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

LTC Insurance Might Cost Less Than You Thought

Have you put off looking into long-term care insurance because you figured it would be too expensive? Well, the American Association for Long-Term Care Insurance recently released a report that might surprise you … Over 200,000 consumers who had purchased state-approved partnership long-term care policies during the first half of 2010 participated in the study. And here’s what the Association found for buyers under age 61: •27.8% pay less than $1,000 a year •19.4% pay between $1,000 and $1,500 a year •28.9% between $1,500 and $2,500 a year •17.1% pay between $2,500 and $4,000 •6.8% pay $4,000 or more Since premiums rise as we get older, the numbers for buyers age 61 through 75 were different: •9% pay less than $1,000 a year •12.5% pay between $1,000 and $1,500 •34.5% pay $1,500 to $2,500 •28.4% pay $2,500 to $4,000 •15.6% pay $4,000 or more Also interesting is that 57 is the average age for purchasing long-term care insurance. What’s more, in 2009, 81% of new buyers were under 65. This tells me boomers are waking up to the fact that they must assume responsibility for their care in case their health changes as they age. Best wishes, George P.S. Not sure if you need long-term care insurance or would you like to explore your other options? Then click here to read a free excerpt from A Boomer’s Guide to Long-Term Care.

Ready to Add Some Real Estate to Your Portfolio?

I’ve always liked real estate. And I think it’s something most investors should own. I know … the past few years have stunk for anyone who got caught up in the herd looking to get in on the boom earlier this decade. The last three rental properties I sold in 2005 and 2006 became bidding wars among crazed buyers. Indeed, it was insanity. So with the real estate bubble popped and prices hitting, or coming close to hitting, their lows this might be a good time to add some real estate to your portfolio. Now I’m not saying you should run out and buy a rental property. Believe me, they’re a lot of work, and you have to watch them like a hawk. And when you use leverage, you walk a shaky tightrope between getting double-digit returns and massive losses. But overall, real estate has treated many investors very well. According to the National Association of Real Estate Trusts, REITs have put the S&P 500 index to shame over just about every conceivable historical period. In fact, over the last 10 years, REIT returns averaged 10.2% annually while the S&P 500 was stuck at -0.8%. REITs own a portfolio of properties. Many focus on a particular sector, such as medical facilities, self-storage warehouses, office buildings, resorts, apartments for college students and overseas properties. Most pay a pretty decent yield. One that I’ve owned for a long time is Public Storage (PSA). I wrote about it back in March. It currently pays 3.3%, which is darn good in today’s environment. You can buy and sell REITs just as easily as any other stock. For good list of REITs go to: http://www.reit.com/AboutREITs/REITDirectory.aspx. Best wishes, George

Problems with Converting to a Company-Sponsored Roth

Are you still considering converting pre-tax retirement money to a Roth? I wrote about this back in July. There’s another incentive Congress has given to get taxpayers to convert and thereby boost tax revenues … The Small Business Jobs Act of 2010 includes a provision that allows certain 401(k) and 403(b) participants to convert their plan funds to a Roth 401(k) or Roth 403(b) within the plan. Money you convert in 2010 will be eligible for the same tax option as IRA conversions made to a Roth IRA. That means you can split the tax liability over 2011 and 2012. And once you convert you or your beneficiaries will never owe income tax on that money, or the earnings! All of this sounds pretty good. After all the way I see it, taxes are almost guaranteed to go up in the future. So if you can get the tax bill out of the way today while rates are relatively low, you’ll have more to spend when you retire. Plus if you can do it with money that’s in your company-sponsored retirement plan, it looks like a good deal. Right? Well … there could be problem. You see, there are three obstacles you must overcome to take advantage of the tax provision. And even if you get around them, you might find you’d be better off moving the money outside your employer’s plan. Obstacle #1 Your 401(k) or 403(b) has to offer a Roth option. Unfortunately, not many do. Obstacle #2 Does your company’s plan allow in-plan Roth conversions? Your company might be reluctant to take on the additional recordkeeping that’s required. Obstacle #3 Are you eligible to take a distribution from the plan? You just can’t move money from a pre-tax plan to a company-sponsored Roth without taking a distribution. And for most plans the only time you can take a distribution is after you leave the company. So you need to see if you can access your funds while you’re still working. If find, though, that one or more of the above obstacles prevents you from converting a 401(k) to an in-house Roth, all is not lost … You can still transfer money from the company plan to your IRA. Once it’s in your IRA, you simply convert it to a Roth IRA and pay the income taxes as discussed above. And like a company-sponsored Roth, you’ll never have to worry about paying income taxes on that money again. After all is said and done, which is better: A Roth option within your 401(k) or a Roth IRA? Although an in-house conversion could be easier and you get to keep the money with your company, an in-house Roth might not offer as many investment options as you might want. But a bigger concern is that the tax provision does not allow you to re-characterize (undo) a conversion. Therefore for example, if you convert and then realize you don’t have the money to pay the additional income tax, you’d be in a heap of do-do. The bottom line: If you want to move 401(k) pre-tax funds to a Roth, you’re probably better off going to a Roth IRA rather than an in-plan Roth. Best wishes, George

Tax Regulation Makes LTCI More Affordable

Are you reluctant to buy long-term care insurance (LTCI) because it’s not exactly cheap? Or maybe you might not like the thought that if you don’t use the insurance, you’ve wasted your money. However, without some kind game plan, a change in your health could wipe you out! Well, thanks to the IRS, you might be able get a policy while still accumulating bucks for the future. It starts with a fixed, deferred annuity (FDA). Money you put into one of these annuities accumulates tax-free until you withdraw it. When you make a withdrawal, part it is considered a return of your original investment, thus comes out tax-free. The rest is considered earnings and taxed at your ordinary income tax rate. As you can see then, FDAs can be a valuable way to put away money for retirement, much like an IRA. Now, back to LTCI … The Pension Protection Act of 2006 includes two provisions regarding FDAs, life insurance and LTCI that took effect January 1, 2010: 1. Money you withdraw to pay LTCI premiums is distributed free of taxes, therefore your after-tax cost for the policy could be less. 2. Money you transfer directly from an annuity or the cash value in life insurance to pay for long-term care insurance is not taxable. Insurance companies were quick to jump on the second provision by introducing FDAs with a LTCI rider. Very simply here’s how they work: Suppose, for example, you put $50,000 into a FDA. And let’s assume it’s designed to pay you up to 300% in benefits. That means you’d have $150,000 in coverage from day one without paying LTCI premiums. And if you never have to use the benefit, your $50,000 continues to grow tax-deferred. Of course, this perk comes at a cost, which is a reduction in the interest rate you’ll receive on the amount you pay in. So be sure to ask your agent for the details. But at least now you have a basic idea of two more ways to protect your nest egg and leave something for your love ones. To learn more about the many options available to help plan for long-term care expenses, be sure to check out A Boomer’s Guide to Long-Term Care. Best wishes, George

Costa Ricans Squash Border Problem … Without U.S. Help!

I just returned from Costa Rica. This time I went south to the San Isidro area. Beautiful mountains, gorgeous beaches, and friendly Ticos. But I got to witness something that many visitors might not appreciate. There was a clash on the Nicaragua border. It seems that a big-time, Nicaraguan landowner was starting to dig a trench onto a Costa Rican’s property. And apparently he had enough influence to get some soldiers to give him a hand. I won’t go into the details. You can read more here if you’re curious. I can tell you this though: All the locals I met were furious. The reporting was nonstop on TV. After a day or so of negotiations, it didn’t look like this was going to get resolved. And I envisioned that the U.S. would get dragged in one way or another. Then on Friday I watched on TV as Costa Rican police loaded planes and headed to the border. Well, sure enough, they settled the issue and sent the Nicaraguans packing. What impressed me is that Costa Rica hasn’t had a military since 1948! A point most Ticos are very proud of. However, they do have police force, which despite being underpaid and under-equipped, is not afraid to act when needed. And they took care of what could have become a huge international crisis without us sticking our nose into it. Best wishes, George

Congress Wimps Out

Well, no doubt our Congressional members are worried about keeping their jobs. So they decided to sweep important tax issues under the rug until after the mid-term election next month. Then, of course, we’ll have the holiday recess. And hopefully a lot of new cast members. I wouldn’t expect income tax, estate tax and alternative minimum tax to come to anyone’s attention until well into the first quarter of 2011. Congress did, however, pass the Small Business Jobs Act of 2010 before hitting the campaign trail. Here’s a quick overview of a few points that might touch your wallet: Employee cellphones — If your employer provides you with a cellphone, you’ll no longer have to deal with the recordkeeping nightmare of logging your personal cell use. Roth 401(k) plans — You can now transfer 401(k) money into a Roth 401(k) plan. You’ll have to pay income taxes, but Roths allow tax-free buildup and tax-free withdrawals. And if you make the switch this year, you can defer the conversion income taxes into 2011 and 2012. The catch is that your employer's plan must allow for such Roth accounts. Annuity payouts — If you own a tax-deferred annuity outside of a retirement plan, you can now break out part of that money to provide a steady income. The balance will continue to grow tax-deferred. For instance, suppose you have a tax-deferred annuity that’s worth $100,000. And maybe you only need enough income each month to pay for long-term care insurance. You could ask the annuity company exactly how big of a lump sum would you need much to generate $xx a month for the rest of your life. Let’s say it’s $25,000. That amount will set you up with the ongoing income you want and the remaining $75,000 will stay in the original account for you to use in the future. Rental expenses — Those of us with rental properties now have one more government-induced aggravation to deal with. Starting in 2011, we’ll have to fill out 1099’s for anyone who does more than $600 in work for us during the year. Landscapers, plumbers, painters are among those who will have to give you Social Security numbers so you can report the income to the IRS. So you better make sure they’re legal residents with valid Social Security numbers before hiring them. What’s in store for us when Congress gets back to work in January? I place my bet on higher taxes for all. And even if Congress refuses to boost taxes or cut expenses, state and local governments are swimming in a sea of red ink. Good luck! George