Two planning opportunities from the fiscal cliff |

Two planning opportunities from the fiscal cliff

Personal Finance
Danielle Howard
Glenwood Springs, Colorado CO
Danielle Howard

While many people are adjusting to having less take-home pay with the increase in payroll taxes, there are a couple of provisions in the Fiscal Cliff deal that may be of benefit to you. One is valuable for people with defined contribution plans (401K, 403b and 457b), and the other is focused on those IRA owners age 70 1/2 and over with charitable intentions.

With the objective of drumming up billions of dollars in government revenue, the American Taxpayer Relief Act (ATRA) allows for the re-characterization or conversion of funds from a traditional 401(k) into a Roth 401(k). An employee would pay taxes at the time of conversion, but if the account was held longer than five years and until after age 59 1/2, withdrawals will be taken tax free. While this conversion is not new, it was previously only allowed for account holders with a “distributable” event. Now it is available to anyone with a traditional 401(k), where an employer offers the option. There are also no conversion limits. Keep an eye out for regulators to hammer out procedures over the next few months.

The conversion of a defined contribution plan is best suited for people in lower tax brackets with cash on hand, those making less income than in typical years and those who see themselves making significantly higher wages down the road. The conversion is also a creative estate planning tool for those who want to prepay the tax liability on retirement accounts they want to pass on to their heirs. Along with the “stretch” provision, this move can be a powerful legacy planning tool. For an initial look at if this may be a fit for you check out:

The Roth 401(k) works similar to the traditionally known Roth IRA except that it allows for higher contribution limits. It is administered by your employer, your investment choices are limited to their choosing, but they may provide matching funds.

ATRA also resurrected the IRA charitable rollover for 2013. The mechanics are very simple. You must direct your account custodian to transfer the gift directly to charity. Do not take a personal withdrawal and write a check! You can contribute up to $100,000 from an IRA, and this contribution can be used to satisfy your required minimum distribution. The amount of QCD is excluded from gross income and is not taken into consideration in determining deductions for charitable contributions. This really helps you leverage your giving. You can still make a donation before Feb. 1 and have it treated as a 2012 qualified charitable distribution. Check out the IRS link for more details:

How would these types of moves benefit you? First, you need to look at what you are trying to accomplish ranging from current cash flow needs, current and future tax implications as well as the meaning of money in your life and your short- and long-term aspirations. It may be painful to pay taxes now on a Roth conversion (either traditional or defined contribution plan), but if in the long run, it will help you realize your objectives, it will be pain well endured. Before you are comfortable giving away IRA funds, you need to determine how much is enough for your family and what causes or concerns are you wanting to financially impact. Take the time and make the effort to see if these ATRA provisions can have positive and impactful benefit to you.

Danielle Howard is a Certified Financial Planner ™ practitioner and Financial Life Planner®. Her office is located at 23300 Two Rivers Road in Basalt. Visit her at or call 927-3909. E-mail her at

Advisory services offered through Lighthouse Financial LLC, a registered investment advisor. Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Cambridge and HFR are not affiliated.

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