3rd Article of a Series

Health Care Reform Bill

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (Patient Act) into law. The House of Representatives also passed a reconciliation bill, the Health Care and Education Affordability Reconciliation Act of 2010, which makes changes to the Patient Act and is currently before the Senate for approval. Together, both pieces of legislation make sweeping reforms to health care in the United States.

U.S. citizens and legal residents will be required to have qualifying health insurance (exceptions apply) by 2014, or pay a fine. It is estimated that more than 32 million uninsured Americans will gain coverage through government subsidies to offset premiums, and through Medicaid coverage. The Congressional Budget Office projects that the final legislation will cut the national deficit. Nevertheless, the bill is projected to cost about $940 billion. Some of that cost will be paid by:

       Imposing a tax of up to 2.5% of household income on individuals who lack qualifying health care coverage, to be phased in beginning in 2014 

       Increasing the medical expense income tax deduction threshold to 10% of adjusted gross income, up from the current 7.5%

       Increasing the Medicare Part A tax rate by 0.9% on wages for individuals with earnings over $200,000 and for married couples with earnings exceeding $250,000, and assessing a new 3.8% tax on unearned income for these higher-income individuals

           An excise tax on so-called "Cadillac Plans"

       Imposing taxes or fees on health insurance providers and drug companies, while doctors and hospitals will receive less compensation from government sources

Key provisions effective within six months following enactment include:

                   A provision that children covered by insurance can no longer be denied                coverage because of pre-existing conditions

       Payment of $250 rebate to Medicare Part D beneficiaries subject to the coverage gap (beginning January 1, 2010) and gradually reducing the beneficiary coinsurance rate in the coverage gap from 100% to 25% by 2020

       Insurers will not be able to impose lifetime caps on insurance coverage

       All plans offering dependent coverage will be required to allow children to remain under their parents' plan until age 26

       Insurers cannot cancel or deny coverage if you are sick except in cases of fraud

       Adults with pre-existing conditions will be able to buy coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions

       The creation of a long-term care insurance program to be financed by voluntary payroll deductions (effective January 1, 2011)

Key provisions effective on or before January 1, 2014, include:

     All Americans must carry health insurance or face a fine, with exceptions for    economic hardship, religious beliefs, and other situations (e.g., a couple has income of less than $19,000)

       Extends Medicaid coverage to non-disabled adults with incomes at or below 133% of the Federal Poverty Level

       Adults with pre-existing conditions cannot be denied coverage or have their insurance cancelled due to pre-existing conditions

       Requirement that states establish an American Health Benefit Exchange that facilitates the purchase of qualified health plans and includes an Exchange for small businesses; also requires employers that contribute toward the cost of employee health insurance to provide free choice vouchers to qualified employees for the purchase of qualified health plans through Exchanges

       Tax credits will be available to qualifying families to offset the cost of health insurance premiums

       Employers with more than 50 employees must offer health insurance for their employees or be fined per employee

Part of the Reconciliation Act passed by the House and presently before the Senate adds student loan provisions including:

      An end to the bank-based system of distributing federal student loans—private lenders would no longer receive government subsidies to make federal student loans and all such loans would now be made directly from the federal government to borrowers

       Annual inflation-adjusted increases would apply to the Pell Grant beginning in 2013

       $2 billion would be paid over four years to community colleges to improve educational and career-training programs

       $1.5 billion would be available over ten years to increase income-based repayment benefits for student loan borrowers—mandatory monthly payments would be limited to 10% of discretionary income (down from the current 15%), and outstanding loan balances would be forgiven after 20 years (down from the current 25 years)

       $750 million over five years would be available for College Access Challenge grants to support state efforts to help more low-income students graduate from college

       $255 million a year would be allocated to historically black colleges and minority-serving institutions

2nd Article of a series

Improving Your Finances

Should I Convert to a Roth IRA?

IRA Conversion Fact Sheet By Christine Benz | 02-22-10 | 06:00 AM   Morningstar Investors of all income levels are now able to convert their traditional IRA assets to Roth IRAs as of the beginning of this year. The opportunity to take tax-free withdrawals on IRA investments certainly holds appeal, but a conversion isn't for everyone. Investors should check with a tax specialist to ensure that they've considered the ramifications--including the potential tax liability--before converting. Here are some common questions related to IRA conversions, along with the answers.  What’s changing in 2010? There are two key benefits. First, Roths offer tax-free withdrawals in retirement, whereas withdrawals from traditional IRAs are taxed as ordinary income. Second, Roths don't require you to take distributions during retirement, so if you don't need the money you can let the assets accumulate for your heirs.  What are the benefits of converting? Two things. First, income limits on conversions have been lifted, so now anyone can convert from a traditional IRA to a Roth. Second, those who convert in 2010 will be able to spread the taxes associated with the conversion over two years--2011 and 2012. Is the change permanent or only for 2010? Income limits are permanently lifted beginning in 2010. However, the special tax treatment (splitting the tax hit over 2011 and 2012) is available only for conversions made in 2010.  Who is a good candidate for conversion? In general, younger people are better candidates for conversion than are older investors who are close to retirement or already retired. Those who have the cash on hand to pay the taxes associated with the conversion are also much better candidates for conversion than those who will need to tap the IRA assets to pay the tax. Investors who have a lot of assets in traditional 401(k) s and IRAs may also benefit from a conversion because it will diversify the tax treatment of their in-retirement withdrawals. Who should think twice about converting? A conversion will tend to be less attractive for older investors who are well into retirement; they won't have the chance to recoup the tax hit. Conversions are also usually a bad idea if tapping the IRA assets is the only way to pay conversion-related taxes. Finally, conversions won't generally make sense for those who haven't saved much for retirement and will therefore be in a lower tax bracket in retirement than they are now. Are the income limits for starting a Roth from scratch going away in 2010, or is conversion the path for investors whose income is over the limit? The income limits to open a Roth IRA are still in place; individuals with incomes of more than $120,000 who can also contribute to a company retirement plan can't open a Roth; the threshold goes up to $177,000 for married couples filing jointly. However, individuals whose incomes are over those limits can take a backdoor way into a Roth, opening a traditional nondeductible IRA, and then converting soon thereafter. They'd owe taxes on any investment earnings at the time of the conversion. This strategy doesn't make sense, however, for those with substantial traditional deductible IRA assets because the taxes associated with the conversion will be based on the breakdown between deductible and nondeductible contributions in the IRA. Check with a tax advisor before opening a "backdoor IRA" because some advisors are concerned that Congress could close this loophole. Can I roll over a regular 401(k) into a Roth IRA directly? Yes, assuming you no longer work for the company where you amassed the 401(k). In this case, the rollover functions almost exactly like a conversion; you'll owe taxes on your deductible contributions and investment earnings at the time you convert. Will I owe taxes because of the conversion? It depends. If you've made only nondeductible contributions and you don't have any investment earnings in the account, you won't owe taxes upon conversion. If, however, your IRA consists of deductible contributions, rollover assets from a traditional 401(k), and investment earnings--or some combination thereof--you'll owe taxes when you convert. Should I worry about what the conversion will do to my reportable income (namely, pushing me into a higher tax bracket)? Yes, and that's one of many reasons to check with a tax advisor before embarking on a conversion. The risk is that in bumping up your income level, you could disqualify yourself for tax credits and deductions that would otherwise be available. When will the taxes be due? Normally when an investor converts an IRA, any investment earnings and deductible contributions in the traditional IRA are taxed as income in the year in which the individual converts. For individuals who convert in 2010, however, they can either take the tax hit for the 2010 tax year or split the tax burden across the 2011 and 2012 tax years. Is there a limit to how much I can convert? No. But once you're looking at converting large sums, it's especially important to consider the tax implications, both the effect on your tax bracket and whether you have money on hand to pay the conversion-related taxes. Is the conversion permanent (or can I convert back)? You can convert back through what's called a recharacterization. A recharacterization enables you to change the character of a Roth IRA to a traditional IRA, and vice versa. This can be an important lever if you convert your IRA and it turns out that the tax burden associated with the conversion is far greater than you had calculated, or if the conversion pushes you into a higher tax bracket and reduces your eligibility for tax credits and deductions. You'll also need to do a recharacterization if you convert your IRA but then determine that you weren't eligible to because of income limits. Will I be able to tap principal in the new Roth IRA without penalty? Yes, assuming five years has elapsed since you made the conversion. If you're over 59 1/2 years old, that waiting period doesn't apply. You can take withdrawals at any time without incurring a penalty. Do I have to convert all of my accounts, or is a partial conversion possible? A partial conversion is possible and advisable if converting in a single year creates an extreme tax burden or pushes you into a higher tax bracket. If I do a partial conversion, can I convert only nondeductible traditional IRA contributions? That would be nice, wouldn't it? Regardless of which IRA assets you convert, the assets will all receive the same tax treatment upon conversion, based on the proportion of nondeductible contributions and deductible contributions/investment earnings. After I convert, can I contribute to the new Roth account this year or in the future? Yes, but only if your income is under the limits for new contributions ($120,000 for individuals who can contribute to a company retirement plan and $177,000 for married couples filing jointly). If your income is above these levels, you'll need to open a traditional, nondeductible IRA and then convert it. A partial conversion is possible and advisable if converting in a single year Please download the first article   "What Every Spouse Should Know"

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