5 Things Taxpayers Can Proactively Do To Best Take Advantage of the New Income and Estate Tax Law

Posted on by in 401(k), 403(b), Estate Tax, IRAs, Tax Law.

There are some BIG changes for taxpayers in the creation of the new 2010 Tax Relief/Job Creation Act.  How can you best respond to this law?  Take a look at these 5 things all taxpayers can proactively do to best take advantage of the changes:

1.  With the money you save on the reduction of your social security tax, you should contribute at least that much additional money to your retirement plan.

2.  Contribute to your retirement plan in the following order:

  • Contribute whatever an employer is willing to match or even partially match
  • Contribute to your Roth IRA and if married to your spouses Roth IRA, even if your spouse isn’t working
  • Maximize your contribution to your Roth 401(k) or Roth 403(b) if available
  • If not available, maximize your contribution to your traditional 401(k) or 403(b)
  • If your income is too high to qualify for a Roth IRA, contribute to a nondeductible 401(k).

3.  Since we have two more years of low tax rates, make Roth IRA conversions.  Consider multiple conversions since you can “recharacterize” or undo them.  If you do multiple conversions, you can keep the ones that do well and undo the ones that don’t.

4.  Review your wills and trusts.  Many, if not most of the wills done for taxpayers with estates of $1 million are now outdated.  Not only will you not get optimal results, but your existing wills and trusts might be a huge restriction on the surviving spouse.

5.  Now that you can either leave or gift $5,000,000 or $10,000,000 if you are married, you should rethink potential gifts to children and grandchildren without tax laws that would otherwise restrict gifts you would like to make.

Recent IRS Notice Lifts Ban on Rolling Over Your MRD

Posted on by in IRAs and tagged , , , .

In response to the economic crisis that kicked into high gear last year, Congress passed the Worker, Retiree and Employer Act (WRERA) of 2008 with the goal of providing older Americans some much-needed relief and flexibility in managing their personal finances. Part of the Act allowed for the suspension of minimum required distributions (MRDs) from IRAs and defined contribution plans. However, WRERA was enacted so late in the year, many retirees and plan administrators were unable to adjust to the new rules and many continued to take their MRDs during 2009.

If you are one of the people who unnecessarily took MRDs all year, you’ll be happy to note that on September 24th, the IRS issued Notice 2009-82 which gives you a second chance to keep the money in your account.  The normal ban on rolling over MRDs is being temporarily lifted and you now have the option to roll the money back into the IRA or defined contribution plan by November 30th for mandatory payments taken before October 1st.  If you took an MRD after September 30th, the deadline for putting the money back into your plan is 60 days after the distribution was made.

Some IRA owners are bound to be disappointed with part of Notice 2009-82.  The IRS did not change the part of the tax code which mandates a one-rollover-per-year rule for IRAs.  If you are an IRA owner who took your MRD in one lump sum – no problem.  You can roll the entire amount back into your plan.  Unfortunately, if you’re an IRA owner who took monthly MRDs, you are limited to rolling back only one of the withdrawals.

If your MRD was not taken from an IRA, but from some other defined contribution plan like a 401(k), this one-rollover-per-year does not apply to you.  Even if you took monthly distributions, you can still roll the entire amount back into your plan.

IRS Notice 2009-82 provides an excellent opportunity to extend your income tax deferral from your retirement account.  Just don’t miss the deadline – November 30th for payments taken before October 1st and 60 days after the distribution for payments made after September 30th.

For a complete look at Notice 2009-82, click on www.irs.gov/pub/irs-drop/n-09-82.pdf.

Michael Jackson’s Estate

Posted on by in 401(k), Estate Planning, IRAs, Roth IRA Conversions.

The circus surrounding Michael Jackson’s death and estate will, no doubt, continue for months, possibly years. No matter what you may think of Michael Jackson personally, we can all learn some lessons from the way that Michael set up his affairs.

For starters, Michael took the time to consider the matter of guardianship for his children.  Some believe that his choice is unwise – naming his 79 year-old mother, Katherine, as guardian and 65 year-old singer Diana Ross as contingent guardian.  The important thing to remember is that Michael obviously gave this considerable thought and wanted to make sure that his wishes were known.  It’s very important that all parents of minors do the same thing and take the responsible step of putting their wishes in their will.

Michael’s will was relatively straightforward — have a look for yourself  – http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will. The will is a pour-over will which basically says that all money or property that has not already been transferred into a trust should be transferred into a trust at the time of death.  For medium or large estates, a pour-over will with a family trust is an excellent way to avoid probate and to maintain some privacy since details of a trust are, in most states, not a matter of public record.

Sorting out the details of Michael’s financial situation will take quite some time.  One of the reasons is that much of Michael’s estate was not liquid.  The value placed on his main asset, a 50 percent interest in the Sony/ATV music catalog, has been reported to be worth anywhere from $500 million to $1.5 billion.  In addition, the estate is burdened by personal debt in the neighborhood of $500 million.

One lesson to be learned from this example is that if you have assets that are hard to value and not terribly liquid, you should consider life insurance.  If set up correctly, the life insurance proceeds would be tax-free and could be used to pay debts of the estate and taxes on the estate.

Finally, a piece of advice in the event that you leave behind a 401(k) plan.  While little is known about Michael Jackson’s estate planning, let’s assume that he got good advice and had set up a 401(k) plan.  If the 401(k) plan was left to Michael’s children, they could make a Roth IRA conversion of that plan in 2010.  They would pay income tax on the plan now, but all future growth of the plan would be income tax-free.  Considering the ages of Michael’s children, the difference would be measured in millions of dollars over their lifetime.

One interesting side note – if Michael had put his money into an IRA instead of a 401(k), his children would not have the option of making a Roth IRA conversion of the inherited IRA.  The ability of heirs to make a Roth IRA conversion is just one of the potential benefits of keeping your money in an existing 401(k) plan instead of doing a rollover to an IRA.

These lessons taken from Michael Jackson’s estate just scratch the surface.  There is much to be learned in the way Michael dealt with his estate while alive and we have put together a more in-depth article which you can access through our homepage by clicking on articles.  We will also be including this piece in our next newsletter.  If you aren’t receiving our newsletter, it’s easy to sign-up.  Go to the homepage of this website and click on e-newsletter sign-up on the left-hand side.