withdrawals may be tax-free.
Although converting to a Roth IRA means that you’ll pay income tax on the money flowing out of your IRA at ordinary income tax rates, “The advantage to a 2007 conversion is that it starts the Roth IRA clock at Jan. 1, 2007, even if the conversion is at year-end,” says Ed Slott, a CPA in Rockville Centre, New York. It’s advantageous to “start the clock” early because after five years and after age 591/2, you can take tax-free withdrawals from a Roth IRA. If you convert before the end of the year, the five-year period will end on Jan. 1, 2012. “This technique gives you one of those five years right away,” says Slott, who publishes Ed Slott’s IRA Advisor newsletter.
If your income this year is a maximum of $100,000, you can convert from a traditional to a Roth IRA. (If you pay tax as “married, filing separately,” you are ineligible for a Roth IRA conversion, no matter what your income.)
“We have clients who are consultants or independent contractors,” says John. “They can time their invoices so they wind up some years with little income, but they still have deductions for mortgage interest, property tax, and so on. For those people, we suggest a Roth IRA conversion.”
With low income, such clients owe little or no tax on a Roth IRA conversion. As early as 2012, once they pass age 591/2, they can tap that Roth IRA whenever they’d like, for tax-free income.
Year-End Plannning Checklist
Gain by losing. Unload the losers in your portfolio to offset any capital gains you’ve taken this year. An additional $3,000 in net capital losses can be deducted on your tax return.
Avoid wash sales. A wash sale occurs when shares of a security are sold at a loss and an essentially identical security is purchased within 30 days. Whether you bought the securities before or after the sale, if it was within 30 days, deducting the loss for tax purposes would be disallowed.
Be charitable with your winners. Instead of writing a check, donate appreciated secur
ities held more than one year. You’ll be able to write off their full value and avoid the capital gains tax obligation.
Give appreciated stock to your college student. In 2007, a student in the 18- to 22-year-old age group can sell the shares and owe only 5% in tax, in most cases. Starting in 2008, “kiddie tax” rules will clamp down on this opportunity.
Press the “on” switch. If you’re self-employed, a business owner, or a professional, now is an optimal time to buy needed equipment. Section 179 of the tax code allows you to deduct these expenses right away: In 2007, first-year write-offs up to $125,000 worth of equipment purchases are permitted. To get this tax break for 2007, the equipment must be in place and used by Dec. 31. Even if you make the payments in 2008, you still can deduct the purchase price in 2007.