WalletPop experts tackle your questions, from back taxes to Roth conversions
Jan 12th 2010 8:00AM
Updated Jan 26th 2010 9:36PM
I am looking for the best way to begin resolving back taxes owed to the IRS. It has been over four years. Do I need to find an attorney?
-- Darlene McCreary, 41, Pensacola, FL
Answer from John W. Roth, Senior Tax Analyst, JD, LLM, at CCH, a Wolters Kluwer business:
The answer as to whether you need a tax attorney depends on the specific facts of the failure to file and pay taxes. You definitely should be represented by a financial professional, either a Certified Public Accountant (CPA) or an Enrolled Agent (EA). These professionals can analyze the situation, assist in gathering any missing information, prepare and file all returns, and provide assistance at audit, if necessary, or if you need to request an installment agreement or an offer-in-compromise to resolve the outstanding tax liability. These professionals will not hesitate to recommend retention of a tax attorney if the situation is complex, as in the case of tax shelter investments.
Is it possible to buy back your home after a bankruptcy at the current home value? My bankruptcy was a chapter 7, discharged December 2009. The house we are still living in is a part of the bankruptcy.
--Stephanie Lotz, 52, Las Vegas
Answer from Andrew I. Radmin, a bankruptcy attorney with Carkhuff and Radmin PC of Plainfield, NJ:
You can purchase the home even after you've filed a chapter 7 bankruptcy if, in fact, you do not still own the property. Most bankruptcy filings in which the debtors are living in their home have yet to be sold back to a bank through a foreclosure sale. In other words, the bank is still in the process of completing the process of obtaining a judgment in foreclosure so the property can go to a sheriff's sale and ultimately a deed is issued back to the bank. At that point, the debtor or former owner would no longer have any rights to the property, as it would be titled in the name of the bank that held the mortgage.
However, assuming the property has yet to go through a sheriff's sale, the debtor is still the owner of the property and at any time up to the sale, they can reinstate the mortgage by paying all of the arrears.
Once a home is sold through a foreclosure, a debtor can always move to reacquire the property, since I am sure the bank would be happy to sell. However, how the purchase can be obtained depends on whether or not the person who wants to buy his home back has the ability to do so.
From the information you provided, I am going to assume you are still on the deed as the owner. From that viewpoint, you have several options available to save your home. Other than just pay the arrrears or refinance, you could file a chapter 13 bankruptcy, which would be a way to pay the mortgage arrears as well as starting to make regular mortgage payments.
So generally, the fact that someone files a bankruptcy does not prevent them from being able to obtain their home at the current market value.
My wife (age 38) began 2009 with about $250,000 in a traditional IRA and about $20,000 in a Roth (sitting in money market). In mid-March, we moved from money market to stocks. In December 2009, the traditional IRA was worth over $1,000,000 and the Roth was about $100,000. I have a Roth worth about $100,000 as well. We do our own investing in personal stocks.
By the end of 2009, I rolled about $40,000 from the traditional IRA to my wife's Roth. I would have loved to do more, but it would have bumped us to a higher tax bracket. This month, I plan to roll more, and spread the tax bill over the next two years. As suggested by my CPA, I will open several Roth IRAs and divide the rollover, so if I decide later in the year to unroll the rollover, I can decide how much to unroll, rather than an all or nothing alternative.
The tax liability is making me sick. We only make about $75,000 per year, and thus do not know how to best minimize the taxes so we can afford it. Yes, we could continue to spread the rollover over the next decade or so, but if my stocks continue to go up in value, then I am fighting a losing battle and will never catch up. I wish I had begun my rollover in March, when the value of the portfolio was much smaller. I also do not want to liquidate positions unless I have to. I think my portfolio is still undervalued and could double in value in 2010.
It probably would not make sense to roll over the entire amount, but I feel it would be wise to be heavier in Roth than traditional.
One other factor to consider: We would like to purchase our first home in 2010 and pay for it with retirement funds so it is not dependent on income from a job. We are looking at $300,000-$500,000. I plan to pay for it from the traditional IRA, spread over five years to avoid the 10% penalty, and to lessen the taxes paid on withdrawn funds.
I would like feedback on the above strategies. Also, are funds rolled over into a Roth treated like contributions in that they may be withdrawn penalty free anytime, or is there some sort of ripening period in which they may not be touched?
Can retirement begin at any age using ROTH funds, like with a traditional IRA, or do we have to wait until we hit a certain age? Even though my wife is 38, I am 46. I do not want to wait until she gets into her 60s to access the funds.
--Frank, Provo, Utah
Answer from Barbara Weltman of the J.K. Lasser Institute:
How to handle Roth IRA conversions and withdrawals is about making both tax and financial decisions, both of which are highly complex, especially where the accounts are so large and have increased so dramatically in such a short time. First understand the tax rules:
- Anyone is now eligible to make a conversion from a traditional IRA to a Roth IRA; previous income limits no longer apply. For conversions made in 2010 only, half of the resulting income (what would have been income if the money had been withdrawn from the traditional IRA) is taxed half in 2011 and half in 2012 unless you opt to report it all in 2010. Whether it makes sense to report all the income in 2010 rather than deferring it to 2011 and 2012 depends on what tax rates will be in the future and what your tax situation will be in those years. Problem: No one knows what tax rates will be in the future. The Bush tax cuts are set to expire at the end of 2010, so higher rates may be back in the picture. Or rates could be even higher if Congress needs money to pay for health care, other government programs, and the deficit. No one knows what his or her tax situation will be in the future (whether you'll be making more income than now, or less). Best strategy: When it's time to file a 2010 return, it may make sense to request a filing extension so you'll have until October 15, 2011, to file your 2010 return and perhaps know what tax rates will be in 2011.
- You don't have to convert all your IRAs at once. You can opt to convert as much, or as little, as you want each year. How much you want to convert annually depends on your overall tax picture and whether you have the funds outside of the account to cover the resulting tax from the conversion.
- Making a Roth conversion does not affect your ability to make an annual Roth IRA contribution in the same year, as long as you have compensation. However, income limits continue to apply for contribution purposes, and any income from a conversion could impact your ability to make Roth IRA contributions.
- If you find that the value of the Roth IRA account following conversion is substantially lower than what it was on the date of conversion, you can hit the reset button and effectively undo the conversion. So, for example, if you converted $50,000 in March 2010 and in November 2010 the account has dropped in value to $30,000, you may want to re-characterize the account so the $50,000 is not taxed now. You can reconvert next year (if the re-characterization was in the last 30 days of this year, you have to wait at least 30 days to reconvert).
- You can withdraw money from a conversion account at any age and at any time with no tax cost, as long as the withdrawal does not exceed your after-tax contributions (the conversion amount you paid tax on); it's like withdrawing your own money from a bank account. But you can't touch earnings without being taxed until the conversion account or any previous Roth IRA contribution or conversion account has been open at least five years and you are at least age 59-1/2 (there's limited exception for a one-time withdrawal of up to $10,000 to pay first-time home-buyer expenses).
- Because there are no required lifetime distributions from a Roth IRA, you have financial flexibility on when and to what extent you tap into your account. If you don't need the funds during your lifetime, you can create a legacy for your heirs.
- It usually isn't a good idea to use funds from a Roth IRA to pay ordinary expenses when you are young because you are depleting a valuable resource for retirement income; once the funds are withdrawn, they can't be replaced after 60 days.
Got a question? Leave a comment in the comment section.