This decision – heck, any decision – has been much anticipated so that people could do their end-of-the-year planning.  The good news is that it also comes with some direction about the estate tax so we can all move forward with estate tax planning as well.

What should you do?

You have probably been talking to your accountant about this contingency, and now you need to act.  If this means shifting income from this year to next, taking more expenses this year, converting an IRA to a Roth, etc., you now need to make all that happen before the end of the year.   (As if you didn’t have enough to do already.)

1. Call your accountant if you have not already for end-of-the-year tax planning.  The possible Bush tax cuts extension is making a mess of everyone’s planning. Come join in the fun.
    
2. If you’re going to convert your IRA to a Roth IRA this year so that you can pay the taxes over two years, you need to do that now.
    
3. Get your payroll service in order.  If you have not been happy with your payroll service or are hiring someone for the first time, you need a solid payroll company.  January is the best time of the year to make a change.
    
4. Get your business planning done.  Record your accomplishments.  Let go of your “failures.”
    
5. No New Year’s Resolutions.  Remember, they don’t work in January.  Wait until at least February 2^nd.  The gym will be emptier by then anyway.

It’s the home stretch of 2010.  Enjoy!

There’s an Alternative Worth Considering

Roth IRAs have two big downsides:  (1) you can’t access the money without penalty until you’re 59 and a half or have special circumstances; (2) the income limits for contributing to a Roth remain intact ($120K for single filers, $177K for married couples in 2010); and (3) the amount you’re able to contribute is low ($5K; $6K with catch-up).  We get this one-time shot at converting to a Roth, but for many of us, we’ll never be able to contribute another dime to that account.

But what if you could?  What if you could put 10 or 20 percent of your income (an amount that might actually get you through retirement) into an account that would grow tax-free, would allow you access the cash tax-free for any reason at all at pretty much any time, would never require you to take a required minimum distribution, and would transfer to your heirs income tax-free?   Would you do it?  You’d sure like to know about it, right?  It exists.  It’s out there.  It’s likely available to you.

Here’s another issue:  If your IRA accounts are a small portion of your overall net worth, it actually might make a lot of sense to leave it alone and let it grow.  If it’s one of the few places that you’ll withdraw taxable income in retirement, you may be financially better off leaving it in its Traditional IRA form.  Take the tax savings and invest it.

To Roth or Not To Roth

There’s much to consider in deciding whether to convert an IRA:

• Do you think you’ll be in a higher tax bracket in retirement?
• Can you pay the taxes owed as a result of the conversion out-of-pocket?
• If not, will you suffer a 10% penalty for paying the taxes by withdrawing the money from the Traditional IRA?
• Should you pay those taxes in 2010 or spread them out over tax years 2011 and 2012?
• And more….

Do:  Talk to your accountant and financial advisor.  Find your IRA statements and your 401(k) statements from previous employers.  You’ll want to make this conversion early in 2010 (as close to January 4^th as possible), so that you have lots of time to see that account perform.  If it doesn’t produce positive returns, you might want to “recharacterize” it back to a Traditional IRA.

Don’t:  Forget that there’s a tax liability incurred by making the conversion. Talk to your financial professionals about how you’ll handle that liability.  Keep in mind that 2011 and 2012 might bring higher tax rates, making an election to pay that liability in 2010 preferable.

And remember:  The removal of the income limit for conversions is permanent.  You don’t have to make a decision this year.  But the opportunity to spread the tax liability over two years is temporary.  You should also note that the income limitations on contributing to a Roth remain.

This might be a great opportunity for you.  Or maybe there’s a better way to spend that tax money.