Conduct a Year-End IRA Review

Each year you should review your IRAs with your tax advisor to ensure you're on track with your retirement planning. Here are some issues to focus on:

Don't miss required minimum distributions (RMDs)

Traditional IRA owners must start receiving RMDs from their IRAs by April 1 following the year they turn age 70½. (Roth IRAs do not require minimum distributions.) Failure to receive an RMD can result in a 50% IRS penalty tax on the amount of money you should have withdrawn, but did not.

Note, however, that The Worker, Retiree and Employer Recovery Act of 2008 waived the RMD requirement for IRAs and employer-sponsored retirement plans for calendar year 2009. This legislation won’t help people who were hoping to avoid taking a withdrawal in 2008, or have already done so. However, the U.S. Treasury Department is considering relief with respect to minimum distributions made during 2008. Talk to your tax advisor to learn more.

Consider using IRA withdrawals to cover tax payment shortfalls

If you haven't paid enough income tax to the IRS for the 2008 tax year, you may be able to use your IRAs to help cover these underpayments. For example, if you're already taking withdrawals from your IRA, you can have additional withholding tax taken from these withdrawals to cover the amount you owe the IRS — thus avoiding the underpayment penalty tax you otherwise would owe.

Take advantage of new charitable distribution rules

Thanks to recent legislation, IRA owners age 70½ or older can direct distributions of up to $100,000 per year to public charities. The IRS allows these distributions for Traditional IRAs and Roth IRAs, but not from SEP IRAs, SIMPLE IRAs or employer-sponsored retirement plans.

Consider a Roth IRA conversion

When compared with a Traditional IRA, the Roth IRA offers the ability to withdraw earnings completely federal income tax-free, provided the IRA has been in place for at least five years and the withdrawal meets at least one of these qualifying events:

The withdrawal is made after you reach age 59½
You become disabled
The distribution goes to the beneficiary of your estate after your death
You use the withdrawal to pay for first-time homebuyer expenses of up to $10,000.

If a Roth IRA withdrawal doesn't meet these requirements, the withdrawn earnings are subject to ordinary income taxes and, if applicable, an IRS 10% early withdrawal penalty tax. Note also that Roth IRAs provide another advantage previously discussed — unlike Traditional IRAs, Roth IRAs do not have RMDs.

Because of these advantages, many people decide to convert funds they have in a Traditional IRA to a Roth IRA (keep in mind this is a taxable event). To qualify for a Roth IRA conversion, your modified adjusted gross income (MAGI) for the year must be $100,000 or less, and you must file your taxes either as a single person or as a married person, filing jointly; married taxpayers filing separately are not eligible for Roth IRA conversions.

In 2007, staying within the $100,000 MAGI limit got easier when a new rule exempted the funds a taxpayer receives through RMDs from the MAGI calculation. For example, if your taxable income from employment and investments totaled $80,000, and you received a minimum distribution of $30,000 from an IRA, you could exclude the $30,000 from the MAGI calculation and remain under the $100,000 limit.

Keep an eye on the five-year IRA conversion "clock"

If you're under age 59½ and determine you could benefit from a Roth IRA conversion, think about doing the conversion this year to get started on reaching the five-year holding period necessary to qualify for federal tax-free withdrawals. The countdown to this five-year "clock" begins on the first day of the first tax year in which you open and fund a Roth IRA. You'll still need to meet at least one of the qualifying events mentioned in the bullet point above to qualify for federal tax-free withdrawals, but it may be a good idea to get the five-year clock ticking as soon as you can.

The tax information contained herein (including any attachments) is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding any tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.

TIAA-CREF Individual & Institutional Services, LLC, and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.

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