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You Can’t Change Your Mind After You Convert

04/10/2013

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Under the new tax law, it is now easier to convert your employer-sponsored retirement plan such as a 401(k), 403(b), or 457 into a Roth IRA account. This is similar to converting your traditional IRA into a Roth IRA, but with one very significant difference.

When you convert a traditional IRA into a Roth IRA, you can change your mind and undo this conversion (also known as a recharacterization) by October 15 of the following year. This may make sense when the value of the account has dropped since you did the conversion, because you do not want to pay tax on a higher value than the account currently has.

When you convert an employer-sponsored retirement plan, you do not have the option of undoing the conversion by October 15. Once you convert your employer-sponsored retirement plan into a Roth IRA, it cannot be undone.

If you decide to convert your entire 401(k) into a Roth IRA, the entire balance will be taxable in the year of the conversion.

If you want to take advantage of this new provision, please contact our office first because there are some very important tax planning consequences to consider. If done without proper tax counsel, you may be paying more taxes than you should. In light of the new tax law, there are now more variables that need to be considered in your tax planning.
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Check Out Your IRA Options 

03/10/2013

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It's not too late to make contributions to an IRA for 2012. You can establish and contribute to a 2012 IRA as late as April 15, 2013. If the IRA is the traditional, tax-deductible kind, you can deduct your contributions on your 2012 tax return. If you're under age 50, the maximum contribution is $5,000; if you were 50 or older by December 31, 2012, you can contribute up to $6,000.

The "charitable IRA rollover" rule was extended through 2013, permitting taxpayers who are 70½ or older to use their IRA to donate up to $100,000 to charity. The donation must be made directly from the IRA to the charity, and it counts as part of the taxpayer's required minimum distribution for the year. 

If you turned 70½ in 2013, remember that you're now required to take a minimum distribution from your IRA (and, unless you're still working, from other retirement plans also) every year. If you delayed taking your first distribution last year, you have only until April 1, 2013 to take it or you'll be subject to a 50% penalty on the amount you should have taken.

Converting a traditional IRA to a Roth IRA is still an available option for all taxpayers. Although a conversion will generate taxable income in the year you do it, later qualifying withdrawals from the Roth will be tax-free. Your conversion opportunities are not limited to just traditional IRAs. You can also convert your 401(k), 403(b), or 457 plan to a Roth.
For details or assistance on IRA matters, contact our office.
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What To Do With Your 401(k) Savings When You Change Jobs

09/02/2011

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If you change jobs you may have an important decision to make - what to do with your 401(k) plan. You’ll have several choices. Unfortunately, the easiest choice is the worst choice: that is, to take a distribution from the old plan and put it in the bank. It may be tempting, because who couldn’t use some extra cash. But if you do, you’ll owe taxes on the balance and usually a 10% penalty as well. You’ll lose the benefits of future tax-deferred growth on your savings. And if you spend the money, you’ll have to start from scratch in saving for retirement. Instead, consider three options.

* Ask your new employer whether you can roll your balance into the new company’s plan. If you can, arrange a direct transfer between plans. You may have to complete a probationary period before you can join your new company’s plan.

* Explore whether you can leave your balance in the old plan, at least for a while. That removes the pressure for an immediate decision.

* Roll over your balance into an individual retirement account (IRA). This avoids immediate taxes and lets your savings continue to grow tax-deferred. It also gives you maximum flexibility for future investments. You even have the flexibility to later convert into a Roth IRA. Be sure to ask for a "trustee-to-trustee" transfer to avoid any short-term tax risk.

A word of caution: If part of your account is invested in company stock, get details on the tax issues before you withdraw or roll over funds.

The bottom line: Do all you can to keep your savings in a tax-favored account. You’ll be glad you did when you reach retirement age. Please call our office if you’re facing this situation. We’ll be happy to advise you on your options.
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