Year End Tax Planning

Since we are in the last few weeks of 2009 and looking forward to a new year in 2010, now is an excellent time for a financial review to ensure you take advantage of every opportunity to increase your savings for retirement and lower your tax bill as much as possible.

• Make sure you take advantage of the “catch-up” provisions for IRAs and retirement plans. That means if you are age 50 or older, you may contribute an extra $1,000 to your traditional or Roth IRA for a total of $6,000 for 2009. For your 401(k), Roth 401(k), 403(b), and 457(b) plans, if you are age 50 or older, you may contribute an additional $5,500 for a total of $22,000. For your Simple IRA and Simple 401(k), if you are age 50 or older, your catch-up amount is $2,500 for a total of $14,000.



• Remember Required Minimum Distributions from your traditional IRA, 401(k) and other qualified retirement plans are waived for 2009 due to the passage of the Worker, Retiree and Employer Recovery Act of 2008. This waiver also applies to Beneficiary IRAs.



• If you inherited an IRA and there are multiple beneficiaries, you have until the end of the year following the year of the IRA owner’s death to split the IRA into separate accounts. If the IRA is not split by the end of the year, the oldest beneficiary’s age will be used to determine Required Minimum Distributions. This could penalize younger beneficiaries because they may want to stretch the IRA out for a longer period of time by using their own life expectancy. If the IRA is not split in a timely manner, they lose that option.



• Remember there is a potential for higher tax brackets in the future. If Congress does not act, after 2010, the current 25%, 28%, 33% and 35% tax brackets will increase to what they were prior to 2001, which were 28%, 31%, 36% and 39.6%, respectively. Proposals are being considered for tax bracket modification; however, we do not yet know what the outcome will be.



• Consider a Roth IRA conversion. Traditional IRAs grow tax-deferred, however, you will tax ordinary income taxes on any withdrawals when you begin taking money out. Roth IRA’s, however, have the potential for not only tax-free growth but also tax free withdrawals. The Tax Prevention and Reconciliation Act makes it possible for anyone to convert their traditional IRA to a Roth IRA beginning in 2010. Remember taxes will be due on the amount converted, but, you also have the opportunity to spread the taxes out over two years paying them in equal installments in 2011 and 2012. There are many factors to consider when thinking about a Roth conversion, and it is usually not advisable to convert to a Roth IRA unless you have money outside of the IRA to pay the taxes.