Read the whole article here: CalRima – Retirement Income Analysis

http://www.calrima.com/Retirement.c501.htm

https://guidance.fidelity.com/viewpoints/new-tax-law

Key Points from IRS Notice 2010-84

On Friday, November 26, 2010, IRS released Notice 2010-84 to provide additional guidance on in-plan Roth conversions. “In-plan Roth conversions” are conversions from a 401(k) to the Roth 401(k) in the same plan (or from a 403(b) to a Roth 403(b) in the same plan), as opposed to conversions from a plan to a Roth IRA, where the funds actually leave the plan. These in-plan conversion provisions were part of the Small Business Jobs Act, effective after September 27, 2010. The Notice, while informative, essentially just confirmed many of the rules and guidelines that had already been assumed by most professionals.

1) An “in-plan Roth rollover” may be accomplished two ways. Non-designated Roth account funds (401(k) funds) may be transferred directly into a designated Roth account at the plan [a Roth 401(k)], or a participant may take a distribution of plan assets and roll the funds into his/her designated Roth account at the plan within the 60-day rollover window.

2) Only amounts that are 100% vested may be converted in an in-plan Roth rollover (a Roth conversion within the plan). Additionally, plan participants will be only be able to convert funds that are eligible for a distribution from the plan. This particularly impacts clients under 59 ½ who, if they are still working for the company, generally do not have access to salary deferrals.

3) Although the in-plan Roth conversion is treated as a distribution from the non-designated Roth account followed by a rollover to a designated Roth account, for certain purposes, including plan loans and spousal consent, IRS will not treat the conversion as a distribution.

4) Plans may be amended to add an in-service distribution option that only allows the funds to be used for in-plan Roth conversions, so long as the new amendment would not restrict already existing plan benefits.

5) There is no way to recharacterize an in-plan Roth conversion. The transactions and resulting tax consequences are irrevocable. This is a significant disadvantage to the in-plan conversion. If the plan funds were converted to a Roth IRA instead of the Roth 401(k), the conversion could later be undone (recharacterized) allowing more long-term flexibility and less market or tax risk.

With no way to unwind the in-plan Roth conversions if account values decline or participants simply change their mind, most people will still be better off converting to a Roth IRAs.

6) In-plan Roth conversions made by direct rollover are not subject to the 20% mandatory withholding requirement.

7) Participants who make in-plan Roth conversions in 2010 will be able to spread the income evenly over 2011 and 2012 or include all the income from the conversion in 2010. This election is independent of any election made for plan-to-Roth IRA conversions and IRA-to-Roth IRA conversions made in 2010. All in-plan Roth conversions must use the same election.

In-plan Roth conversions may be made by plan participants, spousal beneficiaries and spouse or former spouse alternate payees. Non-spouse beneficiaries may not make in-plan conversions, but can still convert inherited plan assets directly to an inherited Roth IRA.

Bottom Line: Clients who are participants in company plans that offer Roth options within the plan can convert within the plan, but cannot undo that in-plan Roth conversion. You should make your clients aware of the in-plan Roth conversion option, but let them know that a conversion to a Roth IRA will still generally be a better option than leaving the funds in the plan. There are some reasons to leave funds within the plan, for example, federal creditor protection, but this should be weighed against the benefits of having more control of the funds in their own Roth IRA (as opposed to a Roth 401(k) within the plan) and the ability to do a recharacterization if circumstances change within the recharacterization time frame.

This update is provided to us, and subsequently to you, from Ed Slott.

If you have questions about this posting or converting all or part of your retirement monies to Roth, call us toll-free at 1-866-589-9366.

As always, we, CalRima Financial & Insurance Agency, does not provide tax advice. We believe this content to be from a reliable source and as always encourage you consult with your tax professional.

If you have questions or suggestions for the thought for the week, please email me or give us a call.  To hide from the web spiders and SPAMMERS my email address is rloek at calrima –  dot – com.  Our toll-free number is 866-589-9366.

Only Hire a Master

Qualified charities do not pay any income taxes on death bequests that come from IRAs and qualified retirement money. Also, your estate will receive an estate tax deduction for the amount of the charitable gift, which helps to reduce the overall tax. Therefore, if your estate plan includes charitable gifts, it is often a good idea to make these gifts with qualified money.

On the other hand, for every dollar of IRA funds you leave your heirs, they could pay up to 35 cents tax and have 65 cents left to spend. Also, your estate may be required to pay estate taxes on some of this money. However, when you leave them a dollar of non-tax-qualified money, the income tax they pay could be reduced and sometimes eliminated as a result of the basis increase they will typically receive on the transferred asset. Furthermore, the estate tax burden can also be minimized and even eliminated in some cases with such estate planning strategies as credit-shelter trusts or irrevocable life insurance trusts.

Consult a well-qualified tax advisor to determine whether your surviving family could be better off if they received their inheritance from tax-qualified or non-taxqualified resources.

Investment Advisory Services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser; Insurance and annuity products are sold separately through CalRima Financial & Insurance Agency, California Insurance License #OF34289.

No specific individual advice, be it legal, tax or investment is given here. As always, consult with your professional tax or legal adviser before making any final decisions. This booklet is to be used solely for educational purposes.

If you would like a free copy of my eBooklet, “Avoiding Common IRA Distribution Mistakes – Including the Perils of Roth Conversion”, Go to this page and fill out the form http://irajedi.com/?page_id=41

Before we discuss the criteria you may ask why would you unconvert? Say your account was worth more when you did the conversion than it is now – it might be worth the effort to unconvert.

The IRS calls this recharacterization. This is done by filing some paperwork with the IRS in a timely fashion. This recharacterization must occur by October 15th of the year following the year of conversion.

Get this, after 31 days or the end of the year of the original conversion, which ever is later, you can reconvert to Roth. Of course you have to qualify to reconvert, your Modified Adjusted Gross Income (MAGI) must be below the threshold(s).

The deadline has been extended to November 30, 2009 or 60 days from the date the funds were received, whichever is later. This means those who received an RMD (which was not required) in January or March, for example, now has the option of rolling those funds back int o a tax-deferred account.

This relief does NOT apply to non-spouse beneficiaries who are prohibited by the tax code from ever doing a rollover.

CAUTION: The one rollover per year rule is still in effect.

But as with any tax ruling – there can be costly tax traps as well.