1 – Open a Roth IRA (if you don’t already have one):
Roth IRAs are tax-free and not subject to Required Minimum Distributions. You need to have a Roth account established by the end of the year. You have until April 18, 2011 to establish your account and make your 2010 contribution. You can contribute $5,000 if you are under age 50 and $6,000 if you are 50 or older.
2 – Make your 529 contributions or open a 529 for your kid(s) and/or grandkids:
A 529 plan is a tax-free college savings program. For example, The Michigan 529 plan, or Michigan Education Savings Program, has an additional feature of allowing you to make a contribution that’s deductible on your Michigan Income taxes. With the MESP, the first $10,000 (joint filers) or $5,000 (single filers) in contributions can be deducted from income on your Michigan tax return. If you make your contributions before the end of 2010 you get that benefit when you file your 2010 Michigan return.
3 – Make your charitable donations:
Clean the house. Empty your closets, kitchen, basement, garage, etc. and get rid of the stuff you don’t use anymore. Get a receipt from the charity and deduct it as a non-cash donation.
If you regularly make cash donations, look at donating appreciated stock from an after-tax account. You will be able to take the deduction on your tax return and you won’t have to pay the tax on the gain. Example: you normally give your college $2,000 as a gift, you could give $2,000 of appreciated stock (say you bought Ford at $4, and now it’s at $16), get the full deduction and avoid the capital gains.
4 – Do a Roth conversion:
In addition to contributing to a Roth, you can convert existing IRAs to a Roth. You pay tax on the converted amount now but all subsequent income and gains are tax free. What’s more, Roth IRAs are not subject to required minimum distributions. If you convert to a Roth in 2010, you may split the income on the conversion over 2011 and 2012 or report all the income in 2010. However, to get the clock ticking, you need to make the conversion before Dec. 31, 2010. And don’t worry if you change your mind, you can recharacterize a Roth conversion up to Oct. 17, 2011 if you file an extension or filed a timely return. No harm, no foul.
5 – Check your estate plan:
Did you buy a second house in 2010? You might need to set up a trust (particularly if it is out of state) or at the very least deed it to your heirs to keep it out of probate.
Did you have another child? Documents should be updated for that. If you had your first child, a Will definitely needs to be set up to name a guardian, as well as establishing a guardian in your Power of Attorney.
Haven’t looked at your Health Care Power since 2006? HIPAA requires certain language in your Heath Care Power of Attorney.
Did you receive an inheritance? Make sure the accounts are titled correctly so they meet your estate planning goals. While you’re at it, check your beneficiary designations on your IRAs, 401(k)s and other assets.
Leon C. LaBrecque is an attorney, CPA, CFP, and CFA (Chartered Financial analyst). Leon is chief executive and chief strategist for the independent wealth management firm, LJPR in Troy, MI. He can be reached at firstname.lastname@example.org or 248-641-7400.