BOSTON — The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that President Barack Obama signed into law last year might not make for great bedtime reading. But that doesn’t mean you shouldn’t examine some of the retirement-planning opportunities contained in what’s
known as the 2010 Tax Relief Act.
Here’s a recap of what experts suggest you might do with your retirement accounts.
Take a deal on a Roth conversion. The Bush era tax cuts — as most astute taxpayers know — have been extended through 2012. The rates for 2011 and 2012 will remain the same, but the brackets themselves are slightly higher because of the built-in inflation adjustments, said Ed Slott, CPA, who edits a newsletter on IRA savings.
“One key group of people who benefit substantially from the extension of the tax cuts are those individuals who converted traditional IRAs to Roth IRAs in 2010, the first year when high-income IRA owners could make Roth conversions,” Slott wrote in his most recent newsletter. “For those 2010 conversions, a special option was available allowing all the income from the conversion to be split equally over 2011 and 2012 — or all the income could be included in 2010.”
Now, in 2011, Slott wrote that those who did Roth IRA conversion must finally decide which option to choose. (You must make the choice by the due date for the 2010 tax return, including extensions, and once it’s made, it’s irrevocable, Slott wrote.)
“Before the tax cuts were extended, this was going to be a difficult decision for many (IRA owners who did a Roth conversion), particularly those at higher incomes. Pay now for 2010 at lower rates, or defer the liability to 2012 and 2013 for 2011 and 2012, but pay at potentially higher rates,” Slott wrote. “Under the new tax law, the debate is now substantially simplified and deferring the income from a 2010 conversion equally over 2011 and 2012 becomes the best option for most of those who did a Roth IRA conversion, all other factors being equal.”
Leave your IRA to a spouse. The estate tax exclusion has been increased to $5 million per person, Slott wrote in his newsletter. What’s more, the exemption is now portable for married couples. “Any portion of a deceased spouse’s unused exemption may be used by the surviving spouse’s estate to reduce an estate tax obligation,” wrote Slott. Given that, he said, more IRA owners will want to leave their IRA assets to their spouse since it will be less likely to cause the estate to be subject to estate tax.
Keep on giving. Another tax law that could help older IRA owners and qualified charities is this. “Qualified charitable distributions have been reinstated through 2011,” Curfman said. “IRA owners and beneficiaries 70 ½ or older can make distributions of up to $100,000 directly to charities. They will not receive a charitable deduction, but the distribution will not be added to adjusted gross income (AGI) and can be used to help satisfy Required Minimum Distributions.”
Save even more. The employee portion of the Social Security (FICA) tax has been reduced from 6.2 percent to 4.2 percent for 2011 only, wrote Slott. For those earning $106,800 or more, this will amount to greater than $2,100 in extra tax savings,” he said. Pundits, by the way, have been suggesting that workers sending the savings into a retirement account, a 401(k) or IRA for instance.
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