• 10 Facts About the New First Time Homebuyer Credit
• How to Get 2010 Off to a Great Financial Start
• Cash Flow: The Life Blood of Business
• Roth IRA Conversion in 2010 (blog posting)

If you are in the market for a new home, you may still be able to claim the First-Time Homebuyer Credit. Congress recently passed The Worker, Homeownership and Business Assistance Act Of 2009, extending the First-Time Homebuyer Credit and expanding who qualifies.

Here are the top 10 things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify.

1. You must buy, or enter into a binding contract to buy a principal residence, on or before April 30, 2010.
2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.
3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.
4. A long time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you've lived in the same principal residence for any five consecutive year period during the eight year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.
5. The maximum credit for long time residents is $6,500. However, married individuals filing separately are limited to $3,250.
6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.
7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009, whether the credit is claimed for 2008 or for 2009, and for all home purchases that are claimed on 2009 returns.
8. No credit is available if the purchase price of the home exceeds $800,000.
9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.
10. A dependent is not eligible to claim the credit.

For more information about the expanded First-Time Homebuyer Credit, visit IRS.gov/recovery or call us.

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Plenty of people make resolutions to lose weight, get a new job or make other things happen in their personal life, but relatively few make solid resolutions about money. Make 2010 the year you’ll live a better life financially. Here are a few resolutions to think about:

Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.

Evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.

Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this.

Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your whole financial picture.

Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.

Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.

Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.
 
Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.

Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.

Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.
 

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Cash is essential to the success of any business. Cash is the "life blood" that keeps a business operating. If cash drys up, the business fails. Understanding your business' cash flow is a key managerial skill.

Failure to properly plan cash flow is one of the leading causes of small business failures. Understanding the basics will help you better manage your cash flow. Cash flow considerations become even more important as the economy struggles and businesses need to tighten all financial controls.

Your business' monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash.

For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable credit sales, usually paid 30 days after the original purchase date.

This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, increasing your cash. Now your cash has completed its flow through the operating cycle, and the process is ready to begin again.

Current Assets

Cash and other balance-sheet items that convert into cash within 12 months are referred to as current assets. Typical current assets include cash, marketable securities, receivables and prepaid expenses.

Cash-Flow Analysis

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. Understanding this will lead to better control of your cash flows and will allow adequate time to plan and prepare for the growth of your business.

It is best to have enough cash on hand each month to pay the cash obligations of the following month. A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

Planning a Positive Cash Flow

Your business can increase cash reserves in a number of ways.

• Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer's balance remains unpaid, the less likely it is that you will receive full payment.

• Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services. You should measure, however, any consequent increase in sales against a possible increase in bad-debt expenses.

• Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.

• Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

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I have several 401k plans that I am considering transferring into a ROTH IRA in 2010 given the one-year holiday from the income phase-out, which has disallowed me from participating in a ROTH.   However, I currently live in a high-tax state and am in a high tax bracket.   I may move to a lower tax-rate state in the near-future but would expect to stay in the same federal tax bracket.   I am unsure how the state income taxes could affect the cost-benefit from switching the 401ks to ROTHs.   Also, I am unsure how state-income taxes would, if at all, be paid, and over what period given that you are allowed to spread the associated tax payments over 2011 and 2012 (I believe).   Could you go through what factors I should be considering and the potential impact of converting a 401k to a ROTH, particularly what state income tax considerations I may be unaware of?

J.H. from New York, N.Y.

J, the idea of tax-free growth and withdrawals in the Roth IRA is a powerful concept, and it seems like a no brainer to convert when given the opportunity. However, there are several considerations that you should think about before deciding the conversion is right for you.   The first concept most people have trouble wrapping their heads around is that a Roth IRA, being tax-free, will net the same after-tax benefits as using a traditional IRA when the income tax rate is the same during contributions, conversions, and distributions.

Let us take an example of someone who wants to save $1,000 in a Roth IRA. This person is in the 25% tax bracket. If they decided to contribute to a traditional IRA instead, they would be able to save $1,333 in the traditional IRA with the same out of pocket cost. How is this possible? Well if this person contributes $1,333 to a traditional IRA, that contribution is deductible, thus saving them $333 in tax they would have had to pay if they had made the Roth contribution instead.   Thirty years later when the $1,000 in the Roth IRA has grown to $10,000, an identically invested traditional IRA with the $1,333 would grow to $13,330. When the $13,300 is taken as a distribution, 25% goes to taxes (assumes the same bracket), and that person is left with the same $10,000.  At the end of the day, both the traditional IRA and Roth IRA have the exact same “value”.

Obviously income tax rates and income tax brackets do change over time. Being able to predict what the rates and your income will be in 5 years is hard, but to predict it in 30 years is nearly impossible.  Current tax rates are at modern historical lows, and many people feel that tax rates must go up from current levels. Our current President has indicated that he wants to raise income taxes, particularly on higher income earners.   There is also a possibility, although unlikely, that Roth accounts could be taxed in the future or subjected to other changes which would diminish their benefits. As stated before, it is hard to know what the tax landscape will look like in the future, as things always seem to change.

The Roth IRA has two subtle differences which can have a significant impact on retirees.  Unlike the traditional IRA, distributions from a Roth IRA do not count towards making Social Security benefits taxable. Many retirees find themselves in the situation where taking traditional IRA distributions can cause both the distribution amount and their Social Security benefits to be taxable. This can create effective tax rates for that traditional IRA distribution which are much higher than expected. The second difference is that the Roth IRA does not have Required Minimum Distributions (RMD).   The Roth can continue to grow with no requirement late in life to take distributions as taxable income. Although these two items are subtle, they definitely are advantages of the Roth IRA. For retirees with significant income in retirement, the Social Security calculations will be a non-issue, as other income will most likely make Social Security benefits taxable.

You specifically asked about the special provision in 2010 which allows anyone (regardless of income) to convert their traditional IRA into a Roth IRA. Currently, conversions are only allowed for tax filers with incomes less than $100,000 (2009). In 2010, anyone can convert their IRA regardless of income, and the amount of any Roth conversion is taxable as ordinary income. The other twist special about 2010 is that the conversion can be split over 2011 and 2012 to ease the tax burden of the conversion. So, for instance, if someone was to convert their $100,000 traditional IRA into a Roth IRA in 2010, they could take $50k in income on their 2011 and $50k on their 2012 taxes or all $100k+ in 2010. The question on whether or not the conversion makes sense from a tax savings perspective mostly comes down to the tax rate you pay when making the conversion and what it will be when you withdraw it.

Let us assume a typical upper-income individual ($100k -$250k/yr) who has a steady income decides to take advantage of the Roth conversion in 2010. By converting the traditional IRA, they are increasing their taxable income by the amount of the conversion. This would quite possibly increase the tax bracket they fall into and, therefore, the tax rate of the conversion. When they retire, they may not have the same high level of income they did while working and they would most likely be in a lower bracket.   If this is the case, it probably does not make sense pay a higher rate now to save a lower rate later. Some argue that even with a lower bracket and lower income, the Roth still might make more sense because tax rates could rise significantly and ultimately be higher than during their high income earning years.

Other factors may also make the conversion more attractive. If you are in a circumstance where you will have a lull in income during the conversion period (e.g. getting an MBA or starting a new business), or if you expect to inherit significant wealth, there may be opportunities because of an imbalance either for the years of conversion or planned retirement distributions. In your question, you specifically asked about moving from a high tax State to a low tax State. Generally, States will look at the conversion as ordinary income and tax it just like your other ordinary income. Each State is different, so you should consult a tax professional familiar with your particular State or city rules.   Since the conversion would add to your ordinary taxable income, a lower tax State would effectively be a lower tax rate. If you plan to retire in a high tax State, then you would probably have an advantage converting in a lower tax State.  

You will have to make a personal determination on where your income will be and what tax rates will be.   As an advisor, it is hard for me to recommend paying more tax at any time. Generally, I recommend deferring tax where possible because you never know with total certainty what will happen with tax rules or personal income. If you convert all of your traditional IRA assets into a Roth IRA and then become permanently disabled, you would probably have been better off not paying the tax because your income would be permanently reduced.

The other major question you will have to address after the tax rate question is how you will pay the tax due. If you use funds from the traditional IRA for the tax due on the conversion, you do not avoid the 10% early distribution penalty if you are under the age of 59 ½. So if you have non-qualified (taxable) assets available to pay the tax, it is like you are converting those non-qualified assets to a Roth IRA because it maintains the full traditional IRA balance (generally pre-tax) in a Roth (tax-free). The 10% penalty would not apply for someone 59 ½ or older, but using traditional IRA assets to pay the tax burden still would diminish the value of the conversion.

I can tell you from personal experience that it keeps more planning options open when our clients have traditional IRA, Roth IRA, and non-qualified taxable accounts. This allows for much more flexibility in structuring investments for tax efficiency and help control the amount of ordinary income that is taken each year. You are not required to convert your whole traditional IRA in 2010 and should consider a partial conversion.   Other reasons you may want to convert to a Roth include reducing the size of your taxable estate for estate tax purposes or if you plan on needing large lump sum distribution in retirement (e.g. major home renovations, big trip). The Roth provides a tax-free way to access large sums without raising your taxable income inordinately for one year.

J, I don’t know how old you are, but here is what I would recommend. If you are under the age of 59 ½, there is no way I would recommend you convert to a Roth unless you have money outside of a tax shelter to pay the tax. It will be very difficult to make up for the 10% penalty otherwise. Be mindful of the high tax/low tax States situation. If you can convert in a lower or no income tax State, it will be a plus to conversion.   Also, if you seriously expect to have a higher income in retirement than you do now due to above average savings or a windfall (e.g. inheritance, significant pension), then those are pluses for conversion. If you are very convinced income tax rates will rise dramatically, then that is a major plus for conversion. If you are over 59 ½, having assets to pay the tax on the conversion is better but is not as much of a deal-breaker as for someone younger.

You also should look at your overall savings, having money distributed between traditional IRA, Roth IRA and non-qualified investments. This gives greater flexibility in retirement. You do not have to convert all of your traditional IRA funds either.   You should weigh your expected tax bracket in 2010 vs. spacing it out over 2011 and 2012. The indications out of Washington are that we will see higher tax brackets in the near future. A 2010 full conversion may be better than spacing it. Keep a close eye on tax rates and the rhetoric out of Washington.

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