IRA Alert

A year-end checklist for IRAs

This year, there are many loose ends that financial advisers shouldn't neglect to tie up

Nov 21, 2010 @ 12:01 am

In the rush of year-end activity, it's important not to forget your IRA-related to-do list. The following are some of the most overlooked year-end items.

RMDs. Required minimum distributions were suspended in 2009 but are back for 2010. Most retirement account owners and beneficiaries (including Roth individual retirement account beneficiaries) subject to RMDs must take them before year-end or they'll be subject to a 50% penalty on any missed distributions. The amount of 2010 RMDs will be based on the Dec. 31, 2009, balance.

Remember that RMDs must be taken for clients who died in 2010 and had not taken their RMDs. The RMD must be taken and reported as income by the beneficiary. It is not taken by the estate of the deceased IRA owner (unless the estate was the IRA beneficiary).

Splitting IRAs. Designated (named) beneficiaries who inherited IRAs in 2009 have until Dec. 31 to split the account into separate shares so that each beneficiary can use his or her own life expectancy to calculate RMDs. Each share should be transferred into a separate, properly titled inherited IRA. The account can be split after Dec. 31, but beneficiaries will be “stuck” using the life expectancy of the oldest beneficiary.

2009 plan beneficiaries. Beneficiaries who inherit plan assets generally are subject to restrictive rules of the plan. An exception allowing plan beneficiaries to escape the plan's rules and secure a stretch IRA is available for those who directly transfer inherited plan funds to an inherited IRA or convert directly to an inherited Roth IRA and take their first RMD — both by Dec. 31 of the year following the year of death. So beneficiaries that inherited plan assets in 2009 have only until the end of next month to complete their transfer and take their first RMD to avoid reverting to the plan's rules.

2010 Roth conversions. A special deal is available for clients who convert to a Roth IRA in 2010. The income from a 2010 conversion can be split equally over 2011 and 2012. In order to qualify for the special deal, though, the converted funds must leave the traditional IRA or other qualified plan by Dec. 31.

Lump-sum distributions. These tax breaks apply only to lump-sum distributions from qualified plans. They include net unrealized appreciation, 10-year averaging and pre-1974 capital gains elections. Each of these special tax breaks for a lump-sum distribution requires that all plan funds be distributed within one tax year. If your client is planning to take advantage of one of these special breaks and has already taken a partial distribution, make sure his or her plan is emptied by year-end or the tax break is lost.

Accelerate charitable donations. Clients who are charitably inclined may want to accelerate charitable contributions to 2010. The increase in donations can be used to help offset Roth conversion income if your client opts out of the two-year deal and includes all the income from his or her conversion in 2010. As an added bonus, the overall limit on itemized deductions is phased out completely in 2010 (and only for 2010), allowing greater deductions for some.

Gifting. Clients have until Dec. 31 to take advantage of the annual gift exclusion for 2010, which is $13,000 per donor to each recipient. That means that a husband and wife can give $26,000 to each of their children without using up any of their unified credit (gift and estate tax exemption amounts). Since the gift tax exclusion is applied per calendar year and not 365 days, clients with available funds can “double up” by gifting before year-end and then again in early 2011. This is a great way to reduce the value of a taxable estate or to provide loved ones with some extra cash so that they can make a Roth conversion.

Avoid estimated tax penalties. IRA owners facing a penalty for underestimating their estimated withholding payments can use an IRA distribution to eliminate the problem. First, calculate the amount your client needs to “pay in” before year-end to avoid a penalty. Then, instruct your client to take a distribution from his or her IRA for that amount, withholding the full distribution for federal income tax. Check state tax, too. Withholding from an IRA is treated as though it were paid in equally throughout the year.

Check beneficiary forms. While a beneficiary form review is not required by year-end, it is a great time for proactive advisers to check with clients to make sure existing beneficiary forms still reflect their wishes.

Ed Slott, a certified public accountant, created The IRA Leadership Program and Ed Slott's Elite IRA Advisor Group He can be reached at irahelp.com.

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