Wednesday, September 23, 2015

Start year-end tax planning now

It may seem a little early to start thinking about the end of the year, but before you know it, the leaves will fall and you will be rushing to buy year-end holiday gifts. That’s why this is a great time to start year-end planning. Don’t wait until you are rushed and forced to make a knee-jerk decision. Start now to make decisions when you have the time to accumulate the necessary information.
Like everything else in the financial and legal world, there is no one piece of advice that fits all. Everyone’s situation is different and what may be good for your next door neighbor or best friend, is not necessarily good for you.
It is important to take information and apply it to your individual situation. In that regard, one area that many people should consider before the end of the year, is a Roth conversion of some or all of their traditional IRAs.
The main benefit of this transaction is two-fold. The first is that money in a Roth IRA grows tax free versus money in a traditional IRA that grows tax deferred. In addition, money in a Roth IRA is not subject to required minimum distribution rules at 701/2.
Nothing comes without a cost. The cost of converting money into a Roth IRA is that you are paying taxes on the amount that you are converting. You will always pay taxes on the amount, however, by converting you are paying the tax earlier
The rules I have lived by in deciding whether to convert existing IRA money into a Roth IRA are:
1). By converting the money and paying the tax on the amount converted, it won’t throw you into a higher tax bracket.
2). You have the money (other than the money you are converting) to pay the additional tax liability.
3). You won’t need the money for at least five to seven years.
If you meet these three rules then a Roth conversion would make sense. Contact your IRA custodian and they can assist you.
Other year-end tax moves that make sense are to accelerate itemized deductions into this tax year or to delay them until next year. For example, if you are charitable in nature and you traditionally make year-end charitable contributions, do those deductions make sense this year or do you delay them until next year? There’s no right answer because it all depends upon your individual situation. If you are not itemizing your deductions this year, then certainly you want to delay those deductions until next year. On the other hand, if you are itemizing your deductions and you’re in a higher bracket this year than you anticipate you’ll be next year, then it pays to take those deductions this year.
Before you know it, 2016 will be here. If you plan to do any year-end planning, don’t procrastinate – start the process as soon as you can. By giving yourself the time to study your situation and talk to your professionals, you’ll make the right decision for yourself.
Good luck.