Investor interest in “real assets” has risen relentlessly during the financial crisis and its aftermath. By real assets we mean claims on the value of tangible items such as timber, oil, soybeans, copper and the like (as well as the companies that own them) or claims on changes in the value of inflation-linked assets (such as Treasury inflation-protected securities, or TIPS). This interest has been driven by fears of high inflation, triggering a tumble in the value of paper money and financial claims.

Whether we might indeed see such inflation is a discussion for another time, but you don’t need to panic about inflation to want to invest in real assets. For the past several years, we have recommended investments in real assets as a means to obtain the diversification benefits of traditional stocks and bonds as well as potential inflation protection. Remember, tangible real assets are critical components of the global economy that tend to rise in value with increased economic activity. Both developed and developing economies continue to place strong demand on these ever-more-costly-to-obtain and often increasingly rare natural resources making them, we think, attractive investments in their own right.

You don’t need to store soybeans in your garage. Stakes in real assets can be acquired through liquid investments such as the common stock of natural resource, energy or infrastructure companies; master limited partnerships (MLPs); real estate investment trusts (REITs); and various commodity investment strategies. Investors may also take illiquid positions in real assets through private equity, private real estate and royalty funds. Each approach carries distinct risks and offers distinct advantages.

Risks and Rewards
The primary advantages of investing in publically listed securities are liquidity and transparency. Listed equities and ETFs, for example, may be sold on any trading day at the prevailing market price. Mutual funds are not quite as liquid: Investors can sell these securities only at the end of a business day at net asset value, which itself could be either real or estimated. Publically traded securities are handy in other ways. They can typically be used as collateral on loans and generally involve less tax-reporting paperwork than do unregistered securities. In addition, the investment minimum is generally quite low and the range of listed companies is significant, allowing easy diversification across geography and investment types.

Tax issues are very important even when securities are publically traded. For example, some listed securities, such as MLPs and some ETFs, are structured as partnerships and so generate Schedule K-1 tax forms. Similarly, although most mutual funds may distribute tax-free to investors, some must pay corporate taxes at the fund level and thus may be less tax beneficial.

The primary disadvantage of listed real asset securities is their strong correlation with broad markets, which reduces their diversification benefits. While many real-asset investments have recovered from lows reached during the credit crisis, investors should expect ongoing large swings in value as our global economic crisis is far from resolved.

In addition, gaining access to some types of real assets through registered securities can be difficult. Available public vehicles in timber, agriculture and royalties, for example, are few and far between. An investor may get neither as much ultimate return nor as much diversification as would theoretically be possible.

Private Investments: Worth a Closer Look
Private investments may provide access to unusual and smaller, less-publicized opportunities with the potential for higher expected returns. The other side of illiquidity is the ability to invest over a period of years, allowing the managers to take advantage of different investment climates. The managers also have more leeway in managing a private fund, which may enhance the ultimate return. In addition, private investments may benefit from partnership accounting, which increases tax efficiency as both gains and losses flow through to investors.

This is why we consider private securities when constructing real asset strategies. But we remain mindful of the disadvantages. Not everyone can or should invest in private securities. Often illiquid, most private securities have qualification requirements. Because they are not registered, they are not required to provide the same level of transparency that registered securities offer. You may be buying on faith alone, because, even at the end of an often-lengthy investment period, the manager may reveal few details of the holdings.

In addition, once committed to investing, you must fully fund the amount you committed. Should you want or need to sell, you may – or may not – be able to find a buyer both willing and eligible to assume your commitment. And if you do find a buyer, the haircut you take on such a secondary market sale may be quite depressing. At the level of annoyance rather than financial risk, private investments generate K-1s, which are often late and frequently complex, almost invariably forcing the investor to file tax extensions and employ a professional tax preparer.

In summary, then, investing in real assets may well be a good idea given your financial situation and aspirations. But how to invest requires balancing a number of issues in a very specific and personal context.

This article was prepared by Contango Capital Advisor’s Investment Strategy Group. Contango Capital Advisors is an affiliate of Zions Direct.

IMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. CCA1011-0177

At the time of this writing President Obama and congressional leaders of both parties have evidently agreed to a framework for a budget deal that would cut trillions of dollars in federal spending over the next decade and clear the way for an increase in the government’s borrowing limit.

While this move enables the country to skirt a default, most of the damage has already been done, at least as far as the investment community is concerned. A technical default would have been terrible, of course: We have commented before on the likely negative consequences, both for asset values and for the real economy, that would follow. But, more fundamentally, the circus of the last months has demonstrated that our political process is incapable of generating an intelligent consensus on tax and expenditure.

The implications are profound. Investors in US obligations, as well as in US-guaranteed obligations such as agency bonds, now anticipate a variety of problems. Chief among them are the potential for the US to be viewed as a second-tier lender, a perception that could impair liquidity and increase the prospect of runaway deficits that could trigger real defaults or, more likely, prompt efforts to eliminate debt by allowing inflation to surge. The US, in short, has lost credibility, while its debt has lost credit quality. Thus, we expect the US to pay higher interest rates across the entire yield curve in the future. And, because all other domestic interest rates are based on Treasury rates, every borrower in US dollars will pay more to borrow.

Higher Hurdles

Let’s estimate roughly what this extra cost might be. Total non-financial debt (the debt of all households, companies and local, state and federal governments) is about 240% of today’s gross domestic product (GDP). If the extra borrowing cost is only 1% – although we fully expect it to be more – then this adds 2.4% of GDP to interest paid. Remember, on average (that is, not during a recession), total federal revenues are a little less than 20% of GDP. This extra burden, then, is equivalent to a 12% increase in the federal tax take from the economy. Add the following fact: Corporations view “cost of capital” as a risk premium above the cost of debt. Hence companies contemplating whether to make an investment will face a hurdle rate that has risen by that same 1% and so will almost certainly decide to take advantage of fewer opportunities. Similarly, families will face higher mortgage, car and credit card interest bills, and so will buy less. There will be slower growth in the real economy and a prolongation of high levels of unemployment.

Redistribution of Wealth

All such changes also entail the potential for enormous wealth redistribution. The Federal Reserve’s current “zero interest” policy transfers real purchasing power from savers (who are earning yields below the rate of inflation on their savings) and transfers it to borrowers (including, especially, our big federal borrower). A jump in the yield curve will shift the transfer of money the other way. Savers will earn more on investments with a floating yield or a fixed yield set after (but not before!) the jump in rates.

Anyone unfortunate enough to own a long maturity bond today will take a large capital loss when interest rates rise. Insurance companies and pension funds are particularly vulnerable. And, if the rate that investments must earn to repay the cost of capital rises, stock prices will fall until their returns (on this now lower base) meet the new target. Because the stock market anticipates changes, we expect that a lot of this reasoning is already priced into stocks.

In this environment, much of the baby-boom generation will find that it is even further from having sufficient assets on which to retire comfortably.

Send a thank-you card to your congressman, your senator and the president.

George Feiger, CEO of Contango Capital Advisors and the author of the preceding article, has recently been quoted by media outlets including BBC NewsHour, Bloomberg News, Bloomberg TV, Chicago Tribune, CNNMoney.com and The Globe & Mail. Mr. Feiger’s past positions include Global Head of Onshore Private Banking for UBS, Global Head of Investment Banking at SBC Warburg and senior partner at McKinsey & Co. Formerly an associate professor of finance at Stanford University’s Graduate School of Business, he holds a PhD in economics from Harvard University.

Contango Capital Advisors is the wealth management arm of Zions Bancorporation (www.contangoadvisors.com). Contango Capital Advisors is an affiliate of Zions Direct.

In light of the rising inflation rate, many consumers, especially those planning for retirement, may be concerned as to how their investments will be affected. With the recent condition of the housing market, even property has not proven to be a reliable investment for some. Fortunately, there may be some answers for those looking to hedge against inflation within their portfolios. One such answer may be found in Treasury Inflation-Protected Securities – or TIPS.

First issued in 1997, TIPS are securities that are distributed for 5-, 10-, and 30-year terms at fixed interest rates determined in an auction. One appealing benefit of TIPS is the reduction of inflation risk. Principal amounts of TIPS increase with inflation and decrease with deflation. These changes ultimately have an effect on the interest earned, which is paid every six months at a fixed rate that is based on the adjusted principal amount. As a result, despite the fixed rate, these distributions may vary over the life of the security. Also affected by these changes is the sum paid out upon maturity, which is the greater of either the original or adjusted principal. In theory, this means that the investor will not lose on the investment if it is held to maturity.

In addition to inflation protection, other advantages of TIPS include state and local tax exemptions (consult with a tax advisor regarding your particular situation), the absence of fees in many cases, and relatively low credit risk due to their backing by the United States Government.

With the backing of the U.S. Government, investment prospects of TIPS appear encouraging. However, this protection may come at a price. Since inflation adjustments are subject to federal taxation, TIPS may carry a small real yield. For instance, in the event that the principal grows in a given year, the increase is considered taxable income, even if the security has not yet reached maturity and the investor has not yet received payment. To counter this effect, some investors may instead hold TIPS only in tax-deferred retirement accounts. Also, like bonds, TIPS are subject to interest rate risk, which can result in a decrease in value prior to maturity. This particular risk becomes more prevalent if TIPS are bought and sold in funds and not held to maturity.

With erratic consumer confidence and uncertainty over future consumer prices and interest rates, relying solely on TIPS in an investment portfolio is not ideal. It is important for investors to balance the fixed-income portion of their portfolios with other investments as appropriate.

Some alternative strategies for relegating inflation risk include investing in short-term bonds and utilizing bond ladders. Short-term bonds may allow holders to take advantage of higher interest rates upon reinvestment should inflation increase. Bond ladders can prepare investors for both rising and falling interest rates, as they allow for regular reinvestment of principal, rather than tying up a single investment for a longer period of time. This strategy has the ability to provide, ongoing liquidity, and relatively lower interest rate and inflation risk.

For those investors who may have been familiar with TIPS in the past, it is important to note that the Legacy Treasury Direct system is being phased out with no new accounts permitted as of the first of May this year. All transactions in this system are set to end by November 1, 2012, with the exception of securities that have not yet matured. Said securities will be maintained and paid upon maturity. Experienced and new investors alike are advised to use the TreasuryDirect web-based account system, which can be found at www.treasurydirect.gov.

For more information on investing, visit www.zionsdirect.com or speak to a Zions Direct representative at 1-800-524-8875.

Alison Andersen is an employee of Zions Bank. Zions Direct is a non-bank subsidiary of Zions Bank.

That being said, with the availability of online investing, and after evaluating their circumstances and investment objectives, investors are learning how easy it is to take advantage of some of the benefits of buying individual bonds. Hence, without much publicity, it appears to this author that the argument has quietly shifted in favor of investing in individual bonds.

In order to understand why this shift is occurring, it is important to first understand both sides of the bond funds versus individual bonds argument. Most writings on the subject have focused on the following investment traits:

                                                            (1) Diversification
                                                            (2) Reinvestment of income
                                                            (3) Investment control
                                                            (4) Cost
                                                            (5) Interest rate risk
                                                            (6) Liquidity
                                                            (7) Portfolio size

A brief discussion of each of these investment traits is outlined below.

(1) Diversification
Bond Funds: Because the underlying portfolio of most bond funds includes many different types of bonds of various maturities, investing in a bond fund conveniently provides the investor with immediate and widespread diversification. With numerous different bonds represented in the fund, the investor’s exposure to the default /credit risk of any one issuer is minimized.

Individual Bonds: In this author’s opinion, in order to achieve adequate diversification with the purchase of individual bonds, investors need about $100,000 or more invested in bonds of approximately 15 different issuers. The impact of a default will be greater within a portfolio of individual bonds than with a bond fund, because of the numerous and diverse holdings within a bond fund. When buying individual bonds, default /credit risk in most cases is addressed by limiting investment to essential purpose, high quality investment grade (preferably “A” or better) bonds.
                                                            Advantage: Bond Funds

(2) Reinvestment of Income
Bond Funds: Bond funds pay interest monthly in a fluctuating amount. Payments are based upon the interest received from the sum of all the investments held in the fund. As a result, the amount of income received varies each month. Because an investor can choose to automatically reinvest income by purchasing additional shares on a monthly basis, low yielding cash investments are typically held to a minimum.

Individual Bonds: Because individual bonds pay interest on a fixed, semi-annual basis, an investor is generally limited to reinvesting the income in short-term cash instruments until that amount exceeds $5,000. At that point in time, an additional $5,000 bond may be purchased for reinvestment.
                                                            Advantage: Bond Funds

(3) Investment Control
Bond Funds: When purchasing a bond fund, investors surrender control to the fund manager to make all investment decisions. An investor’s involvement is limited to matching investment objectives and portfolio duration with the information contained in the fund prospectus. In addition, with investment in a bond fund, investors have no control over how much income they will be receiving during any particular period. Nor does an investor have any control over the timing of capital gains taxes, or determining whether or not bonds inside the fund portfolio are subject to AMT (alternative minimum tax) or are subject to the investor’s state income tax.

Individual Bonds: Decision making responsibility and investment control remains with the investor when purchasing individual bonds. Individual bonds can generate a relatively predictable income with semi-annual interest payments and are redeemed at specific maturity dates. The investor has the opportunity to review the appropriateness of each investment including the use of AMT bonds and bonds issued from within the investor’s home state. The investor purchasing individual bonds is also able to decide the type of issuer, maturity dates, call provisions and credit parameters for each investment.
                                                            Advantage: Individual Bonds

(4) Cost
Bond Funds: A bond fund may be purchased online through a brokerage account; and investors pays annual management fees and bond fund expenses. Shop carefully because these fees and expenses can range from .25% to 1.25%. A word of caution: depending on the bond fund selected, there can also be an up-front sales commission (load) charged (loads typically range from 2% to 4%) on the amount invested.

Individual Bonds: Traditionally, the cost of purchasing an individual bond was either the broker’s commission or an unknown (to the investor) mark up on the price of the bond. Now individual bonds may be purchased online for an exact price at a flat commission per trade (for example: $10.95 per transaction with Zions Direct. Full Disclosure: Zions Direct is a non-bank subsidiary of Zions Bank, where I am a SVP and business development officer.), regardless of the dollar amount of the transaction. Online brokerage websites offer thousands of bonds representing the secondary market inventory of many broker/dealers. After individual bonds are purchased they are held in individual brokerage accounts and principal and interest is received, call redemptions (if any) are automatically processed and year-end tax information is provided.
                                                            Advantage: Individual Bonds

(5) Interest Rate Risk
Bond Funds: Because bonds in a bond fund are constantly being bought and sold, there is no specific maturity date for the money invested in the bond fund. Like all fixed income investments, the money held in the bond fund is subject to interest rate risk (an inverse relationship exists: when interest rates increase bond prices decrease and vice versa). Hence, when shares are liquidated they are sold at the current net asset value (NAV); and, depending on interest rate levels, the sale could result in a potential loss of principal. Generally, the risk of price volatility and fluctuating principal is higher for bonds with longer maturities.

Individual Bonds: Individual bonds have a defined maturity date. Interest rate risk is avoided by purchasing individual bonds with the intention of holding them to maturity. The market price of any fixed income investment fluctuates prior to maturity based upon the level and direction of interest rates. As a result, barring a credit default, if a bond is held to maturity it provides principal protection by being redeemed at par value, regardless of prevailing interest rates.
                                                            Advantage: Individual Bonds

(6) Liquidity
Bond Funds: With bond funds, liquidity is readily available. If a person needs money for an unexpected expenditure or desires to change asset allocation percentages, an investor may sell shares of the fund at anytime at the current NAV less redemption fees, if applicable. As previously mentioned, depending on interest rate levels, the sale could result in a potential loss of principal. Liquidating a portion of the bond fund changes the amount of the fixed income investment and does not change the characteristics of the fund portfolio.

Individual Bonds: Individual bonds can also be sold prior to maturity. The prices for bonds sold in the secondary market are influenced by prevailing interest rates and like mutual funds could be sold for more or less than the original investment. If some bonds are less liquid than others, those bonds may be subject to greater price volatility.

It is important to note that short term objectives and short term investments should not be mixed with long term objectives and long term investments. Hence, liquidity is best accomplished by holding money in short term cash instruments in order to provide funds for unexpected needs. Fixed income objectives should then be met by separately purchasing bond funds or individual bonds that will be held to maturity.
                                                            Advantage: Bond Funds

(7) Portfolio Size
Bond Funds: Most bond funds have an initial minimum investment of $5,000 and allow the investment of any dollar amount above the initial minimum. Hence, an investor is able to make a fixed income investment in a bond fund with a relatively small amount of money. Nor does the investor have a size constraint other than what prudence dictates by way of diversification needs and asset allocation strategies.

Individual Bonds: Most individual bonds are sold in $5,000 denominations and may be purchased in much larger blocks depending on the investor’s net worth and available funds. However, in my opinion, portfolio size of much under $100,000 doesn’t give an investor adequate opportunity to achieve an acceptable level of diversification either by issuer, bond type or maturity.
                                                            Advantage: ?

Conclusion
So what’s the answer? Is it more advisable to invest in bond funds or individual bonds? Is the answer still determined by the summation of each investor’s individual circumstances and investment objectives? Let’s suggest an answer by reviewing some of the more obvious conclusions and allowing the reader to decide his or her own investor profile.

If an investor (a) desires as much diversification as possible in order to protect against default/credit risk, (b) is looking for a quick entry into the fixed income market with the on-going convenience of automatic reinvestment of interest earnings, (c) chooses not to be involved in the underlying investment decisions, (d) understands interest rate risk and that there could be a loss of principal if interest rates are higher when shares are sold, and (e) is willing to pay management fees and fund expenses………then buy a bond fund.

On the other hand, if an investor (a) has at least $100,000 or more of investable, fixed income assets, (b) wants to retain investment control, (c) desires relatively predictable income, (d) intends to protect principal by holding bonds to maturity, and (e) is looking for lower expenses by virtue of buying bonds online directly from the secondary market.…..…then buy individual bonds.

It is this author’s opinion that gradually more and more investors will be attracted to the advantages of purchasing individual bonds. And as investors learn the ease of buying individual bonds online, the investor shift from buying bond funds to buying more individual bonds will likely accelerate.

Nevertheless, decide which type of investor profile you are and start investing!

Larry Denham, senior vice president and business development officer for Zions Bank.

]]> http://think.zionsdirect.com/2011/05/25/a-tale-of-two-strategies-bond-funds-vs-individual-bonds/feed/ 5 http://think.zionsdirect.com/2011/04/06/zions-direct-announces-auction-results-33/ http://think.zionsdirect.com/2011/04/06/zions-direct-announces-auction-results-33/#comments Wed, 06 Apr 2011 15:00:47 +0000 Russell Fisher http://think.zionsdirect.com/?p=8596 Read More]]> Auctions of Municipal and Corporate Bonds for week ending April 1, 2011

SALT LAKE CITY – Zions Direct, the online broker-dealer that allows its customers to purchase municipal bonds and corporate bonds in its daily web-based auctions, announces their weekly auction results. In auctions closed from March 28, 2011 to April 1, 2011, investors purchasing municipal bonds in the auctions received average tax-exempt yields 1.04 percentage points, or 104 basis points, higher than similar bonds as reported by the Municipal Securities Rulemaking Board (MSRB). Customers that purchased corporate bonds in the auctions received average taxable yields 104 basis points higher than comparable bonds reported in FINRA’s Trade Reporting and Compliance Engine (TRACE).

Zions Direct, in conjunction with BondDesk Group LLC, regularly publishes a Market Snapshot for investors to help understand the current bond market, summarizing current weighted-average yields of investment-grade municipal and corporate bonds. Findings are compared against similar securities auctioned at Zions Direct Auctions. Since February 2007, Zions Direct has auctioned over 750 million dollars in more than 2,000 fixed-income auctions.



ZIONS DIRECT / BONDDESK® MARKET SNAPSHOT

Municipal Bonds’ Average Yields Trade Data (source: MSRB)

Municipal Bond Auction Comparison Data (auction data from auctions.zionsdirect.com)

Corporate Bonds’ Average Yields Trade Data (source: FINRA’s TRACE)

Corporate Bond Auction Comparison Data (auction data from auctions.zionsdirect.com)

For more information on Zions Direct and the BondDesk Market Snapshot go to zionsdirect.com to sign up to receive the free weekly newsletter or visit think.zionsdirect.com to view a Market Snapshot archive.

THE INFORMATION IN THE MARKET SNAPSHOT IS NOT INTENDED TO SERVE AS THE BASIS FOR INVESTMENT DECISIONS. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS.



About Zions Direct

Zions Direct is a broker-dealer that specializes in offering securities for self-directed and fixed income-focused investors. Zions Direct allows retail investors to buy FDIC-insured certificates of deposit and corporate and municipal bonds through its web-based Bond Store and auction platforms. In addition, clients can invest in stocks, mutual funds, and exchange-traded funds online or through a Zions Direct financial representative.



About BondDesk Group LLC

BondDesk Group LLC is a financial technology firm, providing enterprise-wide fixed income solutions to many of the top broker-dealers in North America. The BondDesk Alternative Trading System (ATS), run by BondDesk Trading LLC, connects broker-dealers through a centralized marketplace by offering a diverse pool of liquidity for odd-lot fixed income securities in multiple asset classes. The BondDesk ATS executes over 20,000 transactions per day by providing 2,000 broker-dealers access to 35,000 live and executable offerings from over 100 premier fixed income dealers. In addition, BondDesk Group is a leading provider of innovative fixed income wealth management solutions, advisor workstations and fixed income analytical tools and applications.



Market Snapshot Information Disclaimer

MSRB and TRACE bond trade data displayed as weighted average yield. Municipal bond information from MSRB as of April 1, 2011. The Trade Data was developed by BondDesk Group based on information from MSRB’s Real-Time Transaction Reporting System, and excludes transactions in taxable bonds. Auction information from auctions.zionsdirect.com as of April 1, 2011.

Corporate bond information from FINRA’s Trade Reporting and Compliance Engine (TRACE) as of April 1, 2011. The Trade Data was developed by BondDesk Group based on trade reporting information from TRACE, and excludes transactions in callable and floating-rate coupon bonds. The aggregate rating for each bond is based on average ratings from Moody’s and S&P (when available).

Although information in this Market Snapshot is believed to be reliable, Zions Direct and BondDesk make no express or implied warranties of any kind regarding this information, including as to its accuracy or completeness. Auction data excludes bonds in undersubscribed auctions.

Municipal bonds are exempt from federal tax and may or may not be tax-exempt in individual states. The inclusion of municipal bonds selected by tax-exempt status is generated from pertinent federal tax attributes as populated from Muller, IDC, and/or BD ATS data sources.

Terms are defined as follows: < 9 months = anything up to .75 years to maturity; 1 year = anything greater than 0.75 years up to 1.5 years to maturity; 2 years = anything greater than 1.5 years up to 2.5 years to maturity; 3 years = anything greater than 2.5 years up to 4 years to maturity; 5 years = anything greater than 4 years up to 6 years to maturity; 7 years = anything greater than 6 years up to 8.5 years to maturity; 10 years = anything greater than 8.5 years up to 11.5 years to maturity.

Investment products and services offered through Zions Direct, member of FINRA/SIPC, a non-bank subsidiary of Zions Bank are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and MAY be subject to investment risks, including the possible loss of principal value or amount invested. FDIC-insured CDs are insured up to $250,000 per individual account holder per bank.

2010 presents a unique opportunity to get retirement assets into a Roth IRA account. Before this year, only taxpayers with adjusted gross incomes less than $100,000 were permitted to move assets from another qualified retirement account into a Roth IRA. That income limit is removed for 2010, so any taxpayer can now make this change.

Advantages of a Roth IRA:

• Earnings within the account are not subject to tax.
• Withdrawals from a Roth IRA are not taxed — unlike other types of retirement accounts.
• Roth IRA owners are not required to start making required minimum distributions at age 70.5, which is usually required for other retirement accounts.
• Inheritors of the account can also enjoy tax-free earnings and withdrawals, though they do have to start making regular withdrawals.

The downside of a Roth IRA rollover is the rollover amount is fully taxable in most cases. This means that you get to pay tax now for the privilege of enjoying tax-free appreciation and withdrawals later.

Consider these issues when deciding if a Roth IRA rollover is right for you:

• You can pay the tax on the rollover amount with other funds. If you can do this, the entire rollover amount goes into the Roth IRA, increasing the amount building up tax-free in the account.
• If you anticipate having a higher tax rate in retirement than you do now, a Roth IRA is a big advantage.
• The farther you are from retirement, the more years your account will have to recoup the tax hit on the rollover amount.
• The Roth IRA can be a method of passing on tax-free income to your heirs.

There is another benefit of taking advantage of this rollover opportunity in 2010. Taxpayers making a rollover from another retirement account into a Roth IRA account in 2010 can elect to pay the tax on the rollover half in 2011 and half in 2012, or all in 2010. While it would usually be preferable to defer a tax obligation for as long as possible, income tax rates are scheduled to rise significantly in 2011, and the recent health care legislation includes an additional surtax on investment income for higher-income taxpayers. Based on anticipated income and tax rates for 2010 and 2011, a taxpayer can make a reasoned estimate of which years would be best to recognize the tax on the rollover.

The Roth IRA rollover requires compliance with a number of complex rules in order to minimize the amount of tax involved in the transaction. Still, this is a rare opportunity to enhance your retirement assets and is worth discussing with your tax adviser.

Featured in the September/October 2010 issue of Zions Bank’s Community magazine.

Michael C. Walch is a shareholder with the law firm of Callister Nebeker & McCullough, where his practice focuses on tax and business matters, as well as transaction planning for corporations, partnerships, limited liability companies and individuals, both domestic and international, including preparation of tax returns. Visit him at www.cnmlaw.com.