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Money December 2012

Dollar Sense

Bolster and Protect Your Retirement Funds Before the 2012 Clock Runs Out

By Teresa Ambord

You’re probably gearing up for the holidays and don’t want to think too much about your investments. But don’t wait too long. In the final weeks of the year, financial institutions get swamped with requests for investment changes. To deal with that, many of them set deadlines for making those requests and you may miss your opportunity.

Time is just about up to take any necessary actions to maximize your retirement savings for 2012 and avoid certain IRS penalties. Here are some reminders of what you must do – depending on your age and investments – and what you may want to do before December 31st.

  • Are You Considering a Conversion to a Roth Ira? If so, take steps soon to accomplish the conversion for 2012. If the funds are being taken out of one IRA (Traditional, SEP, or SIMPLE) and rolled into a Roth IRA you have 60 days to roll the money into the Roth even if it is completed after the first of the new year. But if you want the conversion to count for 2012, the distribution must occur before December 31st of this year.

Keep in mind, when you convert to a Roth you will pay ordinary income tax on the funds now, as opposed to deferring the taxes into the future. The tax bill can be hefty, so ask your trusted financial advisor to estimate the amount you will owe before you decide.

Why would you want to convert and pay tax now? The answer depends on what you think will happen with your personal tax bracket or with tax rates in general in the future. If you foresee your income rising enough to push you to a higher tax bracket, or if you believe Congress is going to raise taxes after the first of the year, it might be smart to take the tax hit now while rates are still reasonably low.

It’s always a good idea to talk such decisions over with your financial advisor for your particular situation. And while you are at it, if you choose to convert to a Roth IRA remind your adviser to deposit the funds as a Roth conversion, not a rollover. This should help ensure the transaction is accurately reported to the IRS.

You’re probably gearing up for the holidays and don’t want to think too much about your investments. But don’t wait too long. In the final weeks of the year, financial institutions get swamped with requests for investment changes. To deal with that, many of them set deadlines for making those requests and you may miss your opportunity. While there is time, talk to your adviser to find out what deadlines may apply.

  • Are you 70 ½ or older? If so, and you have a Traditional, SEP, or SIMPLE IRA, you must take annual required minimum distributions (also called RMDs) from your retire accounts. If you haven’t already done so for 2012, you must do this by December 31st or face an IRS penalty of a whopping 50% of the amount you failed to take. If you are not sure how much your required minimum distribution must be, ask your plan administrator to calculate it for you. In fact, he or she should have done this last January (and every year) and sent you a reminder.

Exceptions:

    • If you turned 70 ½ in 2012, you have till April 1, 2013 to receive your first payment. Just bear in mind that this is generally taxable income. You will still be required to take another payment by the end of 2013, which means that you will have two taxable payments in 2013. This could be enough to push you into a higher tax bracket. Also, if you suspect Congress will raise taxes in 2013, you will be exposing yourself to a much higher tax bill than you would if you took your first distribution in 2012.

 

    • You may also defer receiving payment if you are still working, and if you participate in a qualified plan that allows you to defer receiving payments. In the future, you can avoid having to think about RMDs every year by asking your plan administrator to arrange for automatic distributions.

 

  • Are you the beneficiary of a retirement account? If so, you may also have to take an RMD by December 31st from this account, if it is subject to a life expectancy option. As with other retirement accounts, failure to take the required amounts can result in a hefty 50% penalty.

Depending on when the owner of the account passed away and how the retirement account is structured, you may be able to waive this penalty by switching to what is known as a five-year option. Don’t make this decision without talking it over with your financial advisor to be sure it is the wise move for you.

If there are multiple beneficiaries, you may want to establish separate accounts for each. Otherwise, all beneficiaries will be subject to the same rules, which are based on the life expectancy of the oldest beneficiary. To establish separate accounts, you must act no later than the end of the year after the year the owner of the account passed away. In other words, if the owner of the account passed away in 2011, you must act no later than December 31, 2012.

  • Do you need to reduce your taxable estate? As another year ends, the fate of the estate tax is in jeopardy yet again. If you die in 2012 with an estate worth less than $5.12 million, you may escape estate tax altogether. But depending on what Congress does, if you die in 2013, the exemption may drop to $1 million, plus the tax on the amount over $1 million may jump significantly.

If you plan on reducing your taxable estate, you may want to take advantage of the gifting rules. Currently you can give up to $13,000 each year to as many people as you wish, without incurring a gift tax. If you are married and your spouse splits the gift with you, you can safely give a total of $26,000 to each recipient. The gifting amounts actually improve for 2013, rising to $14,000 and $28,000 respectively.

Again, talk it over with your financial advisor, but don’t wait too long. The sands in the 2012 hourglass are running out fast. When the hourglass is empty, you may have missed some important deadlines, or opportunities to protect and therefore bolster your savings, and minimize taxes.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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