Check IRAs off your Holiday To-Do List

With legislature constantly changing the tax laws, it is important to make sure you are aware and have completed all the necessary year end procedures relating to IRAs. In order to maximize your tax deductions, minimize any penalties, and maximize your IRA accounts, check the following items off your to-do list:

  1. Required Minimum Distributions (RMD) were reinstated for 2010. Anyone over the age of 70 ½ and any beneficiaries, that are over 70 ½, of people who died in 2010, are required to take their RMDs. The RMD is calculated based on the balance in the IRA Account at December 31, 2009, and if the RMD is not taken, a penalty of 50% is assessed on missed distributions.
  2. If you inherited an IRA account in 2009 you have until December 31, 2010 to split the account into separate accounts for each beneficiary. This is a great thing to do because if it is not completed, the RMD is calculated based on the age of the oldest beneficiary.
  3. Beneficiaries who inherited an IRA in 2009 have the ability to transfer it into an Inherited IRA or convert it directly to an Inherited ROTH IRA. The conversion, as well as the first RMD, must be completed by December 31, 2010.
  4. ROTH Conversions have been a hot topic recently. One reason is that if they are completed by December 31, 2010, the tax liability can be spread over 2011 and 2012.
  5. Net unrealized appreciation, 10-year averaging, and pre-1974 capital gains elections are all tax break options for people who are looking into lump-sum distributions. They require the entire plan to be distributed in one year, so if you have already taken a distribution the entire account must be emptied to qualify for the tax break.
  6. Another strategy if you are converting to a ROTH Account is to accelerate your charitable contributions from 2011 to 2010 to help offset the taxable income, dollar for dollar. This is, of course, if a client opts out of using the two year tax deferral program offered by the IRS for 2010.
  7. Have you given your gifts for 2010? You have until December 31 to gift up to $13,000 per donor to each recipient. This is more valuable for reducing your taxable estate, but if your donees have extra money, it may allow them the opportunity to complete a ROTH conversion, pay the tax, and avoid penalties.
  8. Taking an IRA distribution and applying it all to withholding is a great way to avoid estimated tax penalties. The withholding is treated as if it was withheld throughout the entire year, so the timing issue is eliminated.
  9. Last, but not least, make it a point to check beneficiary forms. It is very important that these are reviewed annually.

Every item on this check list is an excellent planning point. Even though many may not apply to you, it is important to talk to your Anders professionals in order to maximize your tax deductions, minimize penalties, and give your IRA accounts a boost.