Disclaimer of Liability
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
HELP! MY IRA HAS FALLEN AND MAY NOT GET BACK UP!
The tremendous decline in the stock market has affected nearly all retirement accounts. Is there
a silver lining to be found amid all this turmoil? There are several IRA strategies which may
help you to save taxes either now or in the future, which can help offset some of the sting of the
market declines.
1. Convert a traditional IRA to a Roth IRA. A traditional IRA will be taxable to you when
you begin withdrawals, but a Roth IRA is never taxed. You can convert to a Roth IRA by including
the portion you wish to convert in taxable income for the year of conversion. With account
balances being lower now, this may be the best time for you to do the conversion to a Roth.
However, for 2008 and 2009, you cannot do a Roth conversion if your adjusted gross income
exceeds $100,000. In 2010, this limitation will not apply, and you get to pay the taxes due on
conversion in two equal installments due in 2011 and 2012. Any conversions made in 2011 or
thereafter will not be eligible to spread the taxes over the following two years. Remember to
always “run the numbers” to see if the taxes you will need to pay currently will exceed the taxes
you would have owed upon withdrawal.
2. Recharacterize a Roth IRA conversion. If you already converted a traditional IRA to a
Roth IRA earlier this year, chances are your account balance was higher then. Since you pay
taxes based on the value at the date of conversion, you’ll pay more taxes than if you had waited
until now. Fortunately, there’s a solution – convert the new Roth account (plus earnings and
minus losses) back into a traditional IRA account. You can make the recharacterization up until
the due date of your tax return (April 15 of the year following the conversion) or the extended due
date of October 15 if an extension is filed.
3. Reconvert a traditional IRA back to a Roth IRA. Suppose a taxpayer took idea #2
above, but would still like to eventually move the investment to a Roth IRA. Can this be done while
the IRA balance is low? The answer is yes, but there are timing considerations to keep in mind.
The reconversion cannot be made before the later of (1) the beginning of the year following the
year of the initial conversion to a Roth, or (2) the end of the 30-day period beginning on the date
of the conversion from the Roth back to the traditional IRA. For example, a taxpayer who
converted a traditional IRA to a Roth on April 1, 2008, and recharacterized it back to a traditional
IRA on September 1, 2008 because of market declines, would have to wait until January 1, 2009
to reconvert back into a Roth. If you expect the market to recover in the future, you will want to do
the reconversion as soon as allowable.
4. Cash out Roth IRAs to claim a loss. Normally, a taxpayer cannot claim a loss on the
decline of the value in Roth IRA accounts. However, if all Roth IRAs are liquidated in the same tax
year, a loss can be claimed on the difference between the amounts invested plus conversion
contributions, less the amounts actually received. The loss is claimed as a miscellaneous itemized
deduction, subject to the 2% of adjusted gross income reduction. Two warnings on this strategy:
(1) you are giving up the right to future tax-free appreciation within the Roth IRA, and (2) if any
portion of the Roth account was from conversion from traditional IRAs and the liquidation occurs
within 5 years from the year of conversion, a 10% early withdrawal penalty applies of the taxpayer
is under age 59-1/2.
5. Cash out of nondeductible IRAs to claim a loss. This strategy is the same as #4
above, but involves the nondeductible contributions to traditional IRA accounts. If you liquidate all
your traditional IRA accounts in one tax year, and what you receive is less than your unrecovered
basis, the difference can be claimed as a miscellaneous itemized deduction. Again, the downside
is the loss of future appreciation accumulating on a tax-deferred basis.
Finally, keep an eye out for some proposed tax changes that may suspend required minimum
distribution rules for retirees receiving IRA payouts. The theory is that retirees should not be
forced to cash out of investments to meet required minimum distributions when the market is low,
thereby depleting their account balances more rapidly. At this time, this is only a proposal, but
watch future newsletters for updates. Finally, before employing any of these strategies, consult
with your tax preparer or knowledgeable investment advisor to make sure you are complying with
all the rules and dates.
The tremendous decline in the stock market has affected nearly all retirement accounts. Is there
a silver lining to be found amid all this turmoil? There are several IRA strategies which may
help you to save taxes either now or in the future, which can help offset some of the sting of the
market declines.
1. Convert a traditional IRA to a Roth IRA. A traditional IRA will be taxable to you when
you begin withdrawals, but a Roth IRA is never taxed. You can convert to a Roth IRA by including
the portion you wish to convert in taxable income for the year of conversion. With account
balances being lower now, this may be the best time for you to do the conversion to a Roth.
However, for 2008 and 2009, you cannot do a Roth conversion if your adjusted gross income
exceeds $100,000. In 2010, this limitation will not apply, and you get to pay the taxes due on
conversion in two equal installments due in 2011 and 2012. Any conversions made in 2011 or
thereafter will not be eligible to spread the taxes over the following two years. Remember to
always “run the numbers” to see if the taxes you will need to pay currently will exceed the taxes
you would have owed upon withdrawal.
2. Recharacterize a Roth IRA conversion. If you already converted a traditional IRA to a
Roth IRA earlier this year, chances are your account balance was higher then. Since you pay
taxes based on the value at the date of conversion, you’ll pay more taxes than if you had waited
until now. Fortunately, there’s a solution – convert the new Roth account (plus earnings and
minus losses) back into a traditional IRA account. You can make the recharacterization up until
the due date of your tax return (April 15 of the year following the conversion) or the extended due
date of October 15 if an extension is filed.
3. Reconvert a traditional IRA back to a Roth IRA. Suppose a taxpayer took idea #2
above, but would still like to eventually move the investment to a Roth IRA. Can this be done while
the IRA balance is low? The answer is yes, but there are timing considerations to keep in mind.
The reconversion cannot be made before the later of (1) the beginning of the year following the
year of the initial conversion to a Roth, or (2) the end of the 30-day period beginning on the date
of the conversion from the Roth back to the traditional IRA. For example, a taxpayer who
converted a traditional IRA to a Roth on April 1, 2008, and recharacterized it back to a traditional
IRA on September 1, 2008 because of market declines, would have to wait until January 1, 2009
to reconvert back into a Roth. If you expect the market to recover in the future, you will want to do
the reconversion as soon as allowable.
4. Cash out Roth IRAs to claim a loss. Normally, a taxpayer cannot claim a loss on the
decline of the value in Roth IRA accounts. However, if all Roth IRAs are liquidated in the same tax
year, a loss can be claimed on the difference between the amounts invested plus conversion
contributions, less the amounts actually received. The loss is claimed as a miscellaneous itemized
deduction, subject to the 2% of adjusted gross income reduction. Two warnings on this strategy:
(1) you are giving up the right to future tax-free appreciation within the Roth IRA, and (2) if any
portion of the Roth account was from conversion from traditional IRAs and the liquidation occurs
within 5 years from the year of conversion, a 10% early withdrawal penalty applies of the taxpayer
is under age 59-1/2.
5. Cash out of nondeductible IRAs to claim a loss. This strategy is the same as #4
above, but involves the nondeductible contributions to traditional IRA accounts. If you liquidate all
your traditional IRA accounts in one tax year, and what you receive is less than your unrecovered
basis, the difference can be claimed as a miscellaneous itemized deduction. Again, the downside
is the loss of future appreciation accumulating on a tax-deferred basis.
Finally, keep an eye out for some proposed tax changes that may suspend required minimum
distribution rules for retirees receiving IRA payouts. The theory is that retirees should not be
forced to cash out of investments to meet required minimum distributions when the market is low,
thereby depleting their account balances more rapidly. At this time, this is only a proposal, but
watch future newsletters for updates. Finally, before employing any of these strategies, consult
with your tax preparer or knowledgeable investment advisor to make sure you are complying with
all the rules and dates.
| Robert A. Romako, CPA Phone:717.774.3047 |
NOVEMBER 2008