With December just around the corner, the malls are filling with holiday shoppers, the supermarkets are crowded with people getting ready to bake their favorite seasonal treats, and many are preparing for the cold, snowy days. However, the last thing from most people’s mind is getting their retirement accounts in order for the end of the year. While the holidays are approaching, and many of our days are busy, there is little time for thinking about our future retirement. Your retirement should be a time to enjoy and that may mean taking a little extra time now to speak with a tax advisor about what retirement options you should take advantage of. Doing this now may mean more income for you later in life. Here are some things to keep in mind when speaking with a tax professional.
401K contributions expire December 31st – While account holders may contribute to their IRAs up until April 15thof the following year, all 401K contributions must be made by December 31st of the current tax year.
Traditional vs Roth – One thing to take into consideration when deciding whether to contribute into a Roth IRA or a Traditional IRA is how much retirement income you will have from other sources besides your IRA accounts. Traditional IRA’s can be a great tax break now, but can put you in a higher tax bracket when you have to start taking distributions from it. If this situation is a concern to you, you may want to think about putting your money into a Roth IRA. While there is no tax deduction for this now, you do not have to claim your distributions as income because you have already payed taxes on this money.
Roth Conversion – In 2010 the income restrictions that were once set for contributing to a Roth IRA have been removed. It is beneficial to some to take advantage of this by converting Traditional IRA funds into a Roth IRA. With former President Bush’s tax cuts expiring at the end of 2010, something to keep in mind is whether you would rather pay all the taxes now at a lower rate or wait for a higher tax rate at retirement age. Another reason to convert now is because the current tax code allows you to spread the taxes owed from these funds over a two year period if the Roth conversion takes place in 2010.
Maximize your contributions – Take advantage of catch-up contributions. For 2010, the IRA contribution limit is $5000.00. However, if you are 50 or older, you are allowed to contribute $6000.00.
For those of you who have already retired and have reached the age of 701/2, don’t forget to take your Required Minimum Distribution (RMD) for 2010. RMD’s were waived for 2009, but are required for 2010. Most financial institutions send year end statements telling you how much you are required to take.
Speak to a tax professional today. Whatever your situation, it is never too early to get started on retirement planning.