Tip of the Month
February 2010
Should you convert your traditional IRA or any eligible retirement account to a Roth IRA in 2010 when the adjusted gross income limits are eliminated? This creates the opportunity for all taxpayers to qualify for this benefit.
Note the following considerations when contemplating your decision:
- The converted amount is fully taxable in the year of conversion
- When withdrawing from the Roth you must leave the money in for 5 years or until age 59 - whichever is later
- You can make partial conversions
- The best way to do the transfer is directly between the two trustees
- Assets other than the IRA or qualified plan would be a better source of funds to pay the tax liability upon conversion
- The tax can be paid over two years - 2011 and 2012
- Your current and future anticipated tax bracket, especially if you feel tax rates are going to increase
- The period of time between the conversion and the need for retirement income
- Your desire to pass assets tax-free to beneficiaries
It is best to consult with your advisor to discuss both the tax and financial considerations.
January 2010
Are you aware of 529 plans and how they are used and their benefits? 529 plans are helpful to families facing the increasing costs of higher education for their children. A significant benefit is the tax savings.
- Withdrawals from these plans to pay for the costs of higher education are free of federal tax on the earnings.
- There are some instances, limited to the investorŐs home state that may offer a state tax deduction, as well.
If you currently have a 529 plan, then you need to compare the tax considerations with the limited use of the money. The type of approach, either conservative or aggressive, is determined by your childrenŐs ages and how much time you have to save. If your child will be going to college soon then you may consider a more conservative approach.
Two resources that are helpful include Savingforcollege.com or Morningstar.com
There are a multitude of investments that can be used, although use of index funds may offer lower expenses than actively managed funds. There are five states that offer the same tax benefits to residents who invest in out of state plans, Pennsylvania being one of them.