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Year End, Start Planning

Time has a way of ticking by, and it’s not too early to think about the financial moves you want to make before the end of the year.

First, do you have an RMD (required minimum distribution) for your IRA? If you do, and if you make charitable contributions toward the end of the year, but you don’t itemize deductions on your taxes, then consider donating some of your RMD. This is part of the pension protection act passed last year, and this rule regarding RMDs is in effect for only 2006 and 2007. Too bad. If you fall into the small group that would benefit from this, it’s the financial equivalent of taking the tax deduction.

Also, if you are retired, it may be time to consider converting some of your IRA to a Roth. The reasons for this may not seem so simple, but the general goal is. You wish to avoid having your growing RMDs force you into another tax bracket, and/or to avoid having this income subject to the bizarre Social Security tax trap. For example, a married couple finds their taxable income is $40,000, and according to the chart at Fairmark, they are in the 15% tax bracket (i.e. the next dollar taken is taxed at 15%). They may be able to convert $23,000 from the traditional IRA to a Roth, still paying 15%, and that money will grow tax free, with no forced withdrawals. Since RMDs continue to rise as one gets older, this strategy will keep the IRA balance from rising to the point where withdrawals force the couple into the 25% bracket. This example ignores the Social Security tax trap mentioned, and linked, above. More year end ideas to come soon.


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