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Ed Slott's Free IRA Update
January 2009
Volume 2, Number 1
In This Issue
One Year Anniversary
Focus on - Getting Ready for Tax Season
Question of the Month
News, Rulings and Other Updates
Retirement Planning Tip
Ed Slott's IRA Advisor - January Issue

One Year Anniversary
It may be hard to believe, but it has been one year since we published the first issue of Ed Slott's Free IRA Update. Subscriptions have significantly increased since our first issue, and many of the topics we addressed were based on suggestions from you - our readers. We also addressed topical issues to ensure that you were kept abreast of current as well as pending changes that affect retirement accounts. We hope that you will continue to find the information we provide useful. If you enjoy our newsletter, then it is likely that a friend, colleague or family member will too. Please feel free to pass it on and suggest that they sign up if they have not already done so. Signing up is as easy as inputting a valid e-mail address in the required field on the left hand side of the screen where it says "Sign up for our free IRA updates via email:"
Be sure to visit our website often, and check out our helpful resources such as our discussion forum where some of the most knowledgeable IRA experts discuss IRA matters and respond to questions. However, if you are a consumer, consider whether you should talk to an Elite IRA Advisor to ensure any information provided suits your particular financial profile. See The Benefit of Working with YOUR Elite IRA Advisor for more information about Elite IRA Advisors.
Thank you for your suggestions and your continued subscription to Ed Slott's Free IRA Update.
We look forward to a mutually productive year.
Ed Slott and Company, LLC
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January Focus - Getting Ready for Tax Season
If the past year has taught us one thing, it is that we are surely in a YOYO - You're On Your Own - economy. As such, it is now, more than ever, extremely important for a taxpayer to adequately fund his retirement nest egg in order to guarantee a financially secure retirement. One way of doing this is to fund retirement accounts such as IRAs.
It is not too late to fund an IRA for 2008, as the deadline for doing so is April 15, 2009 for most individuals. Individuals may contribute 100% of compensation, up to $5,000 for 2008, plus an additional $1,000 for individuals who were at least age 50 by December 31, 2008. $5,000 may not seem like much at first glance, but it does add up overtime. Consider that a contribution of $5,000 each year for twenty years adds up to about $174,000 - assuming a conservative rate of return of 5%. This could go a long way in defraying retirement expenses, especially if Congress continues to increase the contribution amounts over time.
Choosing Between a Traditional and a Roth IRA
Choosing between a traditional and a Roth IRA can seem like a daunting task. However, working with a financial advisor who understands IRAs and their impact on income taxes and retirement income can help to make the choice easier.  A financial advisor would consider areas such as:
  • Eligibility: Whether the individual is eligible for a Roth IRA contribution  
  • Deductibility: Whether the individual is eligible to deduct a traditional IRA contribution
  • Income tax rate now and later: The individual's current tax rate vs the individual's projected tax rate during retirement , and
  • Affordability: whether the individual can afford to give up a deduction now in order to get tax-free withdrawals later.
Many economists project that tax rates will increase in the future, which makes the Roth IRA the better choice for individuals who can afford to forgo the tax deduction, as it allows them to take advantage of lower tax rates now.
For individuals who are eligible for deducting a traditional IRA contribution and making a Roth IRA contribution, but are unsure of which to choose, splitting the contribution between both types of IRAs can be a good solution as it helps the individual to enjoy the benefits of both types of IRAs. 
Start Early for 2009
Instead of waiting until the 2009 tax season to fund IRAs, individuals should start making their 2009 contributions now. Annual contributions can be spread over a 12-month period. Making a monthly contribution of $416 instead of a lump-sum contribution of $5,000 can be more manageable for some taxpayers.
Choose Direct Deposit for Tax Refunds
The IRS allows taxpayers to split their tax refunds between up to three accounts. This presents a good opportunity for individuals to fund their IRAs. Individuals who want to deposit their tax refund - via direct deposit - into more than one account should file IRS Form 8888 along with their tax return and should make sure that the IRA is opened before filing the tax return. In addition, if the contribution is intended to be for 2008, the return should be filed early so as to allow the refund to be credited to the IRA before April 15, 2009 as deposits credited after that date cannot be applied to 2008.
Contributions May Cost Less for Some Taxpayers
Taxpayers who are concerned about the affordability of funding an IRA may find that the cost is lower than expected if their adjusted gross income (AGI) is less than $53,000 for those who are married and file joint returns, $39,750 for those who file as head-of-household and $26,500 for other taxpayers. These individuals would be eligible for the saver's credit which can be claimed along with any tax deduction claimed for contributions, resulting in refund amounts that can go towards offsetting the cost of the contribution.
Explanations of the rules that govern IRAs are usually provided in Ed Slott's IRA Advisor Newsletter. If you are not already a subscriber and want to get an idea of the content of the newsletter, you can preview past issues before subscribing.

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Question of the Month

Question: I am planning to convert my traditional IRA to my Roth IRA to take advantage of the lower market value of my investments. However, I may receive an increase in salary this year which could put my modified adjusted gross income (MAGI) over the $100,000 threshold, resulting in my conversion being ineligible.  Should I wait until later in the year to decide on whether to complete the conversion?
Answer: If you want to do the conversion now, you need not be concerned about your MAGI amount right now, as you can always recharacterize the conversion later. The deadline for re-characterizing a conversion done in 2009 is October 15, 2010, if you file your tax return on time, and the recharacterization can be done for any reason, including you being ineligible for the conversion or simply because you changed your mind and would prefer to leave the funds in your traditional IRA. 
Should you commingle the conversion with other assets, you will need to compute the net income attributable (NIA) to the conversion and include the amount along with the recharacterization. As such, it may be a good idea to keep the newly converted amounts in a separate Roth IRA from your existing Roth IRA assets until the recharacterization deadline has passed.

News, Rulings and Other Updates

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) has been signed into law, and includes provisions such as:
  • A one year moratorium on required minimum distributions (RMDs) for 2009. This applies to both retirement account owners and beneficiaries. As such, any individual or entity that would have been required to take an RMD for 2009 gets a reprieve and need not take distributions until 2010. This reprieve does not apply to RMDs due for the 2008 year or RMDs from defined benefit plans.
  • Requiring that all qualified plans permit rollovers for non-spouse beneficiaries for plan years beginning on or after January 1, 2010.
  • Rollovers from Roth 403(b)s and Roth 401(k)s to Roth IRAs are not subject to the modified adjusted gross income limit of $100,000.
Detailed information on these and other WRERA provisions are available in the January 2009 issue of Ed Slott's IRA Advisor Newsletter.

January's Retirement Planning Tip:  Start Your 2009 Retirement Contributions Early
Salary deferral plans such as 401(k)s, 403(b)s, 457(b)s and SIMPLE IRAs provide opportunities for larger contributions. The salary deferral contribution is limited to $16,500 plus $5,500 catch-up contributions for individuals who are at least age 50 by the end of the 2009 calendar year except for SIMPLE IRAs where the limit is $11,500 plus $2,500 catch-up. While it may be too late to fund these plans for 2008, starting early for the 2009 year can provide a head start on saving for retirement.

Highlights from Ed Slott's IRA Advisor Newsletter - January 2009 Issue


The January 2009 issue of Ed Slott's IRA Advisor is now available online. The areas covered include the following:
Special Issue!!
RMDs are Waived for 2009 - and Other Key Provisions of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) enacted December 23, 2008

Big year-end tax changes were just signed into law and we have all the details in this issue:

  • No RMDs for 2009!
  • Non-Spouse Beneficiary Rollovers from Employer Plans Made Mandatory in 2010

Financial advisors: Make sure you are up on the latest rules and tell your clients!


Feature Article
New Tax Law Suspends RMDs for 2009
  • No Relief for 2008 RMDs
  • IRA Owners and Plan Participants
    • The Required Beginning Date Does Not Change
    • 20% Withholding Effect for 2009
  • IRA and Plan Beneficiaries
    • No 2009 RMDs for Beneficiaries
    • Death in 2008
    • Multiple Beneficiaries
    • 5-Year Rule Effect
    • Effect on Trust Beneficiaries
  • No 72(t) Relief
  • Qualified Charitable Distributions
  • Roth Conversions
  • Distributions from Annuities
  • Who Does This Provision Benefit?
  • IRS Guidance

Non Spouse Beneficiary Rollovers from Employer Plans Made Mandatory in 2010
  • The Original Problem
  • Non-Spouse Rollover Rules
  • 2010 Inherited Roth IRA Opportunities
  • Do the IRA Rollover


Roth IRA Contributions of Bankrupt Airline Payouts

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