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Monthly Client Newsletter | February 2010

H opefully, your mailbox is starting to fill up with 2009 year-end documentation. Now might be a good time to review and rebalance your retirement and other investment accounts. While you consider your situation and organize your tax records, please take a minute to review this month's articles.

Contents

Is a Roth IRA right for you?

Credit cardsYou have until April 15th of 2010 to contribute up to $5,000 ($6,000 if age 50 or over) into a 2009 traditional IRA or a Roth IRA. Is this an option worth considering for you?

Traditional IRA A traditional IRA is an individual retirement account that allows you to contribute money, and depending on your income level, deduct the contributions from your taxable income. Any earnings made in a traditional IRA account remain tax-deferred until the money is withdrawn from the account, so that tax is only paid on the money once it is withdrawn. After the account holder reaches age 70 1/2 you may no longer make contributions into your IRA and minimum required distributions must be taken from the account. Anyone with earned income can create a traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.


Roth IRA A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed ("after-tax" dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions. In 2010, individuals who earn more than $120,000 and married joint filers who earn more than $167,000 are ineligible to contribute to a Roth IRA



So which is better?
  • Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.
  • Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.
  • Roth IRA accounts have more flexible contribution and withdrawal rules.
So the answer is. . .it all depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA.
If you think your retirement account investments will perform well, then perhaps the earnings growth in a traditional IRA will more than pay for the additional tax at time of withdrawal.


Roth IRA Conversion Rules for 2010

New! Roth IRA Conversion Rules for 2010

Old Rule: In the past, if an account holder wanted to convert a traditional IRA to a Roth IRA, the holder had to pay federal income tax on any pre-tax contributions as well as on any earnings made in the traditional IRA. Moreover, single and married persons with adjusted gross incomes of more than $100,000 were not eligible to convert.


New 2010 Conversion Rule: Starting in 2010, taxpayers with adjusted gross income of more than $100,000 will also be allowed to convert an IRA (or 401(k), 403(b) etc.) to a Roth IRA. This doesn't change the fact that some taxpayers are not allowed to fund a Roth IRA account, but it does mean that anyone can convert an existing qualified retirement account to a Roth IRA.


Tax Considerations for Conversion: The income tax due on the 2010 conversion can be paid immediately or spread equally over 2011 and 2012. Conversion in any subsequent years must be included as income during the single tax year in which the conversion is completed. So you will want to plan accordingly.


If you convert to a Roth IRA, you may consider filing a tax extension. Then, if the Roth loses value (the stock market goes down) you can re-convert prior to October 15th of 2011 and not have to pay tax on a higher conversion amount that loses value.



Example: You convert $50,000 to a Roth in Jan 2010 and in October 2010 the converted value in the account is only $40,000 because the market drops. You would still be required to pay taxes on $50,000, but instead, you reconvert back to your traditional IRA and pay no taxes on the conversion. Because of this, it is usually best to rollover funds into an isolated new Roth account and not co-mingle funds in a current Roth account.



Remember, you should pay taxes on the conversion with non-IRA funds, otherwise the unconverted funds you used to pay taxes on the conversion may be subject to a 10% early withdrawal penalty and it reduces the available dollar amount in your new Roth account.


Should you convert?Each person's situation is unique. You should carefully review your plans for retirement prior to converting funds into a Roth IRA.




Issues to consider include:
?Do you have enough money to pay the tax on the conversion?
?What will the tax rates be in 2011 and 2012 versus 2010?
?Will the rollover disqualify you from important tax benefits (such as dependent child and college tuition tax credits)?
?How much time do you have until retirement?
?Do you plan to leave your IRA to your heirs?
?How will your income tax bracket be affected by retirement?


Credit Card Relief: Part II

In May 2009 the Credit Card Accountability, Responsibility and Disclosure (CARD) Act was signed into law. Some of the provisions enacted became law in August 2009. Another group of major provisions take effect on February 22nd. The major changes becoming active later this month include:



Credit Card BulletRaising interest rates curtailed. Credit card companies may not raise your interest rate on existing card balances unless your payment is more than 60 days late or unless it is clearly stated in your credit card agreement.Credit cards
Credit Card BulletDouble cycle billing comes to a halt. Interest may no longer be applied on current AND previous balances. This stops the practice of charging interest on balances already paid.
Credit Card BulletReasonable payment allocations. Payments you make above the minimum required payment amount MUST be applied to the credit card balance with the highest interest rate.
Credit Card BulletPredatory card issuance to students now limited. Credit cards may no longer be issued to those under 21 that do not have a co-signer or an independent means to pay their bill. Colleges must disclose any arrangements with credit card banks and no credit card sign up enhancing gifts may be made within 1,000 feet of campus. Nor can your credit card limit be "automatically" increased without your knowledge in conjunction with your approval to add a student or minor to your credit card.
Credit Card Bullet Payment due dates predictable. Payment due dates must now be on the same day each month. If the date falls on a weekend, payments processed the next business day may not be assessed a penalty.
Credit Card Bullet Fee restrictions. Banks are limited in a number of fee areas as well. This includes eliminating fees charged for paying your bill via phone, the internet or other means.
Why do you need to know? When the CARD Act was signed into law, many banks complained they would not be able to make the changes in the timeframe required by Congress. So if your credit card company tries to hold you to the old standards, you are within your rights to challenge them. Not sure if they are? Go to the bank's web site. An additional provision in the CARD Act requires credit card terms be stated in easy-to-understand language on the internet.


Where's My Tax Return?

Common items that hold things up


Wondering why your tax return is not finished? Often the delay can come from one or two items that were overlooked and are now needed to process your tax return. Here are some of the most common:


1Looking for RefundMissing Statements. This includes all W-2s and 1099s including any related to gambling winnings, income, interest, and mutual funds.


2Dependent conflict. You claim a dependent on your tax return, but your child claimed themselves as a dependent or an ex-spouse has already filed a tax return with the same dependent's social security number.


3Mismatched names. You recently got married, but did not change your name with the Social Security Administration.


4Missing deduction documentation. Common among them are; charitable contribution recap, medical expense documents, child-care forms, property tax forms, home sales records, pension statements, and retirement forms.


5Waiting for your review. You need to sign your tax return and/or return a signed Form 8879 saying your return is ready to file electronically.


6Receiving documentation late. The closer to April 15th your documents are received, the greater the potential back log of return processing. In tax return processing (and receiving a refund), the early bird not only gets the worm, it also gets the worm faster.


Tax Alert - Haiti Donations

Donations

Haiti relief donations may be claimed in 2009


Cash contributions made to qualified charities from January 11, 2010 thru February 28, 2010 for Haiti earthquake relief may be deducted on prior year (2009) Federal tax returns. Normally these deductions would only be available on 2010 tax returns, but late law passage now allows you to choose which year you wish to take the deduction. This provision does not apply to non-cash contributions.


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