IRA Year-End Planning

IRA Year-End Planning

Those over age 70 ½ have to take required minimum distributions by December 31^st unless this is the year they reach age 70 ½. Then, they have until April 1^st of next year. Generally, it is better to take the distribution this year, otherwise, you’ll have to take two distributions next year.

This is just one of the IRA rules. There are many more and most not as simple as this. Here are some year-end strategies that might benefit you.

• People are permitted tomake a distribution and repay it within sixty days without tax or penalty. One strategy for those that underpaid their estimated taxesfor 2013 is to take a distribution, have all or most of the money paid as withholding tax either to the IRS, your state or both; and then repaythose funds within sixty days. These withholding tax payments will be allocated by the taxing authorities as if they were made on timethroughout the year and you’ll avoid penalty.
• If your plan is to makecharitable bequests, you should consider leaving some of your IRA or retirement funds to the charities. This way, those funds would escape all income and estate taxes when eventually distributed. IRA funds left to individuals are subject to required minimum distribution rules and will be subject to income tax when distributed; and they are also subject to estate tax depending upon the size of the overall taxable estate.
• If you are in a low tax bracket this year, you might want to consider rolling over your traditional IRA to a Roth IRA. Once in the Roth IRA for five years, any distributions will always be tax-free and the required minimum distribution rules will not apply. All earnings in the Roth IRA are also tax-free.
• If you have large balances in an IRA and an equally large business loss, you might want toconsider taking a taxable distribution [that may or may not be transferred to a Roth IRA] that will be sheltered by the losses. If you do not, the business losses might not be fully absorbed by other income, and will expire when you die, while IRA distributions will be taxed when made.
• An estate tax planning strategy with a large IRA is to convert to a Roth IRA and pay the income taxes. This will remove the income tax payments from your assets so your taxable estate would be that much lower. Also, whatever would have been earned on those funds would also not end up in your estate and all future earnings on the Roth IRA would also never be subject to taxation.
• If you are still working, you are not required to take minimum distributions from your employer’s 401k plan that you participate in.
• If you have business income and are eligible to open a one-person 401k plan, it must be opened by December 31. It can be funded by the due date plus extensions of your tax return. If you want to shelter some of your income with a SEP/IRA, you can open and fund it anytime up until the due date including extensions of your 2013 tax return. This might not work so well if you have eligible employees. Check with a tax advisor to find out which will work best for you.
• Now is a good time toreview your beneficiary designations and update them if necessary. If you have grandchildren and named your children as beneficiaries, make sure you add “per stirpes” after each child’s name. This way if a child predeceases you, their shares would go to their children and not their siblings.