How to maximize your retirement benefits before April 15th

By:  Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC

Now that the dust has settled a bit concerning tax laws, it's probably time to make sure you've covered your bases with respect to retirement planning, before you file your tax return this April.

Frank St. Onge, CFP, EA offers 8 retirement planning tips for your consideration:

1.   Be sure to fund the maximum amount each year in the tax-deferred program available to you.  If you work for an employer who has a matching 401k type program be sure to contribute at least the amount needed to get that match; that is free money!

2.   Contribute to the Roth IRA to the maximum for you and your spouse.  You have until April 15, 2013, to contribute to the 2012 program.  The limit is $5,000 for each of you ($6,000 if you reached age 50 in 2012).  If your AGI limits you on contributing to the Roth IRA, you can fund a Traditional IRA and then convert that to the Roth IRA (certain rules apply).  The 2013 contribution limits have increased to $5,500 and $6,500 if over age 50 in 2013.

3.   If you have additional money that can be invested, be sure to accumulate that money so you have a pool of money to be able to pay the tax man when you want to do conversions of IRAs to Roth IRAs when the opportunity is available.

4.   If you have some 401k type money from previous employers, get them rolled over to an IRA and then look at converting them to the Roth IRA.

5.   If you have taxable investment pools, be sure to monitor the performance of each investment.  When you have losers, be sure to harvest those losses as they are valuable at tax time.

6.   If you have investments you have held for a long time with reinvested dividends, be sure you have this recorded on a spreadsheet so you can be selective when you go to sell a portion of that investment and notify the broker what exactly you want to sell.  Are you looking to sell the high cost lots to get a loss or the lower cost lots to have a higher gain – it’s your choice at the time of sale.

7.   Be sure you have a tax professional who is working with you all year to get the best tax position for you at tax time.  A great tax professional is not someone who knows how to record history; a great tax professional is one who is helping you create the right history to keep your tax cost at the lowest possible level while following all the rules.

8.   Be sure your financial planning professional is taking your specific tax situation into account when reviewing your tax and financial plan.

For those who may not be familiar, Frank shares the basics about Roth IRA's:

The Roth IRA is a retirement vehicle that allows a person to make an after-tax contribution to the Roth IRA which grows tax-deferred on the earnings side and provides for tax-free withdrawal once the person reaches age 59 ½.

A second way that a person can create a Roth IRA is by converting assets they have in a Traditional IRA, 401k plan, 403b plan, 457 plan or a Sep-IRA into a Roth IRA and paying the taxes owed based on their income bracket at the time of conversion.  These converted assets then grow tax-deferred in the Roth IRA and are tax-free when withdrawn after age 59 ½.

ROTH IRA ADVANTAGES:

There are several advantages to the ROTH IRA, that are not available with an IRA or other tax-deferred retirement plan:

1.   The annual contributions made to a Roth IRA can be withdrawn at any time which makes it an ideal tool for funding education for children, down payment for purchase of a house or other significant event in your life.  This withdrawal is tax free, no penalties and no age restriction (can be withdrawn before age 59 ½).  If the same uses were done with the traditional IRA and the other vehicles, there will be tax amounts due and a penalty in most situations which is not where you want to be.

2.   The Roth IRA does not have minimum distribution requirements at age 70 ½ like the IRA accounts have.  This means if you have other sources of retirement income like a pension and social security benefits to meet your lifestyle needs you are not required to take money from the Roth IRA in any year.

3.   Upon your passing the Roth IRA will go to your heirs tax-free from income tax, whereas the IRA amounts would create taxable income for the heirs as they take their required minimum withdrawals starting with the date of death of the original owner.

ROTH IRA DISADVANTAGES:

1.    For converted Roth IRAs, the converted amount cannot be withdrawn until after five years of the first contribution to a Roth IRA.  Usually this is not an issue for most people who start a Roth IRA early enough in their life.

2.   When you want to make a conversion of an IRA to a Roth IRA, you have to pay the income tax, federal and state, when the conversion is made.

For many people the biggest issue is they do not have free cash available to do so and psychologically most people have a problem wanting to pay taxes sooner than they have to if they waited until the minimum distribution years.

Frank notes, "when I develop a conversion plan for a client, I take into consideration the current incremental tax bracket they are in as well as what tax bracket they will be in when they reach retirement age to determine how much to convert each year."

NEW PROVISIONS TO CONSIDER IF YOUR EMPLOYER ADDS A ROTH 401k TO THEIR EXISTING RETIREMENT BENEFITS PACKAGE:

In the new tax laws just enacted in January 2013, Congress added a new feature that will allow anyone who is currently working at an employer who has a 401k plan (includes 403b and 457 plans as well) and either has or adds a Roth 401k to that plan to convert their current balance (or some portion) in the 401k plan to the Roth 401k as long as they pay the taxes on the amount converted in the year of conversion.

Why would someone want to convert an employer based retirement plan to a ROTH 401k while they are still working?

The converted amount will now grow as a Roth IRA with all future earnings being tax-free.  If this money had remained in the 401k plan those future earnings would also become taxable income at whatever tax bracket you will be in later in life.

For additional information about tax planning and Roth IRA's, as well as inherited IRA tax strategies, see Frank's additional blog posts below:

http://blog.fpaforfinancialplanning.org/2012/03/27/why-invest-in-the-roth-ira/

http://blog.fpaforfinancialplanning.org/2012/11/27/are-you-ready-for-some-tax-planning/

http://blog.fpaforfinancialplanning.org/2012/02/14/what-if-you-had-stayed-the-course/

http://blog.fpaforfinancialplanning.org/2010/03/25/what-to-do-with-my-inherited-ira/

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Francis St. Onge, CFP®, EA, CFE is the president of Total Financial Planning LLC. He provides tax planning, tax preparation and financial planning (fee-only) services to his clients in Brighton, Mich., and surrounding communities. He is licensed as an Enrolled Agent to represent clients before the IRS to resolve tax issues and bring clients into compliance in filing prior year tax returns.  Francis is also serving as the President of the Michigan Society of Enrolled Agents.

Lori T. Williams is a 23 year attorney based in Birmingham, MI. She owns a legal referral and legal consulting business called Your Legal Resource, PLLC. She assists individuals and small businesses in need of legal advice or representation by connecting them with the right legal specialist for their situation. She also provides consulting services for attorneys and other professional service providers on how to generate more business through effective branding, marketing, networking, and by creating strategic partnerships. For more information, visit www.bestlegalresource.com.