1, 2010 kicks off the Roth Conversion season. If you plan
to convert next year, have you considered rolling some of your
IRA money into your 401(k) or 403(b) account at work to save
Instituted as part of
The Tax Increase Prevention and
Reconciliation Act signed into law by President Bush on May 17, 2006,
taxpayers earning more than $100k finally have the option to convert their IRAs
and other eligible retirement accounts to a Roth IRA starting in 2010.
Please note that this opportunity was included in that Tax Act as a
REVENUE-RAISER. Yes, the government hopes to collect a lot of tax
revenue thanks to high-income individuals who convert their IRAs and other qualified
retirement accounts to a Roth IRA in 2010.
March 2007 Newsletter, we
instructed our readers to begin (or continue) making non-deductible
contributions into their IRAs each year in anticipation of converting their IRA
to a Roth IRA in 2010. The higher the percentage of post-tax dollars
to the total value of your IRAs, the smaller the tax burden on the amount
converted. Remember, you should have been tracking your post-tax
contributions on a
attached to your federal income tax return.
Let's look at an
example of how you will be taxed on a Roth conversion, assuming you currently
have only one IRA account funded with $23k of non-deductible IRA contributions
going back to 2006. If your IRA is worth $30k on the date you convert it
to a Roth IRA, you will owe taxes on $7k of income (FMV of $30k less post-tax
contributions of $23k). That's not too terrible of a tax hit to end up
with $30k in a Roth account growing tax-free.
But what happens if you
also have a rollover IRA or SEP IRA worth $200k? In this example, since your post-tax IRA
contributions remain at $23k while your total IRA value jumps to $230k, your
basis in your IRAs falls to just 10% of your total IRA balance ($23k/$230k).
If you convert your $30k IRA to a Roth IRA, you now only shield $3k of the
amount converted from taxes, and should expect to be taxed on $27k of income.
Tax treatment of a rollover from a traditional IRA to an eligible retirement
plan other than an IRA.
Ordinarily, when you have basis in your IRAs, any distribution is considered
to include both nontaxable and taxable amounts. Without a special rule, the
nontaxable portion of such a distribution could not be rolled over. However, a
special rule treats a distribution you roll over into an eligible retirement
plan as including only otherwise taxable amounts if the amount you either leave
in your IRAs or do not roll over is at least equal to your basis. The effect of
this special rule is to make the amount in your traditional IRAs that you can
roll over to an eligible retirement plan as large as possible.
Basically, the IRS is
reminding you in their Publication 590 on IRAs that you have the option of
rolling money out of your IRAs into an employer sponsored plan that accepts IRA
rollovers. And when you roll money out of an IRA, the non-deductible
contributions remain within the IRA.
In our second example
above, what would happen if that person rolled his $200k Rollover IRA into his
403(b) account at work? In this updated example, the total fair market
value of his IRAs would revert to just $30k, so the taxable income on the
conversion would be the same $7k as in the first example. This person's
taxable income, therefore, would decrease by $20k. That's a pretty good
return on your investment of a few minutes of time spent completing some
One way to push this
opportunity even further is to convert the exact amount of the post-tax IRA
contributions you made over the years, and roll out the remaining
IRA balance into your 401(k) or 403(b) account at work. This strategy
allows you to get the maximum amount of money into your Roth IRA without paying
a dime of taxes. Please read through
to Form 8606 if you are skeptical of this strategy. You also need to
check with the retirement plan administrator at work to confirm whether your
employer's 401(k) or 403(b) plan accepts IRA
I think that famous Polka
tune heard frequently on the Lawrence Welk Show sums up this opportunity the
best: Roll out your IRA, and you'll save a barrel of taxes....
The $8k first-time homebuyer
tax credit has been extended to include homes under contract by April 30,
2010 and purchased by June 30, 2010. Only individuals who have
not owned a home for three years up to the date of purchase qualify.
A new $6.5k repeat homebuyer
tax credit was instituted for post November 6th transactions. To
qualify, you need to own your principal residence for five consecutive years
of the eight years prior to the purchase date.
The income limitation for this
credit has increased for all post November 6th transactions as follows:
Range to Qualify for Both Homebuyer Tax Credits
No credit is allowable for
homes with a purchase price of greater than $800,000 for post 11/6/09
The post November 6th credit
is not available to children under the age of 18, or to individuals claimed
as dependents on another person's tax return.
The IRS has promised
to issue an updated
Form 5405, First-Time Homebuyer Credit, shortly. The
new version of this form will combine the pre and post-November
6th rules, and will be a good resource for anyone who purchased
a home during the year.
It's not too late to cut
your 2009 tax bill. Prior to December 31st:
Increase your 401(k)
and 403(b) contributions if you haven't been contributing at the
maximum rate all year. This year you can put up to $16,500 into
your 401(k) or 403(b) plan. Anyone 50 or older by December 31st
can put away an additional $5,500. Contributing to a 401(k) or
403(b) plan at work is one of the best tax shelters available to you
during your working years.
If you’re self-employed, consider setting up a Solo 401(k) by 12/31.
A Solo 401(k) plan lets a self-employed person hit the $49k retirement
plan max with less income than a SEP IRA, and also allows a person aged
50 or older to put away $54.5k into a retirement plan for 2009.
Take a look at your
withholdings and instruct your employer to withhold additional taxes
if you haven’t had enough taxes withheld during the year to avoid
getting hit with an underpayment penalty.
Consider selling your
investments held in non-retirement accounts that have decreased in value
since your capital losses can offset other capital gains realized during
the year (including from your mutual funds). Excess losses can
then be used to offset up to $3,000 of wages and other income.
Make sure to wait at least 31 days before buying back a security sold at
a loss, or the IRS will disallow the loss under the "wash sale" rules.
Send in your January, 2010 mortgage payment early enough so it will be processed prior to
12/31/09. By sending in your payment a few weeks early, you can
deduct the interest portion of that payment a full year earlier.
Clean out your closets
and donate your clothing and household items to a charitable
since "non-cash" contributions are deductible if you itemize.
Don’t forget to get a receipt. And you should make a list of each
item donated, along with its condition. Remember, only donations
of clothing and household items in "good condition or better" qualify
for a deduction. (To track what you donate, download our
Non-Cash Contribution Worksheet -
Excel Version or the
For gifts of money,
making your donation by credit card before December 31st allows you to
deduct the donation on this year's return, even if you don't pay your
credit card bill until 2010. And you always have the option of
donating appreciated investments to charities. You get to claim your
donation based on the value of the assets donated, without paying any
capital gains taxes on the appreciation.
Pre-pay your projected
state tax shortfall if you'll be itemizing your deductions and not
subject to the alternative minimum tax.
Pre-pay and pay off
your medical bills if your total medical expenses exceed 7.5% of
your income and you itemize.
Evaluate whether you'll
save any taxes by postponing 2009 income or deductions into 2010 or
by accelerating 2010 income or deductions into 2009.
For 2009, the standard deduction for a single individual is $5,700 and
for a married couple is $11,400. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
For 2009, the personal exemption is $3,650.
Individuals will claim a personal deduction for themselves, their spouse, and
The maximum earnings subject tosocial security taxes is $106,800
for 2009 and 2010.
The standard mileage rateis $.55 per business mile as of
January 1, 2009, down from $.585 per mile as of December 31, 2008.
The maximum annual contribution into a 401(k) plan or a
403(b) plan is $16,500 in 2009 and 2010. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account that year.
The maximum annual contribution to your IRA is $5,000 for 2009. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2010 to make your 2009 IRA
Check out this recent post on
following this issue for 5-10 years, even submitted paperwork to the IRS
many years ago to no effect. Finally, just got a notice that UPenn has hired
PriceWaterhouse to try and get the FICA back for its housestaff, I'll
definitely be signing up.