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The start
of a new year is a time for starting over in many
aspects of our life, including financially. There are
the usual money tasks, such as forming a yearly budget.
But this year brings some new tasks that could bring big
benefits in the years ahead.
I won't
save the best for last, so I'll get right into that big
benefit: converting a traditional Individual Retirement
Account into a Roth IRA. In 2010, the
IRS
is allowing the taxes due in a conversion to be paid
over two years. If you converted in earlier years, you
had to include it in that year's income and pay taxes by
the next
April 15
.
But
conversions this year can be paid over two years and are
not included in income until 2011 and 2012 tax years.
For example, a tax of
$10,000
on a conversion would result in
$5,000
due
April 15, 2012
, and
$5,000
due
April 15, 2013
. That's quite a stretch for saving up to pay the tax.
And even if tax day gets close with no money to spare to
pay the extra tax, you can convert back to the
traditional IRA and not have the tax bill — if you
convert back before filing 2010 taxes or amend before
Oct. 15, 2010
.
Although
taxes can be split and delayed, with current tax
brackets expiring this year, some higher earning account
holders may want to pay all the tax in 2010 before tax
rates go back to pre-Bush rates, or higher. Additional
to these 2010 changes, the requirement of having under
$100,000
in adjusted growth income to be eligible is lifted,
allowing even Warren Buffet to convert.
Of
course, the benefit in doing this at all is paying taxes
on the current balance and having that balance grow
tax-free, avoiding taxes in retirement.
Another
important kickoff for 2010 is the opening of the Free
Application for Federal Student Aid, or FAFSA. Parents
began filling them out
Jan. 1
for college-bound children to determine eligibility for
federal student aid. The process got a little easier
this year with a streamlined online application. It also
gives a report on schools the child is interested in and
a complete Student Aid Report when it is filed, showing
which loan the student can expect to receive. The Web
site is http://www.fafsa.ed.gov/.
Finally,
if you are over 70 1/2 years old, the required minimum
distributions are back. Last year, the
IRS
waived the required retirement account withdrawals. But
now seniors must start taking them again in 2010.
As usual,
when rules change, it's always best to consult with an
expert who will help you determine what's right for you.
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