Consider the advantages of
‘Rothing’ in estate planning

A few years ago Congress enacted a new type of retirement savings plan, a Roth IRA, named after the senator sponsoring the legislation.

Hawaii also has tax legislation allowing for Roth IRAs.

With a traditional IRA or 401k plan, contributions are tax-deductible, earnings are tax-deferred, and withdrawals are fully taxable. With a Roth IRA, contributions are not tax-deductible, but earnings and withdrawals are not taxable. From an estate planning perspective, this creates a huge advantage for a Roth IRA.

With a traditional IRA, you are required to take minimum distributions beginning after the year you turn age 70 1/2. With a Roth IRA, there are no required minimum distributions. Most important, at your death the full value of a traditional IRA is subject to estate tax, even though income tax will be payable upon withdrawal.

For example, if you had $100,000 in a traditional IRA and withdrew it, you would have $65,000 after tax, assuming a combined state and federal tax rate of 35 percent. However, for estate tax purposes, you would be taxed on the full $100,000. By comparison, with the Roth IRA, you have prepaid the income tax with dollars that will not be subject to estate tax.

There are limits on the amount of Roth contributions and on the amount of income you can earn and be able to contribute. The amount you can contribute begins to phase out at $95,000 of income for a single person or $150,000 for a married couple. One of the best ways to get large sums into a Roth IRA is by rolling a 401k to a traditional IRA and then converting or "Rothing" the traditional IRA. In order to make such a conversion, you must not have gross income in excess of $100,000.

While $100,000 is a significant level of income, taxpayers that would benefit most from converting, those who would pay estate taxes, typically have income exceeding $100,000. However, planning may allow a conversion after all. Your income only needs to be below $100,000 for the year of conversion. Before and after that year, the income could be in the millions. You may be able to shift investments from those that generate current income to those that seek long-term appreciation. If you have a business, you may be able to accelerate some expenses or use accelerated depreciation or expensing of capital assets to lower the profits for a single year while increasing them for an adjoining year.

By converting your retirement plan to a Roth, you could avoid having to take minimum distributions and avoid paying estate taxes on assets with a built-in tax liability. This simplifies your life while providing tax benefits.

Buying a PC for student?
Here’s your homework

In our last column, we began a series on what to look for when purchasing a new PC for a student. (I've also written a sidebar specifically on laptop purchases for students going to college.) We considered a number of issues including processor speed and brand of processor, memory, storage, operating system and video card. In case you missed Part 1, we'll review previous week's suggestions before we go on to the second part of our series.

Processor speed and brand of processor: Get at least a 2 gigahertz processor. Both Intel and AMD are equally satisfactory.

Memory: You'll want at least 256MB; 512 MB is better.

Storage: You'll want at least 60 gigabytes, but 80 is better.

OperatingSystem: Windows XP (or OS 10.3 for the Mac). If you're getting a laptop, get XP Professional, which will allow your child to more easily plug into the school's network.

Video system: A card with 32 or more megs of memory.

Built-in Wi-Fi: If you're purchasing a laptop, make sure you have integrated Wi-Fi or wireless networking capabilities.

Now, on to more vital issues.

Anti-virus and anti-spyware: Unknown to most PC users, your new computer might come loaded with spyware, according to Gordon Bruce of Pau Spam. He recommends that new users get anti-spyware software that can be downloaded free off the Net. He's fond of Spybot search and destroy, which can be found at www.safer-networking.org. Most machines also come loaded with anti-virus software from MacAfee or Norton. Once that runs out (six months from purchase), check out www.grisoft.com where you can download a free version of AVG Antivirus for personal use. Also, most major ISPs (Road Runner, AOL, EarthLink) provide a free anti-virus/ firewall/anti-spam software. So check out their help sites. If you want to save even more money on word processing or spreadsheet software, consider downloading a free version of Open Office (www.openoffice.org), a no-nonsense open-source software that is compatible with Microsoft's OS.

Speaker system: If your student is heavy into MP3 files and you don't mind springing a few extra dollars, get high-quality speakers and a subwoofer. You also might want a better-than-average sound card like a Creative Labs Sound Blaster Live.

Monitor: Flat-screen monitors come standard with new systems. I'd suggest you look at a 17-inch screen because it's easier on the eyes. Major manufacturers such as Sony, Viewsonic, NEC and others have 17-inch models that begin in the $500 range or less.

Backup system: Almost all new machines come standard with a built-in CD-RW drive, which works fine for most people. Make sure your child understands how important it is to back up data on their CD drive so they won't lose that term paper if the hard drive crashes. Unfortunately, this usually doesn't sink in until after the first one is lost.

Price: Figure on spending at least $500 for your new machine (without monitor) depending on how it's configured. Some manufacturers provide rebates on the computer or peripherals such as the monitor, which can also lessen your burden. Shop around, ask friends where they've purchased their computers and keep this article in your pocket as a reference.

Warranties: If you're buying a computer for a Hawaii student or you're running a home business, the standard warranty, which consists of one year on the system plus three years' warranty on the major parts (motherboard, memory, CPU, and hard drive), is just fine. (I believe an extended warranty only makes sense if you're purchasing large numbers of PCs.) The average life of a computer is less than three years, and most of the parts will be covered on a standard warranty.

Ethernet lets students tap into network In the last column, I offered tips on purchasing laptops for students, particularly those heading off to college. Here are some more important tips to consider. Any new laptop will have built-in Ethernet (and should have Wi-Fi) capabilities in order to connect to the school network. In addition, it's a good idea to have your student pack a 25-foot CAT5 Ethernet cable (available at any computer store). This will ensure they will be able to hook up to the wall jack if it's not situated close to their desk. It's also a good idea to invest in a surge protector, which should cost $25-50. Gordon Bruce of Pau Spam suggests choosing Windows XP Professional OS, which costs a bit more but is configured to deal more easily with plugging into any network. Makes sense to me. A new computer should come with an anti-virus program. If not, pick up a copy of Norton Internet Security 2004 package for Windows ($70) or Internet Security 3.0 for Macintosh ($100), or if you really want to save money, you can download a free anti-virus program called AVG from www.grisoft.com. If you're a Road Runner customer, you can get EZ-Armor anti-virus/firewall/anti-spam program for free. For large files, the built-in CD burner will suffice, but the new key chain-size USB flash backup drives are handy for quickly backing up individual files or small directories, as an alternative to the CD. (They also are useful for downloading MP3 music files from other computers.) I've seen good reviews of the Apacer Handy Steno USB 2.0 Flash Drive, which has a 256MB model for about $60, and the 512MB Cruzer Titanium flash drive from SanDisk for $200. Go to CNET for a look at other brands that start as low as the $30 range. (UH offers its students a free Sandisk Cruzer mini 256MB with purchase of IBM laptops.) If your student is headed to a university, be sure to check the college's admissions department. These folks might have particular specs that they recommend or might have great deals for students. Case in point: If you purchase a Dell Latitude D800 laptop at Yale's computer store, it will set you back around $1,900. The same machine purchased from Dell is priced around $2,400. UH has a list of back-to-school specials on computers and peripherals (for UH students only) that you can check out www.uhbooks.hawaii.edu/computers. Go for an on-site warranty -- particularly if you're at a mainland school. Given the pressure on today's students, they will be dead in the water without their computer. An on-site warranty means the computer will be fixed within 48 hours. It's well worth the extra cost. Thefts of laptops are at epidemic proportions. Check if your home insurance policy will cover theft of a school computer. If not, buy insurance. I've read good things about SafeWare (www.safeware.com). Figure on paying about $120 per year for coverage of a $2,000 laptop.

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