Posted on 15 December 2010
By Mark Miller
The year is closing out with a handful of retirement planning tips stacked up on my desk that I want to pass along. Here are some important odds and ends to keep in mind as you consider your moves for 2011:
–The tax deal makes Roth conversions easier to fund. The two-year extension of Bush-era tax cuts has added a sweetener for anyone still considering making a Roth IRA conversion in 2010.
Converting a traditional IRA to a Roth generates an ordinary income tax bill in the year of conversion that can be hefty. However, when Congress removed the income eligibility limit on conversions, lawmakers also gave taxpayers the option to push the tax bill — in equal shares — to 2011 and 2012. It’s a one-time-only option available for conversions made in 2010. And, of course, the taxes would have to be paid at the then-prevailing income tax rates.
Uncertainty about the expiring Bush-era tax cuts created the risk of higher tax rates in 2011 and 2012. Now, with the Bush-era rates extended through 2012, that risk has disappeared. That, in turn, should make it easier to foot the tax bill over the next two years.
Should you do a Roth conversion? That depends on whether you think tax rates are going to rise down the road, and your personal tax outlook. For example, it doesn’t make sense to convert now if you’re close to retirement and don’t expect much taxable income after you stop working. In that situation, waiting until after retirement to convert will generate a smaller tax liability.
The best conversion candidates are investors who can fund the tax liability from their taxable assets, don’t expect a significant drop in their effective tax rate in retirement, and are converting at younger ages. You’ll also get the best kick from a Roth if you don’t expect to draw heavily from your IRA in retirement and aim to transfer your IRA at death to your beneficiaries.
A final point: The basics of Roth conversion aren’t complicated but they can present some complex choices and tax implications. If you’re going to convert, it’s best to get some expert advice, based on your personal situation, from an accountant or financial adviser.
–RMDs are back. One of the best features of a Roth IRA is flexibility on withdrawals. Unlike tax-deferred accounts, Roths don’t have an annual required minimum distribution (RMD) feature for investors over age 70 1/2. For tax-deferred accounts, RMDs were suspended for 2009 to help investors recoup from the market crash, but they’re back for 2010, so make sure you’ve taken yours from your accounts before Dec. 31.
–Estate planning certainty increases — a bit. Most Americans won’t need to worry about estate taxes, so long as they don’t die in the next two years. The Washington tax deal endd the current uncertainty on estate taxes with an ultra-generous $5 million exemption per individual, with estates over that amount taxed at a 35 percent rate.
But this deal simply kicks the can down the road on estate tax rates into the 2012 election season. If the tax legislation is not approved, estates valued over $1 million would be taxed at a whopping 55 percent starting in January, 2011.
With the tax deal signed into law, we’re likely to have a robust debate about deficit reduction between now and 2012, a discussion that could lead to lower estate exemption levels and higher tax rates just a few years from now.
Estate taxes haven’t been a front-burner issue for the past decade, due to rising exemption rates. Now, that’s changing.
“We need to dust this off and think about it for first time in a decade,” says lawyer and business journalist Deborah L. Jacobs. “We all became accustomed to the idea that a huge amount of our estates would be exempt from tax.”
Jacobs recently published a very useful, everyman’s guide to estate planning issues called Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. I interviewed her recently about four easy ways to protect yourself from higher estate taxes down the road.
–The Medicare plan clock is ticking. The annual enrollment period for Medicare D and Advantage plans ends on Dec. 31 and it’s more important than ever for seniors to get their choices right the first time around this year.
That’s due to new rules governing the Medicare “open enrollment” period that follows in January, which lets beneficiaries make changes to their selections.
Open enrollment runs only from Jan. 1 through Feb. 15 in 2011 — six weeks less than in previous years. And the only change permitted during that window is to drop out of Medicare Advantage and opt instead for traditional Medicare and a Medicare D plan. Click here for my annual guide to shopping Medicare plans.