New England Tax

Many employers offer what are commonly referred to as 401(k) plans, named after the tax code section that created the plans. These plans allow employees to defer part of their earnings for retirement. Some employers offer matching contributions that increase the attractiveness of the programs.

The value of 401(k) plans is enhanced even further by increasing the general contribution limit and allowing individuals over age 50 to make additional contributions. Where an employer’s plan permits, individuals can contribute amounts that are not excluded from income to a 401(k) plan in a manner similar to Roth IRA contributions.

Catch-up contributions are exempt from the regular dollar limits on deferrals provided that all 401(k) plan participants are permitted to make catch-up contributions.

The table below summarizes the inflation adjusted limits for 401(k) plans for 2008 and 2009. If you have additional questions about participating in your employer’s 401(k) plan, please call this office.

Year	2008	2009
Under Age 50	15,500	16,500
Age 50 & Over	20,500	22,000

Extra IRA Contributions – Victimized Employees - Individuals who were participants in a 401(k) plan under which the employer matched at least 50% of employee contributions to the plan with employer stock and the employee was victimized, as in the case of Enron employees, are eligible to make an additional $3,000 IRA contributions in 2007, 2008, and 2009.

Tax laws allow a way for taxpayers to make both Traditional and Roth IRA contributions through their employer’s qualified plans. Under this program, employees can make “volunteer employee contributions” which can be designated as either Roth or Traditional IRA contributions. However, even though these IRA contributions are being made through the employer’s “Deemed IRA” program, you still must meet all of the normal income qualifications and contribution limits for either the Roth or Traditional IRAs. If you do not qualify, then the “Deemed contributions” would be considered over-contributions that would have to be corrected and could incur some tax penalties. Therefore, before becoming involved with a Deemed IRA program, we strongly suggest you contact this office.

Alert – Required minimum distributions have been suspended for the 2009 tax year.  However, this suspension does not apply to delayed 2008 distributions by a taxpayer who turned 70½ during 2008.

Taxpayers who have reached the age of 70½ and have qualified retirement plans are generally required to take minimum distributions from those plans annually. Quite frequently, taxpayers have multiple IRA accounts in addition to one or more types of qualified plans.This gives rise to a commonly asked question, "Must I take a distribution from each individual account?" For purposes of the annual required minimum distribution, a separate distribution must be taken from each type of plan. However, a taxpayer may have multiple accounts for each type of plan, which for tax purposes are treated as one plan. For example, you have three IRA accounts. The three separate accounts are treated as one for tax purposes, and the distribution can be taken from any combination of the accounts.

The decline in the stock market has adversely affected the value of taxpayer’s retirement investments. This decline in value of retirement accounts has uniquely affected taxpayers who have taken early retirement.

Generally, taxpayers who withdraw from their pension plans including IRAs before reaching age 59 ½ are subject to the 10% early withdrawal penalty. However, taxpayers who retire can avoid that penalty by using a special exception that requires that they take substantially equal payments from their pension plan for a period of time that is the longer of five years or the until they reach 59 ½.

The substantially equal payments are computed based on the value of the retirement account. Those retirees who retired before the decline in the market may have substantially equal payments that are excessive for account that have substantially declined in value and are depleting the plan to a point that future recovery is threatened.

Because of this, the IRS has announced that it will allow taxpayers to make a one-time change to the Minimum Required Distribution method, which is the same method used by individuals who have reached the age of 70 ½.

This one-time change will only allow a taxpayer to switch to the Required Minimum Distribution (RMD) method. Caution: switching to the RMD may substantially reduce the annual distribution and may not allow an affected taxpayer to withdraw enough to meet their current financial obligations while they wait to meet the 5-year or age 59 ½ rule. Many of them are counting on the early pension withdrawals until they start receiving their Social Security or employer retirement. Once they switch, they cannot increase or decrease their withdrawal without violating the exception.

This is a nonrefundable income tax credit for 50% of the administrative and retirement-education expenses for any small business (less than 100 employees) that adopts a new qualified defined benefit or defined contribution plan (including a Code Sec. 401(k) plan), SIMPLE plan, or simplified employee pension ("SEP"). The credit is limited to 50% of the first $1,000 of administrative and employee retirement-education expenses in each of the first three years of the plan.

You may encounter certain financial situations making it necessary to withdraw funds from your IRA account. Funds withdrawn from a Traditional IRA are taxed at the regular income tax rates AND are subject to a 10% early withdrawal penalty if you are under 59-1/2 years of age at the time of the withdrawal. However, in addition to death, there are exceptions to this 10% penalty when you meet certain conditions or the funds withdrawn are used to pay certain qualified expenses. But remember even if you avoid the penalty with one of the following exceptions, the withdrawal is still taxable for regular tax purposes.

• Higher education expenses such as tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a qualified student at an eligible educational institution. In addition, if the individual is at least a half-time student, room and board is a qualified higher education expense.
  
  
• First-time homebuyer acquisition costs (within 120 days of the distribution) for the main home of a first-time homebuyer that is the taxpayer, spouse, child, grandchild, parent or other ancestor. The distribution is limited to $10,000 and if both husband and wife are first-time homebuyers, they each can withdraw up to $10,000 penalty-free.
  
  
• Unreimbursed medical expenses, that are not more than: 1) The amount you paid for unreimbursed medical expenses during the year of the withdrawal, minus 2) 7.5% of your adjusted gross income for the year of the withdrawal.
  
  
• Medical insurance premiums that you made as a result of becoming unemployed.
  
  
• Disability - you are considered disabled if you cannot perform any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to last for a continued and indefinite duration.
  
  
• Annuity distributions - if you retire before reaching the age of 59-1/2, you can avoid the penalty provided that the withdrawals are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or joint life expectancies) of you and your beneficiary. The payments under this exception must continue for at least 5 years, or until you reach the age of 59-1/2, whichever is the longer period.

The foregoing is a brief synopsis of the exceptions to the early withdrawal penalty. The rules pertaining to these exceptions are extensive and you are cautioned to consult with this office prior to making any withdrawals to insure you qualify under the more detailed requirements.

The long-term benefits of tax-free accumulation provided by Roth IRAs are hard to ignore. Parents can do their children a real service by encouraging them to establish a Roth IRA at the first opportunity. A Roth IRA, left untouched until retirement, will ensure that your child has a substantial nest egg.

Take for example a youngster, age 17, who contributes $2,000 to a Roth IRA and allows that single deposit to accumulate untouched until retirement at age 65. At a conservative 8% annual growth, the Roth IRA will have grown to $80,421.

Consider what the result would be if that same young person continued to deposit $2,000 a year to their Roth IRA. Assuming an 8% annual growth, the Roth IRA will grow to $980,264 by the time they reach retirement age of 65.

But keep in mind that children, like adults, must have "earned income" to establish a Roth IRA. Generally, earned income is income from working, not from investments. Earned income can include income from a part-time job, summer employment, baby-sitting, yard work, etc. The amount that can be contributed to either a Traditional or a Roth IRA is limited to the lesser of earned income or the annual contribution limit. The following is the annual limits by year for younger individuals.

Your children may balk at having to give up their earnings, especially since their focus at their age will not be on retirement. But this is not an obstacle if parents, grandparents or others are willing to fund all or part of the child’s Roth contribution.

If the parents or others contribute the funds, they need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.

The Saver's Credit provides a nonrefundable tax credit for contributions made by eligible, low income taxpayers to IRAs and qualified elective income deferrals. The plan provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or dependent of another.

The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer’s modified AGI increases. This phase out is inflation adjusted from year to year, and the phase outs for 2008 are illustrated below:

CLICK HERE FOR THE TABLE

Modified AGI - Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.

The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability.

Example – Eric and Heather are married and file a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows:
 

Eric and Heather file a joint return using the standard deduction for married couple and their tax for the year is computed as follows:

 

Caution – To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built-in a two-year look back period that generally reduces a taxpayer’s current year contribution by withdrawals during the look-back period.

Tax laws provide for plans that allow self-employed individuals to establish retirement plans for themselves and their employees, if they have any. Those most frequently encountered are the SEP (Simplified Employee Pension) and Keogh Profit Sharing Plans. Even though they are not IRAs, the SEP plans utilize an IRA account as the depository for the SEP plan contribution, thus minimizing the administration requirements of the employer.

The compensation limits for both of these plans is generally 25% of compensation. The following details the differences between contributions for employees and the amount allowed for the self-employed individual.

• Employees: Contributions in 2009 on behalf of an employee are generally limited to the lesser of $49,000 (up from $46,000 in 2008) or 25% of the employee’s compensation (up to the compensation limit). The compensation limit for 2009 is $245,000 (up from $230,000 in 2008). 
• Self-Employed Individual: The contribution limit is 25% of the net profits from self-employment (20% of the net profits before deducting the contribution itself). The contribution is also limited same maximum contribution amount and compensation limits as the employee.
  
  Both the compensation limit and the annual contribution limit are adjusted annually for inflation.

Withdrawals from a Roth IRA are tax-free if the funds have been in the Roth IRA for at least five years, and

• The account owner is at least 59-1/2, or
• The funds are used for a qualified first-time home purchase (up to $10,000), or
• The accountholder becomes disabled or dies.

Suppose a taxpayer does not meet the requirements for a tax-free withdrawal. The funds contributed to the IRA are always tax-free, because taxes were paid on those funds before they were deposited. Only the earnings would be taxable. Then the question becomes which funds are withdrawn first? Anticipating this question, the IRS has established a set of “Ordering Rules” which specify the sequence in which funds are withdrawn. All Roth IRAs, regardless of where they are deposited, are treated as one for purposes of the “Ordering Rules.”

First from contributions until all contributions have been withdrawn (these funds would be withdrawn tax and penalty-free);

Next from all converted (rollover amounts) until all have been withdrawn (these funds would be withdrawn tax-free, but see acceleration clause below);

Finally, from earnings (these funds would be taxable, and subject to the early withdrawal penalty when the taxpayer is under 59-1/2 years of age.)

Your age at the time you make a taxable withdrawal from your Traditional IRA account can make a big difference in the amount of tax you will pay. Generally, there are three periods within your lifetime where different tax rules apply:

• Under Age 59½ - If you withdraw the IRA funds before you reach age 59 ½, you will pay tax and a 10% early withdrawal penalty unless you can avoid the penalty through one of the several exceptions provided in the tax law. Note: Some states also have small early withdrawal penalties.
  
  
• Age 59½ to Age 70½ - During this period you can make withdrawals of any amount without penalty. You are only subject to the income tax.
  
  
• Above Age 70½ - After reaching age 70 ½, you must begin taking at least the required minimum distributions or face the 50% excess accumulation penalty.

The number one key to minimizing taxes on IRA distributions is to match withdrawals to tax years in which you are in a low tax bracket or even have a negative taxable income. Take for example a year when because of illness, disability, unemployment, large business losses etc. that your income, less your deductions and personal exemptions, leaves you with a negative taxable income for the year. To the extent your taxable income is negative, you could make a taxable IRA withdrawal and avoid any tax on the amount withdrawn, and even if you are under 59 ½, you would only pay the small early withdrawal penalty.

Generally, except as mentioned above, if you are under 59½, your IRA funds are not a good source of cash except in cases of extreme need simply because of the tax liability and penalties. But if there are no alternatives, it may be possible to avoid part or all of the penalties by carefully planning the withdrawals so that they qualify for one or more of the early withdrawal penalty exceptions; (1) amounts withdrawn to pay un-reimbursed medical expenses, (2) amounts withdrawn while qualifying as disabled, (3) amounts withdrawn and used to pay for medical insurance while unemployed, (4) amounts used to pay higher education expenses, (5) amounts up to $10,000 for the purchase a first home, and (6) early retirement amount withdrawn as an retirement annuity. Taxpayers must meet certain criteria to qualify for these exceptions, so be sure to contact this office to make sure you meet those qualifications before proceeding.

For retired individuals, receiving Social Security benefits, planning IRA distributions can also be beneficial. Social Security itself is only taxable when ½ of the taxpayer’s Social Security benefits added to the taxpayer’s other income exceeds $25,000 ($32,000 for a married couple filing jointly). Once this threshold is reached, every additional dollar of other income will cause 50 to 85 cents of the Social Security benefits to also become taxable. Therefore, if a taxpayer’s other income is under the threshold, it is generally good practice to withdraw just enough taxable IRA funds to bring the income up to the threshold amount even if the funds are not needed in that year. They can be set-aside for a future year when they might be used for some unplanned need or large purchase. Retirees, with income that already puts them over the Social Security taxable threshold, should avoid large uneven withdrawals that might push them into a larger tax bracket one year and way below that tax bracket change in other years.

Remember, once a taxpayer reaches 70½, they must begin taking distributions equal to or greater than the Required Minimum Distribution, somewhat limiting planning options. If you wish to explore any of these or other tax saving techniques, please contact this office.

Alert – Required minimum distributions have been suspended for the 2009 tax year.  However, this suspension does not apply to delayed 2008 distributions by a taxpayer who turned 70½ during 2008.

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, distribution begins in the year the IRA owner attains the age of 70½.

BEGINNING DATE REQUIREMENT

IRA owners must take at least a minimum amount from their IRA each year; starting with the year they reach age 70½.

If a taxpayer fails to take a distribution in the year they reach 70½, they can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA must take two distributions in the following year, one for the year in which they reached age 70½ and one for the current year.

If an IRA owner dies after reaching age 70½, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.

MULTIPLE IRA ACCOUNTS

For purposes of determining the minimum distribution, all Traditional IRA accounts owned by an individual are treated as one and the minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

DETERMINING THE DISTRIBUTION

The minimum amount that must be withdrawn in a particular year is the total value of all IRA accounts divided by the number of years the IRA owner is expected to live.

TOTAL VALUE_____ DISTRIBUTION PERIOD

=

MINIMUM DISTRIBUTION

• Determining Total Value: The total value is based on the sum of the value of all the owner’s accounts at the end of the business day on December 31st of the prior year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
  
• Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
  
• Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age of 74, but later in November, turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75 would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 at the end of the prior year. The minimum distribution is $3,537 ($87,000 / 22.9).

UNIFORM LIFETIME TABLE – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of the size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations For table values not illustrated, please call this office.

UNIFORM LIFETIME TABLE
Effective 2003 (Can be used in 2002)

Age	Life	Age	Life	Age	Life	Age	Life	Age	Life
70 71 72 73 74 75 76 77 78 79	27.4 26.5 25.6 24.7 23.8 22.9 22.0 21.2 20.3 19.5	80 81 82 83 84 85 86 87 88 89	18.7 17.9 17.1 16.3 15.5 14.8 14.1 13.4 12.7 12.0	90 91 92 93 94 95 96 97 98 99	11.4 10.8 10.2 9.6 9.1 8.6 8.1 7.6 7.1 6.7	100 101 102 103 104 105 106 107 108 109	6.3 5.9 5.5 5.2 4.9 4.5 4.2 3.9 3.7 3.4	110 111 112 113 114 115	3.1 2.9 2.6 2.4 2.1 1.9

 

TIMING OF THE DISTRIBUTION

The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount.

Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

MAXIMUM DISTRIBUTION

There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

UNDERDISTRIBUTION PENALTY

Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. However, the penalty must first be assessed and then refunded by the IRS if the request is approved.

NOT REQUIRED TO FILE

Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

DEATH OF THE IRA OWNER

If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

BENEFICIARY DISTRIBUTIONS

When an IRA owner dies after beginning the required distributions and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows:

Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary the spouse has the following options:

• Convert the IRA to their own account, thereby delaying additional distributions until they reach age 70 ½.
  
• Or, if already age 70 ½, convert the IRA to their own account and begin taking RMD based on their attained age using the Uniform Distribution Table.
  
• Treat the IRA as if it were their own, frequently referred to as recharacterizing the IRA to a “Beneficial IRA” and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner’s death based on their life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after they are no longer subject to the premature distribution penalty, the IRA can be converted as their own and they can choose to stop taking distributions until age 70 ½.

The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning.

Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust.

Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longest of:

1. The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each year subsequent year after the date of death.

2. The remaining life expectancy of the IRA beneficiary using the beneficiaries attained age in the year of death and subtracting one for each year subsequent year after the date of death.

The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death or for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by September 30th instead of year-end to take advantage of the spouse sole beneficiary provisions.

5-Year Option: A beneficiary, who is an individual, may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year.

The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for non-individual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.

PLANNING CAN MINIMIZE THE TAX

Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need assistance with your planning needs, please call this office for assistance.

For those who annually contribute to their IRA account and wish they could contribute more, there is good news. The annual contribution limit is inflation adjusted each year and is slowly increasing. Taxpayers 50 and older are allowed larger contributions through so-called “make-up” provisions (see table below).

The contribution limit for Traditional IRA Accounts for taxpayers that do not have a qualified plan with their employer is as follows.

IRA Contribution Limits

Year	2006-2007	2008-2009	AFTER 2009
Under Age 50	4,000	5,000	Inflation Adjusted
Age 50 & Over	5,000	6,000	Inflation Adjusted

However, if a taxpayer is an active participant in an employer’s pension plan or a self-employed pension plan, the deductible amount will be ratably phased out if their income for the year (AGI) is within the phase out range and not allowed at all if the AGI exceeds the phase out range (see the table below). The phase-out ranges are adjusted annually for inflation.

Phase-Out Ranges

Filing Status	2008	2009
Single & Head of Household	53,000 - 63,000	55,000 - 65,000
Married Filing Jointly	83,000 - 103,000	88,000 - 109,000
Married Filing Separately	0 - 10,000	0 - 10,000

Special rule for a nonactive participant spouse - The limits for deductible IRA contributions do not apply to the spouse of an active participant. Rather, the maximum deductible IRA contribution for an individual who is not an active participant but whose spouse is an active participant, is phased out for the non-active participant if their combined AGI is between the inflation adjusted limits for the year as illustrated in the table below.

Nonactive Spouse Phase-Out Ranges

Year	2008	2009
Phase-Out Range	159,000 - 169,000	166,000 - 176,000

When one spouse works and the other does not, tax law allows the non-working spouse to base their contribution to an IRA on the income of the working spouse.

This tax benefit is frequently overlooked when spouses have been working and basing their individual contributions on their own income for years, retire and fail to recognize the opportunity to make IRA contributions for a retired spouse. Even if the working spouse has a pension plan at work and his or her income precludes him or her from making an IRA contribution, the non-working retired spouse can still make a contribution based on the working spouse’s income.

However, be careful since traditional IRA contributions, both deductible and nondeductible, are not allowed in the year an individual turns 70-½ and all subsequent years. This restriction does not apply to Roth IRA contributions.

There are some AGI limitations if the working spouse has a retirement plan at work, so please call this office to make sure you qualify before making the contribution.

Beginning in 2010, the new legislation:

(1) Eliminates the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs, and

(2) Permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Under prior law, married taxpayers who filed separate returns were restricted from making conversions.

In addition, for conversions made in 2010, the taxpayer can choose to elect to:

a. Include the income in the 2010 return, or
b. Include one-half of the conversion income in 2011 and one-half in 2012.

Note: 2010 is the last year for the current “low” tax rates unless Congress extends them in future legislation. Thus, using the option to include the income in 2011 and 2012 may not be a good option for taxpayers that may be subject to the increased tax rates after 2010.

Planning Ahead for Roth 2010 Rollover Strategies - Looking ahead, there are some interesting strategies a taxpayer can employ to convert nondeductible traditional IRA contributions to a Roth IRA, thereby funding the more favorable Roth IRA.

• Strategy - Taxpayers who have employer plans and are restricted from making deductible traditional IRA contributions because of income level can make nondeductible traditional IRA contributions in the tax years leading up to 2010, and then convert those nondeductible traditional IRAs to Roth IRAs with virtually no tax since they were nondeductible. Only the earnings would be taxable. Taxpayers who are prohibited from making Roth IRA contributions because their income exceeds the limit may also benefit from this strategy.
  
  
• Strategy - Using the same strategy above, even a taxpayer who can make a deductible contribution can elect to make it nondeductible, providing the same result as above.
  
  
• Strategy – Generally, rollovers are thought of as transfers from a qualified plan to an IRA or from one IRA to another IRA. However, beginning in 2002, the law has allowed an IRA to be rolled (or transferred) to other qualified plans including 401(k) plans, 403(a) and 403(b) annuities and 457 governmental retirement plans (assuming the plan will accept the IRA funds). In addition, the law only allows the taxable portion of the IRA to be moved to qualified plans. For taxpayers who have mixed IRAs (including both deductible and nondeductible contributions), this provides a means to segregating the taxable and nontaxable amounts and then later converting the nontaxable portion without paying any conversion tax (except on any interim earnings). Thus, the taxable portion can be rolled into a qualified plan, leaving the nontaxable portion in the IRA where it can be converted to the Roth IRA.
  
  
• Strategy - More aggressive taxpayers with the financial resources to pay the rollover tax might also consider rolling (or transferring) the funds from a qualified plan into a traditional IRA and then converting the traditional IRA to a Roth IRA.

The amount of tax imposed on a Roth conversion will depend on a number of issues including the taxpayer’s marginal tax bracket, intended conversion amount and whether or not the conversion is made in one or multiple years. Also a factor is whether the taxpayer made deductible IRA contributions in earlier years in addition to the nondeductible contributions intended for rollover to the Roth. All of the taxpayer’s regular, SEP and SIMPLE IRAs have to be combined when determining the amount that is taxable upon conversion, so there could be unintended taxable consequences. Minimizing the conversion tax requires careful planning and strict adherence to the conversion rules.