Don’t overlook the Roth five-year holding requirement

August 31, 2010

The new, less restrictive rules in effect this year for Roth conversions may have you pondering whether now’s a good time to convert your traditional IRA funds to a Roth IRA. While your decision involves many factors, one wrinkle to consider is the five-year holding period for converted assets.

The time limit has nothing to do with distributions of regular contributions from your Roth. As you know, you can withdraw regular contributions at any time, tax- and penalty-free, no matter your age. That’s because you deposit those amounts into your Roth using money on which you’ve already paid income tax.

Rather, the five-year holding period comes into play when you’re under age 59½ at the time you make a Roth conversion. In that case, you’ll generally have to wait five years (or until you turn 59½, whichever comes first) before you can pull the “conversion assets” out penalty-free.

When you fail to meet the five-year rule, the penalty is the same 10% you’d pay if you took an early withdrawal from your traditional IRA. That’s the purpose of the five-year rule – to discourage premature distributions from retirement accounts.

Once you reach age 59½, the 10% penalty disappears, though the five-year holding period for converted assets may still apply. For example, say you use the conversion to fund an initial Roth. During the first five years your new account exists, you’ll pay ordinary income tax on withdrawals of the income earned from the converted amounts.

The five-year holding period can also affect your beneficiaries. For instance, if you had no prior Roth account before making a conversion, your beneficiaries will pay ordinary income tax on distributions of earnings. However, they can withdraw converted amounts with no federal income tax or penalty.

Give us a call to discuss this and other Roth conversion rules. We’re ready to help.

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Prepare now for a possible disaster

August 27, 2010

There’s never a good time to plan for a disaster. There’s never a better time either.

So why wait? Instead of having to reconstruct personal and business records in the aftermath of an unexpected calamity, safeguarding documents before you suffer a loss will make it easier to claim casualty deductions and other tax breaks.

Here’s an overview of some of the paperwork to include in your disaster preparedness plan and why you’ll need it.

1. Purchase and acquisition information. The amount of a casualty loss is generally the lesser of your adjusted basis or the reduction in your property’s fair market value due to the casualty. With the exception of gifts, inheritances, and certain other property, adjusted basis typically equals what you paid for your assets plus improvements, reduced by depreciation or other reductions.

Tip: Make duplicates of titles, mortgages, closing papers, and receipts or scan them into digital form. Store the originals and the copies in separate locations, preferably in fire- and water-proof containers.

2. Prior-year tax returns. When your loss occurs in a presidentially declared federal disaster area, you can amend an already filed prior-year federal return to claim the deduction and the resulting tax refund.

3. Detailed inventory. As a general rule, you’re required to reduce the amount of your personal property casualty losses by $100. In addition, losses must exceed 10% of your adjusted gross income (except in federal disaster areas). A list of your possessions, supplemented by photographs or a video, is essential for maximizing your deduction.

We’re here to help you with pre-crisis management and recovery planning for your personal and business assets. Please call if you would like to schedule a review.

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How to prevent employee theft

August 24, 2010

Employee embezzlement and other forms of theft often follow a predictable pattern. First, the employee is faced with significant external pressures such as high gambling debts, mounting medical bills, or substance abuse problems. To relieve this pressure, he or she finds an opportunity to steal from the company, especially if the firm’s internal controls are perceived to be weak. From there, it’s easy to rationalize fraudulent behavior – “I’ll just take some money now, and pay it back later,” or “I deserve a raise, but management’s stingy, so I’ll provide it myself,” or “They’ve got plenty. They’ll never miss it.”

As a business owner, what can you do to prevent employee embezzlement and theft?

* Screen job applicants thoroughly. Review a potential employee’s criminal history, verify education and past employment, and check references. If an applicant is willing to lie on a resume, why should you trust that person with your business assets?

* Make your policy crystal clear. Your employees should know that theft of any kind will not be tolerated, and managers should model integrity in their interactions with clients, competitors, and government regulators.

* Segregate duties. If one employee takes in cash, someone else should prepare or oversee preparation of the cash deposit, and another should record transactions in the company books. Although such separation of duties may be hard to establish in a small company, creative owners will find ways to prevent such transactions from being concentrated in the hands of a single employee.

* Conduct regular audits. Employees should know that their activities are subject to surprise reviews and an annual independent audit. They’ll be less likely to steal if they know that someone is following after them, checking their work.

* Track down customer complaints. If a customer claims that a bill was paid but a credit doesn’t show up in the accounting records, an employee might be stealing your business receipts.

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Wedded conversations

August 17, 2010

A British study of 500 couples reported some interesting data about married couples and their communication.

* Couples married one year spend 40 minutes of an hour-long dinner engaged in conversation.

* Couples married 20 years spend 21 minutes of that hour talking.

* Couples married 30 years spend only 16 minutes talking during the hour-long dinner.

* After 50 years of marriage, the dinner conversation drops to three minutes of that hour.

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Financial issues the second time around

August 10, 2010

Over five million people will exchange marriage vows each year. Among the starry-eyed newlyweds walking down the aisle will be a number of middle-aged folks tying the knot for the second time around. These couples face some unique financial planning issues. If you’re marrying again in your 40s, 50s, or beyond, here are some suggestions you should consider.

* Enter into a prenuptial agreement. These agreements are not just for the rich and famous. They make sense for many people who bring assets into a marriage and wish to preserve their legal rights in those assets.

* Obtain retirement plan waivers. The law provides that your spouse is entitled to your 401(k) account and survivor benefits from your company’s pension plan in the event of your death. If you don’t want your new mate to receive these assets, he or she must sign a written waiver that renounces rights to them.

* Properly title your assets. If you and your spouse plan to co-own property, be careful how it is titled. Assets titled in “joint tenancy with rights of survivorship” automatically pass to your spouse if you die first. By contrast, if you title assets as “tenants in common,” you can leave your portion of the property to anyone you wish. Consult with your attorney.

* Maintain separate bank and brokerage accounts. Think twice before commingling assets since it can be difficult to determine property rights in the case of death or divorce. However, as a matter of practicality, you’ll probably want to maintain at least one joint bank account to cover routine household expenses.

* Update your will and trusts. Wills and trusts can give you a great degree of flexibility in disposing of property at death. For example, if you and your spouse own a home together, you can provide that your spouse gets to live in the home until he or she dies, at which time your interest in the property is to pass to your children. This is another issue to discuss with your attorney.

For assistance with this or any of your financial concerns, give us a call.

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Homebuyer tax credit is extended

August 4, 2010

If you signed a contract before May 1 to buy a home, but have been unable to close the deal, you still have time to apply for the homebuyer tax credit. The deadline for finalizing the paperwork on your new home has been extended through September 30, 2010.

Here’s what you need to know:

* The extension applies only if you already had a contract in place by April 30, 2010. The new deadline is available for first-time homebuyers and long-time residents.

* The maximum credit remains unchanged ($8,000 for first-time homebuyers and $6,500 for long-time residents), as do other rules for qualifying.

* You can claim the credit on your 2009 or 2010 federal income tax return. You’ll have to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and attach proof that you meet the requirements.

Not sure if you qualify? We can help. Please call for more information.

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