As dreams of retirement trips to the Caribbean can fill people’s minds during the holiday season, many forget the related tax issues that are critical components to reaching their retirement goals.
When considering tax-efficient retirement strategies, keep in mind:
» Contributions to traditional IRA: The deductible amount of your IRA contribution varies depending on your level of adjusted gross income (AGI) since there is a phrase-out of deduction for high-income individuals. To the extent that you have control over the timing of your AGI, you may want to consider deferring part of your income to avoid the phrase-out on the deductibility on IRA contribution.
» IRA conversion (traditional to Roth): As you make the decision with regards to the timing of your conversion, take a look at your 2006 and 2007 tax situations. The conversion is a taxable event — that is, the amount converted is treated as a distribution and is includable in gross income in the year of thedistribution. In general, if your 2006 AGI does not exceed $100,000, you may convert your traditional IRA to a Roth IRA. For example, if your 2006 AGI is expected to be lower than 2007, think about making the conversion in 2006 instead to minimize your tax liability. Keep in mind, though, that the inclusion of this additional income may propel you into a higher tax bracket. You have up to 60 days after the taxable distribution to make the conversion.
» Self-Employed Keogh plans: If you are self-employed and would like to take advantage of Keogh plan deduction, you must set up your plan before Dec. 31. Contributions must be made before the due date of your tax return, including extension.
» Timing your Minimum Distribution Requirement. Once you reach age 70½, you must withdraw a minimum distribution requirement from your retirement plan. If you turned age 70 ½ in 2006, you have until April 15, 2007 to receive your first MDR. The timing of your first MDR can make a difference. If you delay your first MDR to 2007, such a deferral could subject you to a higher tax rate since your taxable income in 2007 will consist of two MDRs. If you accelerate your first MDR by taking it in 2006, your income for 2007 will be lower, and therefore, subject to a lower tax rate.
Elizabeth Sevilla is a senior tax director in the San Francisco office of accounting firm BDO Seidman LLP.