12/22/2010 11:15 PM ET|
Retirement moves to make this year
If you don't know what must be done with your retirement funds before 2011, you may miss opportunities -- and could even face penalties.
However, procrastination can result in missed opportunities and, in some cases, penalties for missing deadlines.
To help you stay on top of year-end retirement matters, here is a list of related items that must be completed by year end.
Establishing a qualified plan
Qualified plans that operate on a calendar-year basis must be established by Dec. 31 of the year for which contributions are to be deducted.
This includes completing the necessary documentation and notifying employees about the plan. Contributions may be made by the employer's tax-filing deadline, including extensions.
Convert Roth IRAs
Roth IRA conversions for a year must be completed by Dec. 31 of that year.
A conversion may be accomplished in one of three ways:
1. Conversion within the same financial institution
This kind of conversion takes place if the non-Roth retirement account and Roth IRAs are maintained at the same financial institution.
If the delivering account is a non-Roth IRA, the custodian may either require the IRA owner to move the assets from the non-Roth IRA to the Roth IRA, or may change the non-Roth IRA to a Roth IRA to accomplish the conversion. For qualified 403b and governmental 457b plans, the assets must be moved to a Roth IRA, as changing the account to a Roth IRA is not permitted.
2. Trustee-to-trustee transfer
Here the conversion occurs between two financial institutions. Generally, the Roth IRA owner will instruct the Roth IRA custodian to submit a request to the non-Roth IRA custodian or plan (qualified 403b or governmental 457b plan) trustee to deliver the assets to the Roth IRA.
To ensure proper tax reporting, the instructions should clearly indicate that the transaction must be processed as a Roth IRA conversion.
3. Distribution and rollover (60 days)
A Roth conversion may also be accomplished by means of a distribution and 60-day rollover. The Roth IRA owner may distribute the assets from the non-Roth retirement account and roll over the assets within 60 days to a Roth IRA.
The Roth conversion applies to the year in which the assets are distributed from the non-Roth retirement account. For instance, assume you convert your traditional IRA by means of a 60-day rollover, distribute the assets in December 2010 and roll over the amount to your Roth IRA in February 2011. The conversion is applicable to 2010 and must be reported on your income tax return for 2010. The tax-reporting forms will be issued for the year the applicable transaction occurs; therefore, your custodian will mail your year-2010 Form 1099-R in January 2011, and your 2011 Form 5498 will be mailed in May 2012.
Be sure to check the tax-reporting documents you receive for your Roth conversion. If you are unsure of the tax-reporting requirements, consult with your tax professional. You may also want to check the activity and description on your account statement prior to receiving these forms, so that you are able to resolve any discrepancy with your custodian/trustee before your tax forms are issued.
Make required minimum distributions
Participants: If you reached age 70.5 prior to the applicable calendar year, you must distribute your required minimum distribution (RMD) by Dec. 31 of that year. If you are an IRA owner who is subject to this requirement, be sure to contact your IRA custodian/trustee as soon as possible to help ensure that the funds will be distributed by Dec. 31, as some custodians/trustees require IRA owners to request their RMDs prior to Dec. 31. To determine whether an RMD amount should be distributed this year, qualified plan participants must consult with their employers or plan administrators, as some plans allow participants to defer starting RMDs until after retirement, even if this occurs after age 70.5.
Beneficiaries: If you are a beneficiary who is required to distribute retirement assets using the life-expectancy method, you may need to distribute a minimum by Dec. 31.
Talk to your tax professional, employer and financial-service providers about these and other deadlines and financial matters that require action by the end of the year, as well as for next year. Taking care of these items will help ensure a smooth financial transition from year to year and give you an upper hand with your financial planning and tax preparation.
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