Year End Financial Planning Tips


Jane M. Young, CFP, EA

Roth Conversion –
The income limitations on converting a traditional IRA to a Roth IRA have been eliminated and taxes due on a Roth conversion, processed in 2010, can be paid in 2011 and 2012.

Required Minimum Distribution –
A required minimum distribution on your IRA and 401k/403b is required every year once you attain 70 ½.

Maximize your retirement contributions –
Be sure to maximize your retirement plan contributions for 2010. Below are the maximum contributions for your 401k and IRA contributions for 2010. You have until April 15th to contribute to your IRA.

401k – $16,500 plus a $5,500 catch-up provision if you are over 50
IRA – $5,000 plus a $1,000 catch-up provision if you are over 50 (income limits apply)
Simple – $11,500 plus a $2,500 catch-up provision if you are over 50

Adjust retirement contributions for 2011 –
There is no change to 401k and IRA contribution limits between 2010 and 2011. However, if you have turned 50 you can make a catch-up contribution. A change in your income may also impact your ability to contribute to an IRA.

Harvest Tax Losses –
If you have been thinking about selling some poor performing stocks or mutual funds, do so before the end of the year to take advantage of tax losses in 2010. However, if capital gains rates increase in 2011 it may be more advantageous to offset gains in 2011.

Charity Contributions –
Go through your closets and garage before the end of the year and donate any unwanted items to get a nice deduction on your tax return. When you drop off your items be sure to get a receipt. When making a charitable contribution, consider donating appreciated stock rather than cash.

Take advantage of the annual gift allowance –
In 2010 you can gift up to $13,000 per person without paying gift tax or impacting your estate tax exemption.

Make 529 Contributions –
Contributions made to the Colorado 529 plan are deductible on your state tax return. Money can be contributed into the Colorado 529 plan for tuition that is payable in 2011.

Review your expenses and draft a new budget –
Everyone should review their expenses and revise their budget at least once a year. December is a good time of year to review historical spending habits and make adjustments to your budget for the coming year. It is difficult to establish saving goals without a good understanding of what is available after your non-discretionary expenses.

Set financial goals for 2011 –
I recommend setting new personal and financial goals at the beginning of every year. Think of it as personal strategic planning. Set some long term goals for 3-5 years then identify some action plans for the next twelve months.

Adjust tax withholdings for 2011 –
Adjust your tax withholdings or estimated taxes for anticipated changes in income and deductions in 2011.

Organize 2010 tax documents –
Year end is a good time to create a folder for all of the 2010 tax documents you will be receiving and to start organizing your expenses and receipts. You will have everything thing in one place when it comes time to complete your tax return.

Make adjustments for changes in family circumstances – birth, death, marriage, dependents, and retirement –
Major changes in your life circumstances may result in numerous changes in your financial situation. For example a birth, marriage, or death will probably necessitate a change in your will and beneficiary designations. It also may impact your income tax withholdings. The birth of a child may result in significant tax benefits. With the birth of a child you also may want to consider starting a college fund and a change in life or disability insurance.

Spend FSA accounts –
With many companies, flexible savings accounts cannot be carried over into the next year so be sure to spend the money in your FSA account this year, before you lose it.

Consider the impact of possible changes in the tax law –
If the Bush tax cuts are not extended, there is a possibility that the capital gains rate will increase from 15% to 20%, that tax rates will increase, and that some tax deductions will disappear. These possibilities need to be considered in making your year end financial decisions.

Roth IRAs – Part II – The Major Differences Between a Roth IRA and a Traditional IRA

Jane M. Young, CFP, EA

The primary difference between a Traditional IRA and a Roth IRA is when you pay income tax. A traditional IRA and a traditional retirement plan are funded with pre-tax dollars and you pay taxes on your withdrawals. A Roth IRA is funded with after tax dollars and you don’t pay taxes on your withdrawals. The decision to buy a Roth or a Traditional IRA is largely based on your current and future tax rates, your investment timeframe and your investment goals. The Roth IRA is usually the more advantageous of the two options but it depends on your individual situation.

Traditional IRA: (tax me later)

• Funded with pre-tax dollars therefore it provides a current tax deduction
• Earnings are tax deferred
• Distributions taxed at regular income tax rates, penalty if withdrawn before 59 1/2
• Required minimum distributions must be taken beginning at age 70 1/2
• Income limit on contributions begins at, if participant is in a retirement plan, $89,000 MFJ and $55,000 if single.
• Annual contribution limit is $5000 if under 50 and $6000 if over 50
• Many IRAs are created as a result of a rollover from a company retirement plan such as a 401k – very similar in tax structure.

Roth IRA: (tax me now)

• Funded with after tax dollars, does not provide a current tax deduction
• Earnings tax exempt (after five years or 59 ½)
• Contributions can be withdrawn penalty and tax free
• Earnings can be withdrawn tax free after five years or 59 1/2
• No required minimum distribution
• Income limit on contribution begins at $166,000 MFJ and $105,000 if single
• Annual contribution limit is $5000 if under 50 and $6000 if over 50

Part III of this series will address the pros and cons of converting a Roth IRA to a Traditional IRA.