Ask Matt: Year-end tax steps for your retirement accounts
— -- Q: What are some stock moves I should be taking in my retirement investment accounts before the year ends?
A: Many investors assume that if they don't have any taxable brokerage accounts, they don't have to worry about year-end investment tax planning.
After all, you don't have to really worry about taxes when it comes to retirement accounts until you retire. That means you can buy and sell like crazy in your Individual Retirement Accounts or 401(k) accounts. Retirement account owners don't have to worry about the headache of capital gains or wash sales.
But are there some tax-related moves even investors who deal mainly with retirement accounts can consider. Even investors who only have tax-deferred retirement accounts can make smart money moves here at the end of the year.
A few things investors may consider doing with their retirement account at the end of 2011 include:
•Converting IRAs to Roth IRAs. You can turn your regular IRA account into a Roth, pay taxes at today's relative low rates and then not have to pay taxes on distributions in the future. 2011 is the last year, currently, that all investors can make this move. "We're still very high on the Roth conversion," says Mark Nash, tax partner at PWC.
Furthermore, with stock prices arguably depressed, investors would be paying taxes on a depressed account balance, Nash says. The conversion is open to all investors at any income level this year, he says. "We're paying taxes at a today's rates on a lower value - both play to our advantage," he says.
The fact taxes didn't go up in 2011 makes converting your IRAs into a Roth a great idea. Furthermore, with a Roth IRA, investors are not required to take mandatory distributions. A Roth can be bequeathed to an heir who could then allow the account to compound, tax-free, for many years, he says.
Some investors might argue that tax rates may not go up in 2012. And that's perhaps correct. But with retirement accounts, what happens longer term is more important and investors may want to plan for the possibility tax rates could be higher in the future than they are now.
•Making charitable contributions. For investors who have charitable leanings, ample wealth and retirement accounts, it's a great time to look at retirement accounts for donations. 2011 is the last year to use investments in IRAs to directly benefit qualified charities with large tax benefits, he says.
Up to $100,000 of money can be directed to a charity by investors 70.5 years or older instead of taking a required minimum distribution, he says. For investors who have adequate income, this is a great way to reduce the balance of an excess account while maximizing the benefit received by a charity. It's important to note, though, that you do not receive a charitable account deduction if you take this option, he says.
•Evaluating where different investments are held. Investors need to consider their retirement accounts in context of all their holdings. Retirement accounts are a great place to hold investments that generate income that are taxable at ordinary income tax rates, such as many dividends paid by bonds. If you're going to own a piece of your portfolio in bonds, you might as well put them in a retirement account, Nash says.
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