GOOD MONEY: RETIREMENT PLANNING OPPORTUNITIES & CHANGES FOR 2009-2010

Good Money: Your guide to financial planning & socially responsible investing

RETIREMENT PLANNING OPPORTUNITIES & CHANGES for 2009-2010

By: Judith L. Seid, CFP ®
President, Blue Summit Financial Group

December 2009 (La Mesa) -- Below is a brief discussion of some of the major opportunities available for you now and in 2010.  A check-up with your tax professional, and/or financial advisor is wise to ensure that you are taking advantage of all great tax and retirement planning strategies given your individual situation.

ROTH – IRA CONVERSIONS for 2009

If your income is low this year, due to layoff or lower business income, for example, you still have time to convert IRA accounts to Roth IRA.  This can save you thousands of tax dollars later as the Roth-IRA monies will grow tax free vs the IRA which is tax deferred.  It is also worth noting that with all of the reckless government spending, there is a great chance that tax rates could increase in the years ahead. This is another reason why now may be as good time as ever to convert. If converting may send you into a higher tax bracket, you could consider doing a partial conversion (only converting a portion of your Traditional IRA to avoid going into the next bracket).  Your AGI must be below $100,000 in order to qualify for a conversion.  Before converting from a traditional IRA to a Roth, be sure to consult your tax advisor and/or financial advisor.  You should fully understand the potential tax impact of a Roth conversion on your finances and your estate.

First determine your 2009 estimated income, and then convert an amount that allows you to at least “use up” the lower (15%) tax brackets for this year. For example, a client who files married-joint for 2009 can have up to $67,900 in taxable income and still be in the 15% tax bracket, so it pays not to waste any part of this low tax bracket. “Fill up” the bracket by converting only enough 401k plan or IRA funds to a Roth IRA in 2009 to bring the your income up to $67,900.

If you are unsure about how much income you will have, convert anyway and adjust the amount later (when your 2009 taxable income is known) by re-characterizing a portion of the Roth conversion. The funds must be converted/distributed to the Roth account by 12/31/09…so no time to waste! And you have until your tax filing 2010, which can be extended until Oct. 15 to undo a 2009 conversion. Here are the 2009 federal tax rate schedules:

Single Filing Status

• 10% on income between $0 and $8,350
• 15% on the income between $8,350 and $33,950; plus $835
• 25% on the income between $33,950 and $82,250; plus $4,675
• 28% on the income between $82,250 and $171,550; plus $16,750
• 33% on the income between $171,550 and $372,950; plus $41,754
• 35% on the income over $372,950; plus $108,216

Married Filing Jointly or Qualifying Widow(er) Filing Status

• 10% on the income between $0 and $16,700
• 15% on the income between $16,700 and $67,900; plus $1,670
• 25% on the income between $67,900 and $137,050; plus $9,350
• 28% on the income between $137,050 and $208,850; plus $26,637.50
• 33% on the income between $208,850 and $372,950; plus $46,741.50
• 35% on the income over $372,950; plus $100,894.50
• on the income over $186,475; plus $50,447.25

Head of Household

• 10% on the income between $0 and $11,950
• 15% on the income between $11,950 and $45,500; plus $1,195
• 25% on the income between $45,500 and $117,450; plus $6,227.50
• 28% on the income between $117,450 and $190,200; plus $24,215
• 33% on the income between $190,200 and $372,950; plus $44,585
• 35% on the income over $372,950; plus $104,892.50

ROTH – IRA CONVERSIONS in 2010 - Why wait until 2010?

In order to generate additional tax revenues, new rules encourage you to convert from IRA to Roth IRA.  In 2010:

• The $100,000 AGI limit for conversions will go away for 2010 and after, as will the exclusion for married filing jointly  This means that anyone can convert no matter what your income level or filing status
• If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns with no income included on your 2010 tax return. This does not apply if you convert in 2009.

Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.

NET UNREALIZED APPRECIATION (NUA) Tax Break

With all the layoffs this year, some people qualify for the net-unrealized-appreciation tax break if they have appreciated company stock in their 401(k) plan. They get to withdraw the stock as part of a qualifying lump-sum distribution of the plan assets and pay tax only on the cost of the company stock to the plan.  Any appreciation in the stock (the NUA) is not taxed until the stock is sold, and even then, it is taxed at favorable long-term capital gain rates (currently 15%) regardless of how long the stock is held (even if less than one year).

To qualify for the NUA tax break, you must first have one of four triggering events:

• separation from service
• reaching age 591/2
• death or disability.

Once a plan participant qualifies, he or she can take a lump-sum distribution, which is a complete distribution of the account within one calendar year. The company stock must be transferred to a taxable brokerage account “in kind,” that is, as stock. The stock cannot be sold in the plan. You must make sure that all of the plan assets are distributed by year-end or the NUA deal will be lost. Non-company stock assets can be rolled over to an IRA since the NUA tax break does not apply to those assets.

Charity transfers

Qualified charitable distributions from IRAs must be completed by year-end. This provision is set to expire after this year. Even though required minimum distributions were waived for 2009, it still can still pay to transfer IRA funds to charities. This provision is available only to IRA owners and beneficiaries who are at least 701/2. The amount that can be transferred is limited to $100,000 per IRA owner or beneficiary. The transfer must be a direct transfer and must be completed by year-end to qualify for the expiring 2009 tax break.  This provision may be extended.

IRA Beneficiaries

If an IRA owner died in 2008 and had named more than one beneficiary, the inherited IRA should be split by the end of this year to create separate inherited IRAs for each beneficiary. Doing so will allow each beneficiary to use his or her own life expectancy for calculating future required minimum distributions.

Even though no RMDs are required in 2009, this split must still be done by year-end. Properly titled inherited IRAs must be set up for each IRA beneficiary, meaning that the name of the deceased IRA owner must appear in the account title, and it must somehow indicate that it is a beneficiary IRA.

Judith L. Seid, President and founder of Blue Summit Financial Group, Inc,  is a Certified Financial Planner who has actively used socially responsible investing for her clients since 1992. She firmly believes that “We can influence corporations to change their policies and create sustainable social change by using proactive investments.” investors looking to use the power of financial investment to create sustainable social change. For more information, contact Judith at Blue Summit Financial Group in La Mesa, (619) 698-4330; www.BLUESUMMITINVEST.com Securities offered through Pacific West Securities, Inc. (Pacific West) Member FINRA/SIPC.  Advisory services provided through Pacific West Financial Consultants, Inc., a Registered Investment Advisor. Blue Summit Financial Group, Inc. and Pacific West are not affiliated.