Thursday, August 5, 2010

Reader with 401(k) question …

A reader sent in a question about his 401(k) plan that I think is worthwhile passing on … “Hi George, I am looking forward to retiring in the next 1-2 years. I have a 401(k) with my former employer, another 401(k) with my current employer, a small cash balance plan pension fund with my current employer, and an IRA into which I rolled my prior cash balance plan into. “My former employer’s 401(k) plan requires that I come up with a distribution plan of equal annual distributions, or take the entire amount in one distribution. “So now, I’m trying to determine the most rational way to take those distributions, such as rolling it all into my IRA, or to do a series of (say, 10) annual distributions into my IRA. “It is my understanding that I can take the distributions from my IRA at any time, in any amounts, as long as I begin the required minimum distributions (RMD) when I reach 70½. Therefore, by moving the money in my 401(k) to my IRA, I gain flexibility in the amount I take each month, and am not stuck being required to take more than I need because of a prior distribution election Am I thinking right? “If not, what is the right way to deal with these various accounts and allow myself flexibility in how I take distributions as the years go by? Please help! Thanks! Brian” Here’s my answer to Brian: To me, it looks like the simplest solution is to just move all the funds from the 401(k) into your IRAs. That could reduce the number of accounts to keep up with and give you the most flexibility as time goes on. So as far as I’m concerned, I'd say that you're thinking is right on. Good luck! George

Tuesday, August 3, 2010

Don't Forget to Use Your Passive Real Estate Losses!

Like me, some readers must finally be getting around to working on their 2009 income tax, because I’ve have several questions recently about passive losses, particularly on real estate. First of all, you cannot deduct every dollar you lose on a passive activity from your other income, such as salary and dividends. The IRS plugged that hole shut back in 1986. Generally speaking, you can only deduct passive losses against passive income. For example, passive losses you have as a limited partner in an oil drilling venture could only be used to offset passive income you might receive from another passive investment, like a windmill farm. And if you have no passive income, the losses could be used against any future income you might receive from the partnership. However, there is an exception for individuals who actively participate in passive real estate investments ... Rental real estate losses up to $25,000 may be deducted if your modified adjusted gross income (MAGI) is less than $100,000. To qualify for this offset, you must actively participate — meaning you make management decisions — own at least 10% and not be a limited partner. The $25,000 exception is phased out at the rate of 50 cents for every dollar of MAGI over $100,000. Suppose your MAGI is $110,000. The $25,000 allowance would be cut by $5,000 to a $20,000 maximum allowance. When MAGI exceeds $150,000, the $25,000 offset is not allowed Any of your passive losses that are disallowed can be carried forward indefinitely until there is passive income to offset or you sell the property. Like everything else in the IRS code, there’s a boatload of exceptions when it comes to passive income and losses. A big one is that real estate professionals don’t have to worry about the MAGI limitation. But if you’re like many investors, you probably have a rental property or two and want to make the most of any tax breaks. So be sure not to miss out on this one! Best wishes, George