Roth IRA Conversion Alert

If you converted all or a part of a Traditional IRA to a Roth IRA in 2008 you may have an opportunity to recoup the income taxes you paid when making that conversion. But you must act before October 15th of this year.

If you made a conversion to a Roth IRA in 2008, the value of the securities you converted have probably gone down. This means you paid taxes on money you no longer have. You should consider "recharacterizing" that Roth IRA conversion back to a Traditional IRA. Recharacterization is the IRS lingo for canceling the conversion and it helps you in a couple of ways. First, you can get a refund of the taxes you paid on the converted IRA funds and secondly, you can redo the conversion 31 days later, potentially producing even more tax free income.

To learn more see the entire article from Ed Slott in this months Financial Planning magazine.

401k Q & A

Through my membership in NAPFA, I received a press request from a reporter with MSN. The questions he posed were so good I though it would make a good blog post.

How can a person tell if their employer sponsored defined benefit plan is good?
Wow, a very subjective question. It is hard to make generalizations but the first place to look is the fees charged to participants. Many 401k providers "wrap" administrative and reporting fees into an "asset fee" or "annual maintenance charge" that are billed against the individual participants investments. While this is legal, a "best practice" is for the plan sponsor to pay these fees directly on behalf of the plan. It is a deductible item for the sponsor and allows better returns for the participants by lowering the expenses charged to their tax deferred account. Another area to examine is the total fees paid by participants, which include "asset fees" and the expenses of the investments a participant chooses to use in their account.

If not what can they do to remedy the situation?
Many employers are not aware of their options. The employer has made a financial commitment to their employees by offering the 401k, and they are almost always participants themselves. I am sure they want to offer the best plan they can. A good resource for plan sponsors is www.dol.gov/ebsa/fiduciaryeducation.html. Here sponsors can download booklets and forms to help them evaluate different 401k proposals.

Can you have a Traditional IRA if you have a 401k or 403b plan at work?
Yes, if you meet certain income limits. For single filers with modified adjusted gross income of $52,000 and under for joint filers with income of $83,000 and under if you participate, or income of $156,000 and under if your spouse is the participant, you can make fully deductible contributions. For single filers with MAGI between $52,000 and $62,000 and joint filers with MAGI between $83,000 and $103,000 if you are the participant and between $156,000 and $166,000 if your spouse is the participant you can make partially deductible contributions. Another option is a Roth IRA contribution which you can use if you would qualify for a fully or partially deductible Traditional IRA contribution.

Charitable Donations From Your IRA

If you are over 70 1/2 you know that each year you are required to take money from your IRA whether you need it or not. Good news for those in this group who make charitable contributions - the IRS will allow distributions again in 2007 to be made directly to qualified charities without including the contribution amount in your Adjusted Gross Income.

This could allow more of your itemized deductions that are tied to you AGI to count, like Miscellaneous Expenses (must exceed 2% of AGI) and Medical Expenses (must exceed 7.5% of AGI) or could reduce the taxable amount of your social security benefits.

Bottom line if you must take a required minimum distribution from an IRA and you plan to donate to charity you are probably better off having the donation paid directly from your IRA. As always check with you tax advisor first.

photo courtesy of cohdra@morguefile.com

Naming A Trust As An IRA Beneficiary

Sometimes there are good reasons to name a trust rather than an individual as a beneficiary of your IRA. Maybe you have a child who you fear will spend the money they inherit wastefully, or maybe you have a special needs heir and a direct inheritance would affect their qualifications for aid, maybe there is a second spouse you wish to provide for but children from a first marriage you want to protect also.

All of these goals can be achieved and the "stretch out" provisions of IRA rules preserved if you do some careful planning.

IRS rules only allow individuals to inherit IRAs without triggering immediate taxation. However if you structure a trust as a "see through" trust you can exert some control without losing the tax benefits of a "stretch IRA". To qualify as "see through" the trust must:

• The trust must be valid under state law;
• The trust must be irrevocable or become irrevocable at the death of the grantor;
• The trust beneficiaries must be identifiable individuals
  
• Documentation must be provided to the custodian of the IRA by Oct. 31 of the year after the owner dies
  

The trust must pay out the IRA's required minimum distributions to the beneficiaries or be subject to taxes at the trust level which reach the maximum tax rate (35%) with only $10,000 of income. The trust must base the RMD on the age of the oldest beneficiary so if there is a large difference in the ages of your desired beneficiaries you may want to consider splitting the IRA to allow a lower RMD for younger beneficiaries.

Having a trust as the beneficiary of your IRA can provide many benefits, but the price of making a mistake is high, so be sure to consult with a qualified legal and tax advisor before choosing this option.

technorati tags:Finance, IRA Beneficiary, estate planning

Pension Protection Act

The Pension Protection Act of 2006 was recently signed into law by President Bush. The act contains numerous provisions that benefit individuals including:

• Made permanent the increased IRA contribution limits that were set to expire in 2010 and provides for indexing contributions to inflation after 2008.
• Made permanent the tax free withdrawal status for qualified distributions from 529 college savings plans that were scheduled to expire in 2010.
• Allows non-spouse beneficiaries of qualifies plan assets to rollover the proceeds to their own IRA.
• Allows for automatic enrollment in 401k plans, requiring workers to opt out rather than opt in.
• Allows employers to pay advisors to counsel participants in qualified plans without becoming liable for the advise given to participants as long as the company performs due diligence when hiring advisors and the advisor is a fiduciary accepting person liability for the advise provided.
• Allows members of the military called to active duty to take penalty free distributions from IRA, 401k, and similar qualified plans.
• Permanently allow for Roth 401k and 403b plans.
• Made permanent the Savers Credit under which low and moderate income tax payers can receive a non refundable credit for contributions to retirement savings plans and IRAs based on income and filing status.

For more information look here and here.

technorati tags:finance, Pension Protection Act of 2006, financial planning,

The Estate Plan For Your IRA

Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes probate court and public filing of related documents, or they can transfer by contract.

The advantages of having your assets transfer by contract include:

• Privacy - The details of a contract are private and not subject to the public scrutiny of your will and the probate system.
• Speed - Contractual agreements transfer outside of the probate process and so are not subject to the delays that often arise during probate.
• Expense - By transferring assets outside of the probate process you and your heirs could save significant money in probate fees (these fees vary from state to state).
  

Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts, and your IRA and 401k accounts if you complete the beneficiary forms correctly.

When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets transfer by contract. You should also name contingent beneficiaries and choose whether you want the assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your wishes are honored after your death.

Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds will be encumbered until the courts name a guardian).

Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA, but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after 2007.

The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the right way to transfer these assets can save time and money, but can also be confusing. If you are unsure how to proceed choose a professional to help you, but don't delay.

technorati tags:Finance, estate planning, IRA