Consider Accelerating Income to Maximize Savings – First in a Series
NEWARK, N.J.–(BUSINESS WIRE)– This tax season provides some unique planning opportunities for retirement and financial planning purposes, according to Robert Fishbein, a vice president in Prudential Financial’s (NYSE:PRU) Tax Department.
With tax rates scheduled to increase next year, it may make sense to accelerate income into 2010 to pay tax at the lower tax rates in effect for that year, Fishbein explains. In this first in a series of three releases on tax planning tips, below is a list of ways to consider accelerating income into 2010 and pay tax at the lower rates:
1. Consider maximizing contributions to after-tax retirement vehicles. Contributing to an after-tax retirement vehicle such as a Roth 401(k), Roth 403(b) plan or a Roth IRA requires you to pay income tax on your retirement contribution today, but in exchange you get a tax-free retirement asset. Assuming that tax rates are the same or less than when you would withdraw the retirement asset, this will result in more after-tax retirement funds for you to live on. Even if rates go up in retirement, there are other benefits that still might make funding a Roth a smart economic move.
2. Mull over a Roth conversion. Converting from a traditional IRA to a Roth IRA accelerates the built-in tax liability associated with this retirement asset. This can be a particularly attractive planning opportunity given the elimination of the income limits that precluded many from utilizing a Roth IRA prior to 2010.
3. Review company stock options. For some, exercising stock options can result in income to the extent of the difference between the dollar amount you pay for the stock and the then fair market value of the stock.
4. Evaluate participation in deferred compensation plans. In most cases, you would have had to have elected not to participate in the plan prior to 2010, unless you are a new hire or eligible for other limited exceptions.
5. Assess stock or mutual funds. In so doing, give special consideration to selling stock, mutual funds or other capital assets with a significant built-in gain position. If you are selling a business interest, consider selling for an immediate payment rather than an installment sale where you recognize the gain over time as payments are received. These strategies must be weighed with the benefit of dying with an appreciated asset that will receive a step up in basis for heirs that avoids income tax.
6.Consider RMD options. For individuals attaining age 70 ½ in 2010, a onetime option exists to defer taking your first Required Minimum Distribution, or RMD. If you choose this option you must take your initial RMD by April 1 of the following year, and you must also take a second RMD amount by the end of the second year. Given the possible desire to accelerate income, and since delaying the RMD withdrawal would result in two RMD distributions in 2011, an individual in this position may choose to take his or her first RMD in 2010.
As with any financial decision, you should consult with your tax planner or financial advisor to determine the actions that make the most sense for you as part of your overall saving strategy, Fishbein concludes.
Next week, Fishbein discusses deferring 2010 deductions to help maximize retirement savings.
Prudential Financial, Inc. (NYSE: PRU), a financial services leader with approximately $667 billion of assets under management as of December 31, 2009, has operations in the United States, Asia, Europe, and Latin America. Leveraging its heritage of life insurance and asset management expertise, Prudential is focused on helping individual and institutional customers grow and protect their wealth. In the U.S., the company’s Rock symbol is an icon of strength, stability, expertise and innovation that has stood the test of time. Prudential’s businesses offer a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. For more information, please visit www.news.prudential.com.
Lisa M. Bennett, 973-802-2894
Source: Prudential Financial, Inc.