a report issued by the Joint Committee on Taxation, estimated budget effects.  According to government accounting, the ability to convert traditional 401k balances to Roth balances should raise 2.1 billion over the next 4 years.  Of course there is no mention as to the lost revenue in future years.

Future taxes are currently on sale, better act fast.

Today The Small Business Jobs Act of 2010 was passed by the Senate.  Its virtually assured to pass the house next week.

One of the provisions of the Act is to allow participants in a retirement plan to convert their balances over to a Roth account.

Back in 2006, a new section of the tax code created something called “Designated Roth Accounts” for 401k plans.  They are pretty much exactly how they sound, 401k participants are allowed to fore go the tax deduction on contributions, and in return when they make distributions, the distributions come out tax free.

A little known aspect of this provision is that it is considered a means for the government to earn more money.  As you can no doubt guess, Congress thinks short term and the short term result of this code section is less people will be able to take tax deductions for their 401k contributions as they will want to make the contributions to the Roth side of the plan.

Well, evidently Congress thought a really great way to raise revenue would be to allow people to convert some of the 17 trillion dollars they have in retirement plans over to Roth 401k funds.  Since people will have to pay taxes immediately on the conversion, Congress can in effect jump start the expected cash flow from retirement distributions.  Instead of waiting 30 or 40 years for the revenue, the government gets it now.

Great idea, but just a couple of challenges.

The first is the lesson we learn from lottery winners.  When people receive a windfall of money they typically aren’t the best stewards of that money and end up broke in a few years.  Its pretty much a foregone conclusion the government is going to waste this windfall as well and ignore the long term consequences of the tax free growth of the Roth accounts.

The other big challenge is that only 29% of retirement plans have even been modified to allow for the designated Roth accounts.  That means the vast majority of savers aren’t even going to be able to take advantage of this great opportunity.

If you have money inside a retirement plan, ask you trustee or administrator if you have the Roth feature, if not you owe it to yourself to ask that they make the feature available.  By way of shameless promotion, here a link to one of our  websites that offers Roth 401ks for dirt cheap.

Captain Obvious here.

Yesterday it was announced that Elizabeth Warren would be appointed as a “special advisor” to the President.  This was an interesting twist as there was heavy speculation she would be appointed as the head of the new consumer protection bureau being created.

However Senate approval is required for the new head of the consumer protection bureau and the White House didn’t think it could get Ms. Warren confirmed by the senate.

Why would it be hard to get her confirmed?  After all, even the Wall Street Journal said, “There really is no other choice. . .  Giving the job to someone else would be like letting Steve Jobs come up with the iPad and then giving it to Microsoft Corp. ”

The problem is Wall Street knows she is going to stand up for the middle class.  Thus the question at the top of this article, who does the Senate represent, Wall Street or Main street?

Lest I be labeled as some sort of pinko commie for bringing up this discussion and supporting Ms. Warren, lets discuss a very similar topic, the fiduciary status of financial advisors.

In a recent survey, 97% of Americans believed, “”when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”

The concept that a financial advisor is looking out for the client’s best interest is a concept that Wall Street is fighting tooth and nails.  In fact, in a number of lawsuits the defense of the stock broker, financial planner, name them what you will, is the firm was not a fiduciary and didn’t owe a duty to the buyer.  One particularly ballsy quote from a lawsuit is, “The Principal [name of the investment firm] was not providing investment advice, but was instead selling [the] company’s [investment] products.”

Is that how your last financial planner presented things to you, they weren’t there to present you with investment advice, they were there to sell you inventory?

Along the same lines, the last time you elected your Senator, did they say they wanted to go to Washington to protect you, or the profit margin of Wall St?

Back in my stockbroker days, I had a client come in for financial advice for her IRA.  When I asked her what the IRA was invested in, she told me the friendly lady from the bank said a muni bond mutual fund was the best choice for her IRA.

I still groan and laugh at the same time when I think of that incident.  Sure, the yields might have been outperforming govt bonds and stocks at the time, but yield is only part of the equation.  How about risk, how much risk was she taking on by investing in those munis with large yields?

Today we are having similar issues.  A story in Investment News tells how people are willing to purchase almost anything, even buying Guamanian Munis, if they can get a high enough return.

Talk about short term thinking.  Yes, yields suck right now.  There is no getting around that issue.  However PIMCO, a giant size bond fund just made a giant size bet that inflation is going to kick in, which will increase yields.  Not only that, but chances are a number of city and state bond issuers are going to go bust. Just yesterday, the state of Pennsylvania had to bail out its capital, Harrisburg.

Some times it pays to do nothing, at least that way the money will be available in the future when rates inevitably start to increase again.

In my previous posts I commented how in a recent survey, people said they liked the benefits of an annuity, but if you used the word, annuity, people freaked out.

It appears the Department of Labor has the same opinion.  Over the last 2 days, the DOL hosted a hearing, “Lifetime Income Options For Participants And Beneficiaries In Retirement Plans”.  That is government speak for annuities and retirement plans.

A couple funny comments about this hearing.  The first is the number of comments from people: 779.  That is a huge number of comments from the public.  It is probably due to the concern that the government is going to take over people’s retirement plans, and in return only give them a 3% return on their retirement money.  This was a trial balloon floated by a college professor about the time Obama was voted President and while the idea was never seriously considered it has definitely scared the American public.  I’m constantly getting phone calls from people asking how to protect their IRAs from government confiscation.  The caller typically makes reference to what happened down in Argentina.

The other ironic aspect of the DOL’s concern for people to receive an income for life from their retirement plans is the DOL’s own rules have curtailed the use of annuities.  Back in 1995, the DOL issued regulations saying the retirement plan owners, “must take steps calculated to obtain the safest annuity available.

The challenge is if the retirement plan purchased an annuity, and something went south, the retirement plan could probably be on the hook according to this regulation. Well, since people are risk adverse, the people running the retirement plan didn’t want to generate liability and thus sharply curtailed the purchase of annuity products.

Before you say you don’t want to even discuss annuities, you really need to look at all the benefits the new breed of annuities offer.  sure they aren’t going to give you a 20% annual return, and yes the insurance is going to make money if they sell you one — why would they offer one otherwise — but they do offer fixed returns, guaranteed income for life, and in some cases pretty strong asset protection as well.

A number of great articles that have implications for retirement planning came out this week.

The first was pretty much a mind expander.  Its a post from Seth Godin’s excellent blog about business.  In the post he shows a letter drafted in 1919 from the publisher of a magazine called the Red Cross, to the founder of Readers Digest.  Basically the publisher of Red Cross said he thought the idea and concept of Readers Digest stunk.  How many of you have heard of Red Cross magazine?  How about Readers Digest?

In the post Mr. Godin makes the great point that people with a vested interest in the status quot don’t like new ideas.

Now lets jump to a survey commissioned by Allianz Life.  In the survey, when Allianz talked to people about annuities, 54% had a negative reaction.  However when people were told about the benefits of a financial product, over 80 percent liked the product described, an annuity.  (Allianz obviously is not a disinterested third party as they are massive in the annuity market).

Why do you think people have such a negative aversion to annuities?  Probably lack of knowledge as well as knowing that in the past they have heard bad things about annuities.  Thus even though the need breed of annuities can protect against losses and give guaranteed returns, people who love those concepts still get turned off by annuities.

Another key to the bad reception annuities get is another group with a vested interest in the status quo might be harmed by a shift to annuities.  Registered investment advisors.

The Oblivious Investors blog has a post about how Registered Investment Advisors can be biased when talking to people about their portfolios.  If the investment advisor is paid a fee based upon assets under management do you think they are going to make any suggestions that is going to give them a pay cut?  The blog gives the example of where a single premium immediate annuity is clearly in the best interests of the client, and yet by suggesting the SPIA, the investment advisor is going to lose a lot of income.  Do you think the investment advisor is going to make the suggestion?  Or is the status quo going to win?

There is a lot of buying coming from the middle east.

Way back when I was both a commodities and stock broker.  The standard joke/statement in our office when a client asked why the market was moving was to blame it on some buying or selling coming from the middle east.  That was shorthand for, “hell if I know”, but a client wouldn’t be happy to hear their so called investment advisor didn’t have a clue.

A few years later I was with a client (I was acting as their attorney) meeting with their investment advisor, and the guy actually used the line about heavy buying coming from the middle east.  I almost fell out of my chair laughing.

I bring this up as I just received an email from a financial planner of a client.  I think the financial planner used every 5 syllable word they could possibly find, I’m still shaking my head thinking what a load of B.S. the entire email was.

Meredith Whitney, one of the analysts I actually believe, gave a great interview to Cspan the other day.  In the interview, at minute 33:20, she says the biggest ponzi scheme is Wall Street attempt to befuddle the investing public.  The theory is the more lingo and weird phrases they use, the more likely middle America is going to think they don’t have a chance to understand investments.

If anyone tries to talk to you about an investment, and you don’t understand it.  Walk away the more complicated the more likely you are going to lose.  

Back in 2001 a new provision was added to the tax code that allows IRA owners to fix a problems with their rollovers.  Yeah, the basic rollover rules are pretty simple but it seems that financial institutions are putting the assets in the wrong account and thus causing problems with the IRA rollover.

Today the IRS issued 5 new rulings as to whether they would waive the rollover requirements and thus not hit taxpayers with massive bills that would wipe out their retirement savings.

These rulings are becoming so common we decided to create a webpage just to show you what does and doesn’t work in these IRA rollover waiver requests.

Just today a bankruptcy court in Florida reached the same conclusion; inherited IRAs do not have asset protection, inherited IRAs are not exempt assets.

This is really going to be important in future years as various studies show that most people really don’t want to ever use their IRA money during their lives. Sure, if there is an emergency, or they want to pay for a family cruise, they may tap into the nest egg, but in most polls, people say they plan for their IRA to be legacy money. That is to say funds they just want to pass on to the next generation.

Financial planners have even devoted most of their marketing campaigns to promoting the concept of “stretch” IRAs. IRAs that can be stretched over the lifetime of the next generation.

One major problem with these concepts; bankruptcy. What is the point of building up and stretching a big nest egg if it can just be taken away in one fell swoop? IRAs are only exempt from creditors if they meet the definition of a retirement plan as put forth in the tax code. More and more bankruptcy courts are declaring that inherited IRAs don’t meet that definition and thus aren’t protected.

Since the court determined inherited IRAs are not exempt assets, all the assets that it took a lifetime to accumulate inside the IRA are now up for grabs. The real sad aspect is the simple use of a Family Owned Retirement Trust, or other basic steps could have protected the IRA.

We have devoted a special page on our web site as to the asset protection status of inherited IRAs, listing all of the known court cases on the subject.

As the economy sputters and falters even more it is pretty much a foregone conclusion that more people are going to start running behind on their taxes.

A common question I get is if the IRS can take away your IRA or retirement plan (The fancy phrase is can they levy your IRA or retirement plan). The simple answer is yes.

Baker & Donelson, just wrote a quick piece on the subject at this web page: http://www.bakerdonelson.com/irs-seizing-retirement-benefits-08-31-2010/

If you have concerns about the asset protection of your IRA, give us a call, this is an area we have a lot of experience in.