IRA and Roth Retirement Plans

Contributions to either an IRA or Roth IRA must be made by April 15th, regardless of when you file your return.

The contribution limits for 2010 have not changed from 2009. The limit for both IRA and Roth IRA is 100% of earned income up to $5,000 plus an additional $1,000 for individuals age 50 and over. Remember that if you are an active participant of an employer-sponsored plan, your IRA limit is phased out if your income exceeds $66,000 if single or $89,000 if married. The Active Participant limitation applies even if you don't elect to contribute to your employer's plan.

There are several tax planning ideas using your IRA account. The first pertains to the conversion of a standard IRA to a Roth IRA. As you are aware, contributions into a standard IRA reduce your taxable income and will be taxable when they are distributed out of the IRA. Contributions into a Roth IRA are not deductible when made and all distributions out are tax free. But you have the opportunity to convert your standard IRA into a Roth IRA at any time. The amount you convert will be taxable in the year of the conversion. This provides an interesting planning opportunity. If you have a year where you don't expect to have taxable income, such as if you are unemployed for a significant part of the year, you can convert your IRA and recognize the taxable income. Then, when you distribute the funds out of your Roth account in future years, there will be no tax due at that time on the principal or earned interest. Best of all, if you elect to convert your IRA to a Roth IRA and find out in April that you shouldn't have done it, the IRS let's you have a "mulligan" and reverse the transaction. And you can then do it again next year if you want.

Another opportunity involves making charitable gifts from your IRA if you are 70 and over. If you want to donate to a charity and don't itemize your deductions, you won't get a deduction for your contribution. If you are required to take a distribution out of your IRA, that is taxable to you. The net effect is you get to pay taxes on the contributed amount. As an alternative, make the charitable contribution directly from your IRA. You will not need to report the amount as a distribution out of the IRA, thus providing you the tax benefit of the charitable gift.

Finally, the rules for non-spouse inherited plans have been liberalized. If the deceased had begun taking distributions, the beneficiary must continue to take a distribution at least equal to what the deceased would have received. The big change occurs when the deceased did not begin distributions. The previous law was that the entire amount had to be withdrawn within 5 years of the date of death. That continues but Congress has added another option. The beneficiary can elect to begin distributions in the first year that are spread over their life expectancy. This provides young beneficiaries the opportunity to spread the tax over their lifetime instead of five years.

As always, please call (949-683-8111) or email us at info@southcountycpa.com if you have any questions. We are here to help.