Disclaimer: The Defensive Coordinator is here to give free tax advice, not to engage in the practice of law or the practice of accounting. Hopefully, he can help you be more efficient in your dealings with the IRS as well as your legal and accounting advisors. You should consult competent tax counsel regarding any tax decision that you make. You got it?

Thanks for the questions! I assumed that most of the income tax questions would be investment related but that’s not the case. IRA questions seem to be the most prevalent which, considering the Code’s complexity, seems reasonable.

Is there a way to trade my own IRA assets?
No. The Code lays out several restrictions to qualify as an IRA, one of which precludes an individual from qualifying as a trustee/custodian. So, beware that it may be a disadvantage (from a control standpoint) to rolling over a distribution from a retirement plan where you can serve as a trustee to an IRA.

Are there any restrictions on how my IRA is invested?
Yes. Generally, the agreement creating the IRA must prohibit the investment in life insurance or any other kind of insurance. Also, the account cannot be commingled with other property.

Can I rollover/convert my traditional IRA to a Roth IRA?
Yes, if your adjusted gross income (AGI—line 33 on your 1999 tax form) is $100,000 or less (not including the rollover amount) and you are not "married filing separately." Remember, you must include in income the amount of the distribution that would taxable if you didn’t roll it over—usually the entire amount. Should you roll it over, pay the tax today and enjoy tax-free distributions at retirement? That’s a difficult question to answer that takes some analysis. Generally, the further away from retirement you are (10 years or more?) the more a conversion makes sense. Also, compare your income tax bracket today with what you expect it to be at retirement. And, paying today’s tax on the conversion from the IRA assets could result in early withdrawal penalties. Visit www.rothira.com for more Roth resources.


Gift and Estate Tax
What is the "Dynasty Trust" that I hear about?
Essentially, a Dynasty Trust is just an Irrevocable Life Insurance Trust designed to last the maximum length of time allowed under state law. Some states have abolished any restrictions on trust duration which permits the trust to last forever. Because it’s irrevocable, the assets are out of the estate of the grantor. Many times a large contribution/gift is made to the trust equal to the unified credit. With today’s numbers, $675,000 is contributed to the trust and this amount is used by the trustee (not the grantor) to purchase life insurance on the grantor’s life. Assuming the generation-skipping tax exemption is allocated to the gift, beneficiaries can enjoy the trust’s assets (death benefits) estate-tax free forever. And, because the trustee is given discretion to invest the assets, the trustee can purchase a home, business, or other needs for the beneficiary (keeping the assets protected from creditors) or distribute assets to the beneficiary for such purposes.

About the Defensive Coordinator: Our Defensive Coordinator is a JD/CPA playing minor league ball for a "Big Five" accounting firm and in the pros as an estate tax strategist for 20+ financial planners. You have a question? Ask the Defensive Coordinator.