“I was seldom able to see an opportunity until it had ceased to be one”. –Mark Twain
If Mark Twain were still around he would certainly have some interesting insights on the tremendous changes that took place in the 2008 financial markets. Those changes combined with the various government responses have produced some unique planning opportunities for 2009.
Required Minimum Distributions (RMDs): Congress suspended RMDs for 2009 from IRAs (including inherited IRAs) and defined contribution employer plans for account owners and beneficiaries. This creates tax planning opportunities for those folks over 70.5 that are able to fund living expenses from assets outside retirement plans. Instead of completely stopping your RMDs, it might make sense to scale them back to keep your taxable income in the lowest income tax brackets. However, for this type of planning, each situation is unique and there are no rules of thumb.
Refinancing: Home mortgage interest rates are at a historically low level. Consider refinancing your primary home mortgage or your home equity line of credit. Refinancing your primary mortgage may make the most sense for people who have a sizeable loan and plan on staying in their current residence for a few years.
Gifting: The 2009 annual gift tax exclusion increased to $13,000 per person. A person can give $13,000 to any number of recipients in a calendar year without using up their lifetime gift tax exemption. For married couples each spouse has an annual exclusion, so they can transfer a total of $26,000 per recipient.
Estate Taxes: The estate tax exclusion rose from $2,000,000 to $3,500,000 per person for 2009. With proper planning, a couple can now shelter $7,000,000 free from federal estate tax. However, there is a risk for many of our clients of “overfunding” the credit shelter or “Family” trust as part of an estate plan. The exclusion increase is significant and should prompt a review of your estate plan.
Charitable Gifts from IRAs: If you are over 70.5 you can make tax-free donations directly from your IRA to your favorite charity (including churches). This provision will expire at the end of 2009.
Converting to a Roth IRA: The conditions might be right for converting part (or all) of your Traditional IRA to a Roth IRA. In order to qualify for a 2009 Roth conversion your Adjusted Gross Income (AGI) needs to be under $100,000, but in 2010 the AGI limit is eliminated. As an added bonus, taxable income generated by the conversion can be divided equally between 2011 and 2012 thus helping to spread out the tax bite. If you have more assets than you will use during your lifetime, believe income taxes may be higher in coming years or think asset prices may increase significantly in the future you should consider a Roth conversion.
Making the decision to utilize any of these strategies should involve a detailed analysis of your financial situation. Give us a call and we can help determine which of these strategies may be best for you.