Year-End Moves for IRA Owners

Year-end is a tricky time of year for IRA owners. There are steps many IRA owners should take or at least consider taking by December 31. Make the wrong move and it could cost you money now or spread over the years. Take the time to carefully review your IRA options.

IRA owners over age 70½ should remember that required minimum distributions must be taken by December 31. RMDs were suspended for one year only in 2009. To determine the RMD for the year, consult the life expectancy tables in IRS Publication 590 (the key tables also are on the members’ web site under the “Extras” tab). Divide your life expectancy for the year into the ending balance of your IRA on Dec. 31, 2010. The result is the total RMD required by the end of 2011. You can take the RMD in any pattern you want: equal monthly amounts, one lump sum, or sporadic distributions.

When you own multiple IRAs, you total the 2010 balances for all the IRAs and determine one RMD. Then, you can take that amount from the IRAs in any combination you want. Take it all from one IRA, equally from all the IRAs, or any other combination that suits you.

Keep in mind that you don’t have to sell assets to take an RMD, because an RMD doesn’t have to be in cash. You can distribute property from the IRA, and the fair market value on the date of the distribution will be the amount of the distribution. That also will be your tax basis in the asset. When you have the IRA with a mutual fund family or a broker, for example, open up a taxable account with that institution. Most IRA custodians will transfer assets from an IRA to a taxable account without charging an additional fee.

While you looking at your IRA, consider your asset allocation. In the past we discussed in detail assets that should be held in IRA and those that should be held in other types of accounts to earn generate maximum after-tax wealth. In general, IRAs should hold investments that produce ordinary income, such as bonds, real estate investment trusts, stocks that will be held for less than one year, and mutual funds that have a lot of short-term capital gain distributions. Other assets are best held in taxable accounts. For details, consult our May 2011 visit or my book The New Rules of Retirement.

You also should consider a couple of strategies that are appropriate for some taxpayers. One strategy is to convert a traditional IRA to a Roth IRA. We discussed this many times in the past, and the detailed discussions are in the IRA Watch section of the Archive on the members’ web site.

The other strategy to consider is to take distributions that exceed either the RMD or the amount you need for spending. In other words, empty your IRA early ? either in one year or over several years ? pay the taxes, and invest the after-tax amount in a taxable account.

There are advantages to emptying an IRA early, especially when you have sufficient other income or assets to meet your spending needs. When assets are kept in a traditional IRA, you’ll generate a lot of future RMDs you won’t need. That will increase your income taxes over the years and possibly diminish the after-tax wealth available to you and your heirs. Details are in …

When you converted a traditional IRA to a Roth IRA in the past, monitor the move and consider whether you should reverse the conversion. You have until October 15 of the year after you did the conversion to reverse it (called a recharacterization) without penalty.

If you reversed a conversion already in 2011, consider if you want to do another conversion in 2012. You can do another conversion after waiting the later of 30 days or the next calendar year. We discussed this in detail in our March 2011 visit.

RW December 2011.