10 End-of-Year IRA and Retirement Plan Tips

As you hurry around doing your holiday shopping and getting ready to celebrate with family and friends, don’t forget to take some time to tidy up your IRA for the year. These 10 end-of-the-year moves could save you a lot of money and eliminate headaches next year. End of Year Move #1— Take required minimum distributions (RMDs) Anyone who is required to take minimum distributions — including Roth beneficiaries — must do so before the end of the year. Otherwise you could get hit with a 50% penalty on amounts missed. The amount you must withdraw is based on the 2009 end-of-year account balance. End of Year Move #2— Split inherited IRAs If you inherited an IRA last year, you have until the end of this year to split the account into separate shares so each beneficiary can use their life expectancy to determine RMDs. Each share should be transferred into a separate inherited IRA for each beneficiary. Missing this deadline means beneficiaries will have to use the oldest beneficiary’s life expectancy to calculate distributions. In other words, they’d end up depleting the account faster and paying taxes sooner. End of Year Move #3— Move inherited plan Did you inherit a 401(k) or other retirement plan assets last year? You might have to abide by the plan’s rules, including taking the money out and paying taxes much sooner than you had hoped. However, you can get around that and stretch the required distributions over your life expectancy by: • Transferring the inherited funds directly to an inherited IRA, or • Converting directly to an inherited Roth IRA. In either case, you must take your first RMD by December 31. Otherwise, you’ll have to stick by the retirement plan’s rules. End of Year Move #4— Convert to Roth When you convert an IRA or a qualified retirement plan to a Roth, you’ll owe income tax on the amount converted. But if you make the move by December 31, you can spread the tax over two years — 2011 and 2012. End of Year Move #5— Take your lump sums You might be entitled to special tax breaks from your qualified retirement plan. Examples: Net unrealized appreciation and 10-year averaging. To take advantage of them, though, you must remove all the assets within one tax year. Therefore, if you have taken a partial distribution, you better clean out the plan by the end of the year or the tax break is lost. End of Year Move #6— Make your charitable gifts Accelerating charitable donations to 2010 could help offset Roth conversion income. Thereby, possibly reducing your tax burden. End of Year Move #7— Use the gift exclusion Are you looking for an easy way to reduce your taxable estate? You have until end-of-year to make use of the annual gift exclusion for 2010. This lets you give $13,000 ($26,000 for married couple) to as many people as you wish, without using any of your unified credit. End of Year Move #8— Use your IRA for estimated taxes You could end up with a steep penalty if you underestimate your estimated withholding tax payments. But you can use an IRA distribution to eliminate the problem since withholding from an IRA is treated as if you had paid in the money throughout the year. Figure out how much you’ll owe before the penalty kicks in; don’t forget any state tax. Then take an IRA distribution for that amount. Instruct the custodian to withhold the full amount for income tax. End of Year Move #9— Review beneficiary forms Of course, there is no requirement that you must make changes to your IRA or retirement plan beneficiaries by the end of the year. But this is a good time to consider any changes there may have been in your life and whether those changes warrant revising your beneficiaries. Those could include: A marriage, a birth, a divorce or a death. End of Year Move #10— Max out 401(k) plan contributions See how much you’ve put into your 401(k) this year. The maximum is $16,500. And if you are 50 or older, your plan might let you contribute another $5,500. But you only have until December 31. You only have 16 business days left to make any of the above moves. So be sure to give them a close look before time is up! Best wishes, George