The Minefield of Year-End PlanningArticle added by Denise Appleby on October 28, 2008

Denise Appleby

Joined: July 30, 2007

December is one of the busiest months for financial planning, as taxpayers try to complete transactions eligible for tax write-offs and tax reductions for the year. You can help your clients by sending them reminders of transactions that must be completed by December 31, in order to claim tax benefits for these items and/or avoid IRS assessed penalties.

Establishing a Qualified Plan
Small business owners can shelter up to $45,000 from tax for the year by adding the amount to a retirement plan established for their business. If the plan is a 401(k) and the business owner is at least 50 years old, this goes up to $50,000. For defined benefit plans, the amount can be up to $180,000. However, qualified plans must be established by the end of the plan year in order for the business owner to be able to add any amount for the year. Business owners who miss the year-end deadline may consider a SEP IRA instead, as they can be established and funded by the tax-filing deadline of the business, including extensions.

Taking a RMD Amount
With two exceptions, retirement account owners who are at least age 70 1/2 and beneficiaries who are subject to life expectancy payments from inherited retirement assets must withdraw their 2007 required minimum distribution amounts by December 31, 2007. Failure to do so will result in a penalty of 50 percent of the RMD shortfall. Exception: Individuals who reach age 70 1/2 this year need not withdraw their 2007 RMD until April 1, 2008. However, this means that they will be required to withdraw two RMD amounts during 2008, since the 2008 RMD must be withdrawn by December 31, 2008. Also, individuals who are at least age 70 1/2 but are still employed and are not considered 5 percent owners of the company sponsoring the plan need not begin RMD withdrawals until they retire.

Converting a Roth IRA
Individuals who want to accumulate tax-free earnings on their IRA assets can convert their traditional, SEP and SIMPLE IRAs to a Roth IRA, where qualified distributions would be tax-free. Roth IRA conversions for 2007 must be completed by December 31, 2007. Technically, this means that the assets must leave the traditional IRA by December 31. Therefore, a taxpayer who takes a distribution from his traditional, SEP or SIMPLE IRA by December 31 can deposit that amount to a Roth IRA within 60 days as a Roth conversion. Make sure the deposit is in fact treated as a Roth conversion, and not a regular rollover.

Taking a SEPP Payment
Amounts withdrawn from retirement accounts while the account owner is under age 59 1/2 are subject to an excise tax of 10 percent, unless an exception applies. One exception is for the account owner to take withdrawals under a substantially equal periodic payment schedule (SEPP). If more or less than the annual calculated amount is withdrawn by the end of the year, the account owner will owe the IRS the 10 percent excise tax, plus interest on the excise tax waived for any previous year. Financial institutions are often bombarded with requests to process year-end-deadline-oriented transactions during December, and often institute an early deadline to ensure transactions are processed by December 31. The deadlines range from December 15 to as early as November 30. So there's nothing wrong with taking care of these things as early as possible.

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