Update Your Understanding of Your IRA

IRA money is important in retirement planning. First, your 401(k) or 403(b) money should be transferred into your IRA (see why and how here ). Then you need to strategically position the IRA money as either before-tax (in a traditional IRA) or after-tax (in a Roth IRA) to minimize your taxes once you start taking distributions in retirement. Finally, you want to plan for your heirs receiving the most benefit from their inheritance. Let's take a look at these last two points.

The reason you want to manage your eventual withdrawals from your IRA is because of the 'Tax Torpedo' - the hit to your wealth from being taxed not only on the withdrawal, but also on your Social Security benefits (read about the 'Tax Torpedo' here ). Avoiding taxes of around 50 cents for every dollar of IRA money you withdraw needs some planning - specifically , shifiting some of your IRA assets into an after-tax Roth IRA type account. In 2010, you will be able to transfer money from a regular IRA account (traditional, rollover, or inherited) to a Roth account without any income limitation. You will have to pay income tax on the money transferred, but this can be paid over two years. Although this is unpleasant to do, consider that the taxes have to be paid some time, and tax rates might be even higher in the future (as we repay current government deficits). Ideally, you should pay the tax bill from other savings, allowing the full amount transferred to enter into the Roth account, not an amount reduced by paying the taxes). This would leave the maximum amount in the Roth account, where it is most valuable for both avoiding the 'Tax Torpedo' and benfiting from the 'Stretch' described below. Tip: if you earn too much to make a Roth contribution (more than $159K if married), put your after-tax contribution into your regular IRA for 2008 & 2009, then transfer it to a Roth in 2010 (no tax is payable, since you already paid it).

An IRA or Roth makes a great inheritance for a child or younger family member. The money continues to accumulate over the many years of a child's life and can grow into millions of dollars through the wonders of compound interest. This effect is known as the 'Stretch.' The IRS requires that some money (a Required Minimum Distribution or RMD) be taken out of the account each year by a non-spouse inheritor. Make sure you do this because there is a huge penalty if you don't. If the beneficiary is young, the amount to withdraw is small, allowing the remaining money to go on growing.

Speaking of Required Minimum Distributions (RMD), if you were over the age of seventy and a half in 2008, you need to take the 2008 RMD before 4/1/09. Due to the current recession, there is a temporary waiver of the Required Minimum Distribution for 2009, and if you are currently taking distributions under the 5-year rule, take a holiday in 2009 - it temporarily becomes a 6-year rule! Calculating the RMD can be complex, especially if you inherit an IRA. This is an area where it pays to consult an expert.

Finally, beginning in 2010, you can rollover money from a qualified retirement plan, like a 401(k) or 403(b), inherited from someone other than your spouse into an IRA account, You have previously been able to do this if it was your spouse's plan, but not if it was your parent's, or brother's, etc.

Yes, the rules for iRA's are complex. Feel free to call if you have questions - 408-725-7135.

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