#261 Tax Prep Boot Camp with Ed Slott

Ed Slott CPA is a nationally recognized IRA expert, television personality and best-selling author who has dedicated his life to educating Americans on saving for retirement and the intricacies of IRAs.  He was named “The Best Source for IRA Advice” by The Wall Street Journal and is the author of numerous best-selling books. His web site www.IRAHelp.com. He started our conversation with an overview of what has changed for this year's tax filing season (not too much) and then explained why well-prepared taxpayers should not be afraid of an audit. (NOTE: Ed says that the key to the entire  tax preparation process is to keep flawless records and documentation throughout the year!)

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Ed also focused on the need for retirees to shift gears in retirement. While there may be some lucrative opportunities, there are also challenges/minefields, like those thorny stealth taxes, which can trip us up.

The old favorites include the whopping 50 percent penalty for not taking your required minimum distribution (RMD) and not making estimated tax payments, but last year's change about IRA rollovers is also causing a new headache among some retirees.

As much as everyone complains about paying taxes, Ed says that tax rates are still the lowest they have been in years. That means that now could be a good time to move funds from tax-deferred vehicles, like 401 (k)s and IRAs into tax free Roth IRAs. Ed also noted that the very best retirement strategy is to work as long as you can. Extra income can prevent you from dipping into your nest egg; with earned income, you can continue to make Roth and spousal Roth IRA contributions (though once you turn 70 1/2, you can NOT make traditional IRA contributions); you may be able to delay your RMDs from your company-sponsored retirement plan; and most importantly, working longer will help you combat the reality of longevity!

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World and the worst LinkedIn User. Here's how to contact us:

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5 Year-End Retirement Tips for 2014

With just weeks to go before the end of the year, here are five potential money-making/money saving retirement moves to consider. 1. Fully fund employer-sponsored retirement plan contributions. Unlike IRA’s, the deadline for funding 401 (k), 403 (b) or 457 plans is December 31. This year, the limit is $17,500 per employee. If you over the age of 50, you can make an extra $5,500 as a “catch-up contribution”. Remember that a contribution into your employer-sponsored plan is an “above-the-line deduction,” which means that it is taken before you calculate your Adjusted Gross Income. I love above the line deductions because they are allowed in full -- many other deductions are phased out for high earners.

2. Consider converting Traditional IRA into a Roth IRA. A conversion requires that you pay the tax due on your retirement assets now instead of in the future. Whether or not a conversion makes sense for you depends on a number of factors, the most important of which is whether or not you can pay the tax due with non-retirement funds. If you have money available to pay the tax due, some advantages of conversion are: paying the tax at a lower tax rate, if you think that your tax bracket will rise in the future; eliminating the tax on future growth of assets; reducing future Required Minimum Distributions (RMD’s); and reducing the taxable amount of Social Security benefits. If you already converted your account this year, you may want to reexamine it. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

3. Be aware of new IRA rollover rules.Starting in 2015, new rules apply for withdrawing and rolling over money from an IRA. Next year, you can only roll over an account once every 365 days (note: the rule specifies "every 365 days," not once a calendar year). The rule applies to IRA-to-IRA rollovers where the owner takes custody of the money him or herself. The rule does not apply to rollovers from employer plans to IRAs or to "trustee to trustee" transfers.

4. Take Required Minimum Distributions (RMDs). Generally, once you turn 70 ½, you must begin withdrawing a specific amount of money from your retirement assets (there are some exceptions). Remember, money that you have previously contributed to these accounts bypassed taxation - RMD’s ensure that the government taxes those funds. The penalty for not taking your RMD is steep -- 50 percent on the shortfall!

A few notes about RMDs: Even if you have multiple individual retirement accounts, you don't have to take the RMD out of each individual account. You are allowed to take one RMD from any of your retirement accounts, based on your age and the total value of the accounts. Also, filing a joint return doesn't mean you can take the entire amount for both spouses from one spouse's account - RMDs are calculated for each individual. Finally, if you inherit an IRA, check before year's end to see if you need to take an RMD on behalf of the deceased.

5. Consider a Qualified Charitable Distribution (QCD). Since its enactment in 2006, one way to sidestep the taxation on your RMD is to make a Qualified Charitable Distribution, which allows you to gift up to $100,000 directly from your IRA to a charity without having to include the distribution in your taxable income. However, you swap having to claim the income for making a charitable deduction. Not only does a QCD help avoid taxation, it also means that the extra income is not included in other tax formulas for Social and Medicare Part B premiums or for the Pease limitation on itemized deductions. As of this writing, lawmakers have not yet extended the QCD and while experts believe that it will be extended, you should be careful. If you choose to make a QCD, remember that the money must go directly to the charity, not to a private foundation or a donor-advised fund.