As we get to the end of the year, it’s a good time to review to make sure that no opportunities are missed.  Below are some steps that you should consider to make sure your tax situation is optimized.

Individual Taxpayer To-Do List:

1.  Contribute to the Max: Maximize your salary deferrals.  Now is a good time to check to see if there is any room to make additional contributions.  This is especially true if there are matching contributions available.  While many will advise to salary defer up to the amount that will be matched, best practice is to contribute the most possible.  Studies show that most people are woefully behind on retirement savings — make sure you are prepared.

2.  Make it a Roth: Consider making the above deferral a Roth 401(k) deferral, contributions go after tax but grow and are distributed on a tax-free basis, to take advantage of looming tax rate increases.  There are no income limits, and the amounts able to be deferred are three times as much as a Roth IRA contribution.

3.   Convert to Roth: Consider converting a portion of your 401(k) by way of an in-plan conversion or convert IRAs to Roth.  With tax rates presumably going up next year and in the future, now may be the perfect time to convert large pre-tax accounts into Roth accounts.  Rules are very favorable for this, and having a sizable amount of Roth balances allows you to help optimize the withdrawals post retirement. For example, you can help implement an approach that withdraws the first $50,000 each year from traditional pretax retirement accounts, and then draw upon Roth accounts for additional needs to keep the tax bite low.  Further, Roth balances are tremendous estate planning vehicles.

4.   If You are 70 ½+ or Have an Inherited IRA, Don’t Forget to Take Your RMD: A common error for retirees is to miss a Required Minimum Distribution (RMD). Remember that most of the time, unlike non-owner participants, owners of a business and their spouses are not able to delay their RMDs in a qualified plan. If you have savings in a retirement plan or IRA, don’t trust that the plan or IRA will handle the RMD automatically. Inherited accounts are particularly tricky, because even Inherited Roth IRAs are subject to RMDs.

5.   Outside to Inside: If you like a dividend stock or alternative investment, put it into your 401(k).  You may have a recommendation for a dividend paying stock or alternative investment.  Given that dividends will be taxed at ordinary income rates, it is very clever to place these positions in pretax or Roth accounts.

6.   Sell High: Outside of a plan, consider selling appreciated stocks. A big part of the fiscal cliff is a big jump in capital gains rates. This does not impact retirement accounts, but don’t miss factoring in this big change as you review your taxable investments.

7.   Use it or Lose it: Use the estate/gift tax exemption. Another huge area of impending change is in the estate tax arena. If your estate is valued over $1 million, it may be clever to use the current $5 million gift tax exemption to get money out of the estate before the exemption decreases and the rates go up with the fiscal cliff.  Of course, this decision must be made in consultation with your estate and tax attorney.

Business To-Do List: Retirement Plan Optimization

1.   Stop Your SIMPLE Plan.  Savings Incentive Matching Plans for Employees (SIMPLE) plans are anything but simple. While these plans may appear straightforward, often the restrictions outweigh the apparent convenience. And these plans are hard to stop–there is a very small window of time at the end of 2012 that an employer cannot be obligated to the plan for 2013.  Current limits and design options of 401(k) plans make a 401(k) a better alternative, so don’t miss the window to stop that SIMPLE.

2.   Pay Yourself First: Add provisions that increase contributions to owners, including adding a Cash Balance Plan.  Many business owners are unaware of the powerful strategies that allow disproportionate contributions to go to owners and key managers. It is quite common to be able to design approaches where 85% or more of the plan contributions go to targeted individuals. Rank and file employees end up with substantially more as well.  First Allied Retirement Services can analyze a business retirement plan and provide real options to the business owner.

3.   Pay it Forward: Create loss carry forward via large plan contribution. As businesses plan for 2013, it may be possible to use a plan contribution for 2012 that generates a business loss for 2012. This loss can then be carried forward to offset 2013 income. Only corporations can take advantage of this, and the strategy should be implemented along with your CPA’s input.

4.   Perception is Reality: Change your match formula to a 10% threshold. New research focuses on the great significance of the match threshold in determining participant behavior. Many plans have discretionary matching formulas or a formula with a low match threshold–say 3-6% of pay. The research shows that participants are able and willing (despite their verbal protests) to increase deferral rates if the plan demonstrates some benefit to increased deferral rates. So, participants will increase their contribution with no additional match liability to the employer. For example, a 100% match up to 5% of pay costs the same to the employer as 50% match up to 10% of pay.  But participants will defer more with the higher threshold. Everybody wins.

5.   Out of Sight, Out of Mind: Implement automatic deferral increases.  The same research shows that participants are very willing to have deferral rates increase annually. This approach is common at large firms.  First Allied Retirement Services can help your employer make this happen.

6.   Clean house: Pay out terminated employees with small balances to reduce participant count. A common lazy error with investment providers is to not automatically distribute small accounts (<$5,000) out of a plan. This has the effect of increasing plan costs and maybe even causing an expensive plan audit.

7.   Get Noticed: Get Notices out for Safe Harbor, Qualified Default Investment Alternatives (QDIA), Automatic Contribution Arrangements (ACA), and Savers Tax Credit.  Each year employers are required to deliver a host of participant notices covering a whole host of various rules. An uncoordinated effort confuses participants alike. We are here to answer questions to assist you.

Quite a list!  Would you like some help with getting these tips implemented?  We are here to help. Contact our office today to take advantage of the last-minute 2012 tax planning opportunities.