While retirement investors have had a miserable time lately, tax season is always a good time to do some long-term planning.
With the April 15 tax deadline coming into view, I asked several smart financial planners and tax experts for their best ideas for retirement investors. Most advisers this year are focusing on ways to make the best of depressed asset values and to add flexibility to your long-term retirement plans.
Here are six of the best suggestions that I heard:
1. Convert to a Roth. This is top-of-mind for most advisers right now. Shrunken asset values make it a great time to move dollars out of traditional tax-sheltered IRAs to taxable Roth IRAs. The value of the funds you move is taxable now which means you can more easily move a greater amount of equity value.
Just don't convert so much that you bump yourself into a higher tax bracket, cautions Jon Beyrer, a Certified Financial Planner (CFP) with Blankinship and Foster.
"A Roth conversion lets you pre-pay the taxes based on today's low prices and at a low tax rate," Beyrer says. "Later, when investment values rise and if your tax bracket is higher, you won't have to take minimum distributions, and you won't pay any taxes on distributions you do take."
2. Reverse a Roth. If you converted a traditional IRA to a Roth in 2008 when equity prices were much higher, the law allows for something called a Roth Recharacterization the equivalent of a do-over. "You can un-do a conversion before you file your 2008 tax return so that you won't pay tax on value that has been wiped out by the stock market," says Ed Slott, a CPA and author of Stay Rich for Life! (Ballantine Books, 2009).
3. Don't take a distribution in 2009. If you're over age 70-1/2, normally you'd need to take a Required Minimum Distribution (RMD) from your traditional IRA or 401(k) funds, and report it as income. But Congress suspended the RMD for 2009 in order to help battered investors recover from the market meltdown. Going without a distribution this year - if you can afford it - means less tax liability, too. "Seniors who don't take an RMD this year will likely be in their lowest tax bracket that they'll see for the rest of their lives," says IRA distribution expert Jim Lange, author of Retire Secure! Pay Taxes Later-The Key to Making Your Money Last (Wiley, 2009).
4. Take inherited IRA deductions. Slott notes that if you inherited an IRA in 2008 and took distributions from it--and the person you inherited from had an estate that paid federal estate taxes, you are entitled to a major income tax deduction that's generally overlooked by beneficiaries. It's called the "Income in Respect of a Decedent" (IRD) deduction. "You take it as a miscellaneous itemized deduction, not subject to the 2 percent adjusted gross income limitation," Slott says. The IRD deduction is also exempt from alternative minimum tax, he notes. This deduction, however, has some complicated twists, so be sure to consult a retirement planning expert or accountant to make sure you qualify.
5. Get ready for higher tax rates. The Obama Administration is moving to make good on the President's campaign promise to raise rates on America's wealthiest households. The Bush tax cuts likely will expire at the end of 2010; from an investment standpoint, this likely means higher tax rates on capital gains for the most affluent households. Obama's campaign pledge was to raise capital gains taxes back to 20 percent (from 15 percent) on long-term gains for households making more than $250,000 a year. "We always tell our clients that they should expect higher tax rates at some point," says Beyrer.
6. Transfer assets. If you have enough assets to support your own needs, this is a good time to make gifts for estate-planning purposes. An individual can give $13,000 to any one person in 2009, notes Kevin Dorwin, a CFP with Bingham, Osborn and Scarborough. If you're making a gift of depressed equities, this simply means you can transfer more shares without exceeding the limit.
Copyright 2009 Tribune Media Services