NEWS AND RESOURCES

Financial Planning for December, 2009

Prepare now for the New Year

"Out with the old and in with the new," or at least that's how the saying goes as we approach the end of the year. Some of the new tax rules could be truly exciting, so let's take a look at what you need to do to get ready for 2010.

Roth IRAs

The concept of the Roth IRA is not new. To recap, you make non-deductible contributions to a Roth IRA and in five years your withdrawals - both principal and interest - are tax-free (assuming you meet the regular requirements for IRA withdrawals, such as age).

What's new? The limits for contributing to Roth IRAs disappear on Jan. 1, 2010.

First, let's talk about converting your traditional IRA to a Roth IRA. Before Jan. 1, 2010, individuals with modified adjusted gross income in excess of $100,000 could forget about converting their traditional IRAs into Roths. On that magical date, all limits are eliminated and the coast will be clear to convert your traditional IRA into the more advantageous Roth. But that's just the beginning.

Many high-income earners have large traditional accounts, so tax on the conversion of an IRA could be steep. But the solution is novel. You can elect to average the income resulting from a traditional to Roth conversion and pay tax on it in 2011 and 2012. This can be a major benefit, depending on your tax bracket. Even if splitting the income won't change your tax bracket, you win by putting all of the tax off for a full year and part of the tax off for two years.

Before you make the election to pay the tax in 2011 and 2012, remember that it will be paid at rates in effect for those years. The current Congress is expected to raise the top tax rates in the next year or two, so putting payment off could be a disadvantage. When the time comes, don’t forget to factor this into your final decision.

Also, if you plan to convert in 2010, make a few calculations and determine whether or not you are better off following the traditional tax planning technique of accelerating deductions. You might be well advised to defer deductions and pick up some income you would have otherwise put off until 2010.

If you decide to make the conversion, when should you do it? That's where you need to pull out your crystal ball. Where do you think the market is heading in 2010? If you think it's headed up, make the conversion as soon as possible. The worst that can happen is that you are wrong. In that case, you can always reverse your decision before year's end. If you think it's headed down...well, this author is not an expert in market timing.

One other point to remember is that until 2010, individuals filing married but separate could not make the conversion. That restriction will also disappear in 2010.

Estate Taxes

Don't forget that the Federal Estate Tax is scheduled to go away on Jan. 1, 2010, and return on Jan. 1, 2011. Whether this will continue once Congress is able to further address the issue is anyone's guess, but is well worth factoring into your estate planning.

Happy New Year

Make 2010 as happy a new year as you can by taking a few minutes to look at some last minute items. In particular, let's get together and discuss plans regarding the possible conversion of your traditional IRA to a Roth IRA. A little time spent now could save you a fortune in the future.

Happy Holidays to you and yours!

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