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Year-End Tax-Savings Strategies
The end of the year is fast approaching—and so are several
important December 31 financial deadlines. Here are financial
to do's you may want to carry out before the year ends.
Convert to a Roth IRA. With many individual retirement
accounts decimated by the bear market, taxpayers may find
this the perfect time to convert their traditional individual
retirement accounts to a Roth IRA, whose eligible earnings
are not taxable upon withdrawal. Because you pay regular income
taxes on the money you shift to a Roth, the idea is to convert
the smaller pool of assets into a Roth before the assets rebound
in value.
Furthermore, taxpayers who couldn't qualify for a Roth
conversion before because their income was too high (over
$100,000 for couples and singles) may qualify now if their
income is down for the year. You must take the money out of
the traditional IRA by December 31. The hitch to all this?
It's better to pay for the conversion taxes with money
outside of the IRA—potentially difficult in a bear market.
Open a solo 401(k) plan. The self-employed and business
owners with no full-time paid employees should consider opening
a solo 401(k). The 2001 Tax Relief Act made changes to 401(k)
plans that make individual 401(k) s cost effective for the
first time. Participants can now sock away up to $42,000 to
be put into these accounts in 2003 , far more than alternatives
such as the SIMPLE IRA or SEP IRA. For 2002, the 401(k) must
be opened by this December 31 if you follow the calendar year.
Begin required retirement plan distributions. Did
you turn 70 1/2 before July 1 this year? You're required
to start taking minimum distributions by December 31 from
your traditional IRA and employer-sponsored retirement plans
(except for the plan of your current employer if you're
still working). Technically, you can delay the initial distribution
to April 1 of next year, but that means you'd have two
required withdrawals next year because all subsequent withdrawals
must be completed by December 31. Two minimum distributions
in the same year could push you into a higher tax bracket
and potentially expose more of your Social Security benefits
to tax.
Pay attention to mutual fund distributions. You could
face the irony of paying taxes on capital gains distributions
made by your taxable mutual funds even though the funds lost
money for the year. If it's a fund you want to sell anyway,
consider selling it before the "ex-dividend"date, which
commonly is in November or December. Equally, if not more
important, avoid buying into funds before they make their
distributions—otherwise you're paying taxes on gains
you never earned.
Review investment gains/losses. Now is the time to
consider selling losing investments to offset those scarce
investment profits you made in 2002, or selling profitable
investments so they are sheltered by losses you've already
realized (and perhaps rebuying those profitable assets if
it makes investment sense). If you don't have profits
to offset, you can use losses to offset regular income up
to $3,000 (the excess losses carry into future tax years).
Bunch deductions. A time-honored tax strategy is to
bunch deductions into a single year. For example, you might
accelerate payment of your second installment of property
taxes due next spring into this year. The same for next January's
payment for estimated taxes. Bunching elective medical expenses
such as orthodontia bills also might push your total medical
deductions over that often difficult to hurdle 7.5 percent
threshold.
Consider charitable deductions. Consider increasing
charitable contributions in higher income years, or delaying
the donation of investments until they regain some of the
appreciation they have lost—you'll receive a larger
deduction when you do. (Be to donate appreciated assets rather
than selling them first.)
Don't wait until the last minute (April 15, 2004) to contribute
to your IRA for this year. If you can contribute now rather
than wait for the deadline next spring, you may be able to
get ahead of the game. This way you are taking advantage of
having that money working, compounding for you over a longer
period of time. If you are over age 50 remember that you qualify
for a special Catch-up contribution of $500 for 2003 making
the total allowable contribution $3,500.
Because some of these strategies are complicated and may
even conflict with each other, be sure to review them with
your financial planner or tax advisor.
Securities offered through Cadaret Grant & Co., Inc. Member NASD/SIPC, PPG and CG are separate entities. Securities and/or insurance products not insured by FDIC/NCUA or any government agency. May lose value. Not a deposit of or guaranteed by any bank, credit union or any affiliates. Licensed in AZ, CA, CO, CT, GA, ID, MA, ME, NC, NH, NJ, NY, PA, VA, VT and WY.
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