Four tips, to be exact . . .
- Convert your traditional IRA to a Roth IRA. If you’ve been planning to convert your traditional IRA to a Roth IRA, but just haven’t gotten around to it, consider converting before year-end, especially if you anticipate being in a higher tax bracket next year. You will pay taxes on all pretax assets that you convert, but not the 10% early distribution penalty tax, regardless of your age at the time of conversion. Once you convert, you’ll have the advantage of tax-free growth in a Roth IRA, and you’ll avoid required minimum distributions during your lifetime—allowing you to pass along tax-free IRA assets to your heirs.
- Take any required minimum distributions. If you’re age 70½ or older, you must take a required minimum distribution from your traditional IRA by year-end or pay a 50% excess accumulation penalty tax on the amounts that you should have taken—but didn’t. If you just turned age 70½ this year, you can delay your required minimum distribution until April 1, 2014. As an IRA owner, you’re responsible for taking your required minimum distribution by the deadline. Many credit unions assist their IRA owners with calculating required minimum distributions, so check with the professionals at your credit union if you have questions.
- Make a qualified charitable distribution. If you’re age 70½ or older, you can take a tax-free distribution of up to $100,000 from your traditional or Roth IRA if you have it paid directly to a qualified charity. And, you can use the qualified charitable distribution to satisfy your required minimum distribution. If you want to make a qualified charitable distribution you’ll need to do so before year-end, as qualified charitable distributions sunset on Dec. 31, 2013—unless Congress acts to extend them—and no longer will be permitted under current tax laws.
- Review and, if necessary, update your IRA beneficiary designation. If you haven’t reviewed your IRA beneficiary designation recently, you should do so before year-end to ensure that your IRA proceeds are distributed in accordance with your wishes. Were you married last year, divorced, have a new baby or a new grandchild, or was there a death in the family? All of these life events should cause you to review your IRA beneficiary form to make sure that it still reflects your wishes.
“We see many IRA beneficiary forms that have not been updated since the IRA was opened in the early 1980s,” according to Dennis Zuehlke, compliance manager for Ascensus, Middleton, Wis., a company that provides retirement plan services to financial organizations nationwide.
“This often means that a former spouse is still named as the IRA beneficiary, children or grandchildren born after the IRA beneficiary form was completed are not listed as beneficiaries, or the beneficiaries named at the time are now deceased. This can result in the IRA proceeds being paid to the IRA owner’s estate or costly legal battles as to who is entitled to the IRA proceeds,” Zuehlke adds.