At the beginning of the year, the conventional wisdom was that mortgage rates on the 30 year fixed would drop to around 4.5% at some point and then move higher.  Well, the conventional wisdom was mostly right this time.  They have touched 4.5% this year but have drifted lower in three distinct moves with the most recent hitting record lows last week   Currently the 30 year according to bank rate average around 4.97 with the 15 year fixed at about 4.25%.  To obtain the rates, an average of 1.17% point was charged.  A good source for rates is www.bankrate.com

Many have already refinanced this year, but for those that haven’t now is another opportunity

While most of the talk in Washington centers on health care and Afghanistan, there is a considerable amount of energy focused on financial reform to prevent another “market meltdown” we have seen over the last couple of years.

One piece of the debate is how to regulate advisors, brokers and planners.  Each currently has a different set of rules covering their behavior towards clients.  Brokers are held to a suitability standard which means they need to have a reasonable basis for the recommendation and “know their client.”  Additionally their  advice should be “incidental” to the transaction.   However, Advisors registered with the Securities and Exchange condition are held to a higher “fiduciary” standard that entails the advice be prudent and in the interest of the client.   This topic can be somewhat arcane, but a recent WSJ video does a nice job of pointing out the key differences.

http://link.brightcove.com/services/player/bcpid452319854?bctid=51077511001

Watch for more as congress debates on how best to regulate the advice providers.

A common planning strategy when one has left a company with a large stock position with a low cost basis is to employ Net Unrealized Appreciation (NUA).  This strategy allows for the transfer of the stock from a 401k to a taxable account with the basis in the stock taxed at ordinary income rates and the gain, the net unrealized appreciation, taxed at capital gain rates once the stock is sold.  If you are under 55, you will need to consider the impact of the 10% early withdrawal penalty on the cost basis of the stock.  The additional benefit in this strategy is the flexibility gained in the ability to liquidate the stock position overtime at the beneficial capital gain rates.

However, now according to IRS notice 2009-75 you have an additional choice to consider within the NUA strategy as you can now move the company stock to a Roth IRA.  In this case, the cost basis will be taxed at ordinary income rates, but the Net Unrealized Appreciation will be taxed at capital gain rates at the time of distribution, not when sold as in the above example.  Distributions from these accounts then would be tax free because you already paid ordinary income on the basis and capital gains on the net unrealized appreciation.

Does a Roth NUA strategy make sense?   As a practical matter, probably not.   Many who use the NUA strategy are attracted to the idea of moving money from “tied” up resource to one that allows for more flexibility at a reasonable tax hit.  Nevertheless, the argument can be made that if you have a longer time horizon, or are thinking about the move to a Roth as an estate planning strategy, then the Roth NUA strategy would be something to consider

Let’s say you decide that the Roth conversion was a mistake, what can you do? 

 You can reverse the Roth conversion decision through recharacterization of the conversion.  By doing this,  the Roth conversion never happened.  You have until your tax filing deadline the year following the conversion to recharacterize the Roth conversion. 

Why would this happen?  Well, for one, the market sells off 30%  from when you converted  and consequently you ended up paying taxes on a higher amount than the current value.  You can then recharacterize , then reconvert at the lower value. 

Despite the “dog days” of Summer, it is not too early to think about 2010 and one of the key events in 2010.  No,  not the 2010 World Cup, or the Vancover 2010 Olympic games, or even the 2010 Census.   Rather, an even  more compelling event is whether  to convert or not convert your  IRA to a Roth IRA.

The benefits of converting a traditional or rollover IRA account to a Roth IRA will soon be available to those who have been shut out due to the income limits.  In 2010 the income limits for Roth IRAs will be lifted. So, if you are looking for a way to improve your financial position for the long term and help the economy out in the short term, then a Roth Conversion may be a right move for you. The basic idea behind a Roth conversion is to pay taxes now on the amount converted, and tucking that amount in a Roth account to grow tax deferred and at retirement, the funds can be withdrawn tax free. There is a 5 year holding period along with an age requirement of 59 ½ before you can make tax free withdrawals. An added perk in 2010 is the ability to spread the tax payment over two years (2011 and 2012).

With the lifting of the income limits, everyone with a traditional or rollover IRA – even those who are transferring assets from a company-sponsored plan like a 401K – should at least consider whether a Roth conversion makes sense. This is one of those financial planning decisions that do not easily fit into either the “don’t even think about it” or “what are you waiting for” categories. It really does depend on your personal circumstances and overall goals.

To take a step back, it is important to understand why a Roth can be a beautiful thing from a financial planning perspective. Here are few of the benefits:

* Tax Diversification – You’ll know a certain part of your account won’t be taxed when withdrawn.

* Portfolio Management – In developing your diversified portfolio, you can position your Roth investments somewhat more aggressively since the out-performance of this account relative to your other assets in a diversified portfolio will not be taxed.

* Flexibility – There are no required minimum distributions, allowing for increased cash flow flexibility at retirement.

* Estate Planning – You can pass this asset to heirs who will not need to  pay taxes on withdrawals. Keep in mind, though, Roth beneficiaries do have to take distributions across their life expectancies and Roth assets are still included in the decedent’s estate.

* Possible Tax Savings – If you think you will be at the same or higher tax bracket when you retire, you may save on taxes.

* Market Opportunity — The idea here is to tax the seed, not the harvest. Convert when the market is lower with the expectation that the market will recover over the long term horizon.

Sounds great, huh? But, does it make sense for you? The next few posts will drill down on specific hypothetical examples to help you sort it out for your situation.