Congress Passes the Big Bucks to You and Your Heirs

Uncle Sam may have just saved you thousands of dollars or more and given your heirs even millions more. When Congress passed the Tax Relief Act of 2010* that was signed into law in December, it brought back some old favorites and added new twists that could have an incredible impact on your financial portfolio. Now is the time to take advantage of these opportunities. You and your heirs will be glad you did.

Posted on | Irvin G. Schorsch III, CIMA, CFP, AIF | Comments ()

Uncle Sam may have just saved you thousands of dollars or more and given your heirs even millions more. When Congress passed the Tax Relief Act of 2010* that was signed into law in December, it brought back some old favorites and added new twists that could have an incredible impact on your financial portfolio. Now is the time to take advantage of these opportunities. You and your heirs will be glad you did. 

Revisit Your Estate Plan

Perhaps the most significant aspect of the new tax law is the temporary gift and estate tax provisions. The new law reunified the gift and estate tax system.  It now allows individuals to give or bequest up to $5 million without paying federal gift or estate taxes! In addition, if a married individual dies and does not fully utilize his or her $5 million max, the remaining amount can be allocated to the surviving spouse. These new provisions can make a dramatic impact on the legacy you leave to your family. The increase from the previous exemption to $5 million could potentially build millions of dollars of additional wealth for your heirs from generation to generation.

 

Convert Aggressively to Roth

The best time to convert your IRA and 401(k) accounts to a Roth account is at the beginning of the year (not the end).  When you convert at the beginning of the year, you have more time to change your mind and undo the conversion, if necessary.  The Roth rules give individuals a "free-look" period up to the time they file their taxes the year after conversion. This nuance up to the extension deadline, which is 6 months after the filing date (October 15) provides extra time for evaluation. The Roth IRA owner can un-do the Roth election for any reason during the free-look period and not incur a tax liability. The time to decide whether to convert your traditional IRA to a Roth account is not at conversion, but it is at the end of the recharacterization period.  There are many strategies you might consider such as segregated accounts, non-correlated investment strategies, taking required minimum distributions and integrating with tax planning to enhance this opportunity. You should visit or consult with your registered investment advisor to decide whether a Roth conversion or recharacterization is right for you.

Use Caution When Recharacterizing 2010 Roth Conversions

If you converted your traditional IRA to a Roth IRA in 2010 and would like to extend the "free-look" period in 2012, do so with care.  If you recharacterized your Roth IRA back to a traditional IRA, the rules do not allow you to convert the same account back to Roth until the greater of 30 days or the next calendar year from the original conversion.  This means if you change your mind on your 2010 Roth conversion now, you'll have to wait 30 days to reconvert back to a Roth account. 

Give Your IRA Required Distribution to Charity

If you are over 70 1/2 and have an IRA account, you can give your Required Minimum Distribution (RMD) directly to your charities of choice without incurring taxes. This can be an attractive strategy if you do not have low-cost basis securities (typically the preferred asset to give to charity) and have charitable intent. It is a good strategy for tax payers who do not have significant Schedule A Itemized Deductions. Another strategy you might consider is giving your RMD to your favorite charity to reduce your tax liability and then convert a portion of your traditional IRA to a Roth IRA.  

Align Your Investments With Your Risk Level

Most investors have a disconnect between their investments and their risk tolerance and risk capacity. There are a number of risk tolerance tools available on the web and through your favorite registered investment advisory firm to help you assess your risk tolerance. Understanding your risk tolerance level is not an end unto itself.   You also need to recognize your capacity to take risk by developing a detailed cash flow analysis.  You might have a high tolerance for risk, but may not have the capacity to take that amount of risk. A professional financial advisor can help you use the proper tools to assess your risk tolerance and risk capacity.

Conduct an Insurance Audit

You could save hundreds, if not thousands, of dollars by having all your insurance policies reviewed by insurance professionals. More often than not, those who have insurance audits can save on premiums or increase their benefit coverages.  A proper insurance audit can also help reveal shortfalls in coverage, exposure to losses and other potential liabilities.

The provisions of the 2010 Tax Relief Act* are complex with many nuances. These are just a few of the highlights that can positively impact your wealth creation. You have a minimum of 2 years to seize the opportunities from this new tax law, which currently expire in 2012. But don’t wait, it will take time and good planning to coordinate these changes with your personal financial picture. Seek out the advice of the professionals you trust. The sooner you take action to realign your financial strategies, the longer you have to reap the benefits of these new provisions.

*The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010


This information is general in nature and may not apply to your own financial situation. Please consult your own professional tax advisor regarding this information and your own personal tax needs. For complete disclosure statement, click here.

Blog written by Irvin G. Schorsch III, CIMA, CFP, AIF
Irvin G. Schorsch III founded Pennsylvania Capital Management with the vision to build a firm centered on the client first and...