With about thirty days remaining in this calendar year, those of you with IRA accounts have a number of opportunities or responsibilities with a year-end deadline.
- Required Minimum Distributions (RMD). As a result of the financial and economic crisis, congress temporarily eliminated the Required Minimum Distributions for retirement accounts for 2009 but brought it back for 2010. If you turned 70 ½ this year, you must take a minimum distribution from your IRA account by April 1, 2011. However, if you wait until then, you’ll be required to take two distributions in 2011…a year when tax rates may be higher. If you are 71 or older, you must take your required RMD by December 31st of this year or face a 50% penalty.
- Convert your Traditional IRA to a Roth IRA. For 2010, congress eliminated the income limitation for converting a traditional IRA to a Roth. As a result, many people are considering doing a conversion this year. To sweeten the pot, congress passed a special rule: If you convert by December 31st, you have the option of reporting the tax on converted funds on your 2010 tax return or splitting the income between tax years 2011 and 2012. Remember, rarely is it advantageous to convert to a Roth IRA unless you have the funds to pay the tax from a source other than your IRA account. If you plan to do a conversion this year and pay the tax on your 2010 tax return, one strategy to lessen the tax bite is to accelerate several years of planned charitable donations with a contribution to a donor advised fund such as the Community Foundation of Greater Birmingham (205 327-3800). This will allow you to partially offset your taxable IRA conversion with your charitable deduction. The donor advised fund allows you to receive the deduction this year but pay the funds out to charities of your choice over future years.
- Special attention for Inherited IRAs. If you inherit an IRA from anyone other than your spouse, you are required to either a) take all the money out by December 31st of the fifth year after date of death of the IRA owner or b) take distributions each year based on your life expectancy (called a ‘Stretch’ IRA). If you are part of a group of beneficiaries who inherited an IRA and you want to use the Stretch IRA strategy, your required minimum distribution is based not on your life expectancy, but on the life expectancy of the oldest member of the group. You can avoid this problem by ‘splitting’ the group inherited IRA account into individual inherited IRA accounts by December 31st of the year following the year of death of the IRA owner. This means that for IRA owners who died in 2009, you have until year-end 2010 to split the account into individual inherited IRA accounts. You must also take your first minimum distribution by December 31, 2010. Be careful to title the account properly.