Odds and Ends
Continued from Page 1 of property (even stocks and other investments). The approach will even allow for a progressive distribution of the property to the recipient as he, she or they reach a sufficient maturity level to be able to handle the wealth.
Income Tax Planning Ideas
The so called “Bush tax cuts” expire at the end of 2010. For those of you (probably the very few of you with the stock market variations we have experienced this year) who have investments which have accumulated “capital gains,” you should consider the consequences of taking your gains before the close of this year. Unless Congress makes a change in the tax structure, next year the capital gains tax rates will be higher.
Time Growing Short for Tax-Deferred Conversion to Roth IRA.
Your first question might be, “Why would I want to convert to a Roth IRA?” The answer is to lower your taxes and preserve your retirement investment. With the traditional IRA you will invest pre-tax money. So when you take it out it is all taxed, both principal and income. So, there are only two real problems with the traditional IRA: (1) The owner pays taxes on retirement withdrawals on the entire withdrawal and (2) after certain income limits you no longer get a tax deduction for contributing to one (you still get the tax- deferred growth, but that’s it).
When one makes retirement withdrawals from a Roth, there is no income tax consequence as a result of the withdrawal. Because money contributed into a Roth is after-tax dollars there are no taxes on the principal contributions into the Roth when withdrawn, nor will there be taxes on the profits made inside the Roth.
The Internal Revenue Code now provides for a conversion from one to the other if it appears to the individual that it is tax advantageous for him or her to do so. So then your next question might be “Why is 2010 an important year for this?” It is the first year
in which the conversion may be made regardless of your income levels. Last year if you made more that a certain amount you were not permitted to make a conversion. Furthermore, 2010 is the only year in which you will be able to convert and divide the tax consequences of the conversion between the following two years.
This year the taxes from the “conversion income” can be deferred until 2011 and 2012. You will have the option to claim 50 percent of the conversion amount as income in 2011 and the remaining 50 percent in 2012. By dividing the income between the years it further reduces the tax cost of the conversion. This provision only applies during 2010. After 2010, conversions must be reported in full in the taxable year in which they are made.
Here are seven steps I believe you should consider in making a conversion to a Roth IRA:
1. Seek professional advice; 2. Evaluate your IRA and/or 401(k); 3. Weigh financial and tax factors; 4. Calculate the potential tax due; 5. Decide when to pay the tax bill; 6. Consider when to convert;
7. Fill out conversion paperwork (or not if the first six steps suggest it is not good for you).
As a footnote about Roth IRA plans, here is a idea for someone torn between saving for retirement and saving for college: Use a Roth IRA as a College Savings back-up plan. The 529 college savings plans are a superior way to save for college, but if you’re behind in saving for retirement then this alternative strategy might suit you. You may not know this, but a Roth IRA for retirement may also be used for education. There is a provision which allows you to withdraw from your Roth IRA to pay for “qualified higher education” expenses while avoiding the 10 percent early withdraw penalty. If your cash flow is putting you in the position of making a choice between retirement savings and college savings, isn’t it better to have extra savings tied up in the Roth versus a College Savings Plan which might never get used? This idea offers flexibility.
OKLAHOMA BAPTIST UNIVERSITY 11
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