Looking back, forward: End of the year IRA tips
December 19, 2010 Walton Sun
You can make a 2010 contribution to your Roth or Traditional IRA even after the beach ball drops in Panama City on New Year?s Eve. The deadline is when you file your 2010 return. However, don?t overlook year-end IRA check-ups and tax planning ideas.
You can convert a Traditional IRA to a Roth IRA as long as you pay the tax liability. Unfortunately, Roth IRA conversions were limited to individuals or couples with an AGI of $100,000 or less.
For 2010, the limit goes away albeit temporarily, only one year. For 2010 conversions, you can pay the tax liability over two years. Roth contributions are not tax-deductible while Traditional IRA contributions are deductible.
However, qualified distributions from Roth IRA have zero tax liability while distributions from Traditional IRA are ordinary income.
Does converting to a Roth make sense?
Make some educated guesses about what your retirement tax bracket looks like. Of course, no one knows what tax rates may be in the future and tax rates are at historical lows.
Even today?s low tax rate environment does not indicate a Roth conversion. For instance, if you work in a state with an income tax and your retirement locale includes Florida?s sunny beaches a Roth conversion does not make sense because you will state income tax on any conversion.
Make sure the Roth conversion doesn?t kick you into a higher 2010 tax bracket and any year you earn unusually higher income, don?t convert.
In 2008, Congress in a vote-buying frenzy suspended IRA RMDs for 2009, but owners and beneficiaries have to take a distribution prior to year-end in 2010. Failure to take the appropriate distribution results in a 50 percent penalty. Consider this your warning.
Remember John Ensign, the other senator from Nevada. His billionaire parents ?gave? his girlfriend and her family $96,000 in $24,000 increments. Giving money to your son?s paramour and her family could be unsavory; it passes IRS muster as long as the donors do not exceed IRS limits. For 2010, the limit bumps up to $13,000. Consider making a gift to help a family member with a Roth conversion tax liability.
If you are charitably inclined think about bumping up your charitable contribution in 2010 and using the deduction to, you guessed it, reduce any Roth conversion liability. The overall limit on itemized deductions phases out completely for 2010 so for those charitably inclined consider making additional donations in 2010.
Year-end should be a great time to review all beneficiary forms not just on IRAs but life insurance policies, too. Make sure you have secondary beneficiaries designated or you could unintentionally disinherit a grandchild.
Charitable IRA rollovers have been extended for the 2010 and 2011 tax years. If you are over 70 1/2, donate directly from your IRA to your favorite charity. <update>
English speaking people derive January from Janus, a two-faced Roman god who looked forward and backward. Every New Year should be a time for reflection and planning.
No one plans to fail ? they just fail to plan.
December 19, 2010 Walton Sun
You can make a 2010 contribution to your Roth or Traditional IRA even after the beach ball drops in Panama City on New Year?s Eve. The deadline is when you file your 2010 return. However, don?t overlook year-end IRA check-ups and tax planning ideas.
You can convert a Traditional IRA to a Roth IRA as long as you pay the tax liability. Unfortunately, Roth IRA conversions were limited to individuals or couples with an AGI of $100,000 or less.
For 2010, the limit goes away albeit temporarily, only one year. For 2010 conversions, you can pay the tax liability over two years. Roth contributions are not tax-deductible while Traditional IRA contributions are deductible.
However, qualified distributions from Roth IRA have zero tax liability while distributions from Traditional IRA are ordinary income.
Does converting to a Roth make sense?
Make some educated guesses about what your retirement tax bracket looks like. Of course, no one knows what tax rates may be in the future and tax rates are at historical lows.
Even today?s low tax rate environment does not indicate a Roth conversion. For instance, if you work in a state with an income tax and your retirement locale includes Florida?s sunny beaches a Roth conversion does not make sense because you will state income tax on any conversion.
Make sure the Roth conversion doesn?t kick you into a higher 2010 tax bracket and any year you earn unusually higher income, don?t convert.
In 2008, Congress in a vote-buying frenzy suspended IRA RMDs for 2009, but owners and beneficiaries have to take a distribution prior to year-end in 2010. Failure to take the appropriate distribution results in a 50 percent penalty. Consider this your warning.
Remember John Ensign, the other senator from Nevada. His billionaire parents ?gave? his girlfriend and her family $96,000 in $24,000 increments. Giving money to your son?s paramour and her family could be unsavory; it passes IRS muster as long as the donors do not exceed IRS limits. For 2010, the limit bumps up to $13,000. Consider making a gift to help a family member with a Roth conversion tax liability.
If you are charitably inclined think about bumping up your charitable contribution in 2010 and using the deduction to, you guessed it, reduce any Roth conversion liability. The overall limit on itemized deductions phases out completely for 2010 so for those charitably inclined consider making additional donations in 2010.
Year-end should be a great time to review all beneficiary forms not just on IRAs but life insurance policies, too. Make sure you have secondary beneficiaries designated or you could unintentionally disinherit a grandchild.
Charitable IRA rollovers have been extended for the 2010 and 2011 tax years. If you are over 70 1/2, donate directly from your IRA to your favorite charity. <update>
English speaking people derive January from Janus, a two-faced Roman god who looked forward and backward. Every New Year should be a time for reflection and planning.
No one plans to fail ? they just fail to plan.
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