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President's Articles - December 2008

12/25/2008

We Get A Break in 2009!

On December 11, 2008, Congress passed the Worker, Retiree, and Employer Recovery Act (WRERA) of 2008 and the President is expected to sign the bill when it reaches his desk.

The WRERA temporarily suspends required minimum distributions (RMDs) for 2009. It also includes some technical provisions relating to direct rollovers from employer plans to Roth IRAs and non-spouse beneficiary rollovers from inherited employer plans.

The WRERA suspends RMDs for 2009. No minimum distribution will be required from IRAs and employer-sponsored retirement plans for the 2009 calendar year! These plans include qualified pension plans, qualified stock bonus plans, qualified profit-sharing plans, 401(k) plans, 457(b) plans, and 403(b) plans. This applies to both RMDs during a plan participant's or IRA owner's lifetime as well as after-death RMDs to beneficiaries.

An individual who reached age 70½ prior to 2009 would normally be required to take his or her 2009 RMD no later than December 31, 2009. As a result of this legislation, that RMD will not have to be made. An individual who reaches age 70½ in 2009 would normally be required to take his or her first RMD on or before April 1, 2010. As a result of this legislation, no distribution is required for 2009, and thus there is no requirement that a distribution be made by April 1, 2010. However, in both cases, the individual will still be responsible for taking an RMD for the 2010 calendar year on or by December 31, 2010. Employees still working beyond age 70½ are not required to take RMDs until they separate from service, unless they are 5 percent owners of the employer.

IMPORTANT!!! Individuals are still required to take an RMD for 2008. Normal RMD rules apply: For individuals who reached age 70½ prior to 2008, 2008 RMDs must generally be made no later than December 31, 2008. An individual who reached age 70½ in 2008 is generally required to take his or her 2008 RMD on or before April 1, 2009. The WRERA does not affect this requirement.
The Pension Protection Act of 2006 allowed for direct rollovers from qualified retirement plans, 403(b) plans, and governmental 457 plans, to Roth IRAs, subject to the limitations that generally apply to rollovers from traditional IRAs to Roth IRAs. The most common limitation is on adjusted gross income. The language in the 2006 Act was confusing as to whether a direct rollover from a Roth 401(k) or Roth 403(b) account to a Roth IRA would also be subject to an adjusted gross income limitation. The WRERA clarifies that a rollover from a Roth 401(k) or Roth 403(b) account to a Roth IRA is not subject to the adjusted gross income limitation.

The Pension Protection Act of 2006 provided that the designated beneficiary of a deceased employee's eligible retirement plan could transfer distributions from the plan directly to an IRA without tax consequence. Previously, only surviving spouses had this option. Subsequent interpretation of the provision held that plans could, but were not required to offer this rollover option to non-spouse beneficiaries. The WRERA provides that, for plan years beginning after December 31, 2009, plans must allow non-spouse beneficiaries to roll over funds to an IRA in a direct transfer, provided all requirements are met. Plans must also provide appropriate notice to non-spouse beneficiaries. It’s important to note that the IRA was, and still is, treated as an inherited IRA.

Consult your friendly home town banker for all of your retirement, savings, and pension program questions.

12/18/2008

Programs for Modifying Distressed Mortgages

Homeowners in financial trouble who need help with their mortgage may have more options than they realize. Here's a summary of some programs aimed at helping homeowners find a way to stay in their homes.

The Federal Housing Finance Agency (FHFA) oversees Fannie Mae and Freddie Mac. Fannie and Freddie own or guarantee almost 31 million mortgages. FHFA has established guidelines for reworking mortgages that are owned or guaranteed by Fannie or Freddie. The guidelines are similar to the program developed by the FDIC to manage IndyMac mortgages after the bank was taken over earlier this year. The program is designed to set an industry standard for modifying private label mortgages and streamline the modification process. The program opened on December 15, 2008 and is structured to help modify loans so that mortgage payments, including homeowner association dues, total no more than 38 percent of the household's monthly gross income. Options for modification include reducing the interest rate, extending the term of the loan, deferring payment on part of the principal, or some combination. Mortgage servicers who participate will receive $800 for each loan modified through the program. The program is focused on borrowers who (1) own and live in their homes, (2) are at least three months behind in making mortgage payments, and (3) are not in bankruptcy proceedings. Borrowers who are defaulting because of financial mismanagement or simply being overextended will be encouraged to get financial counseling through agencies approved by the Department of Housing and Urban Development (HUD).

HOPE for Homeowners (H4H) allows borrowers to refinance into a 30-year fixed-rate loan insured by the FHA. H4H is voluntary for lenders who must be willing to take a loss by reducing the principal balance owed. The program was launched October 1, 2008, and is scheduled to run through September 2011. Lenders will make the final determination if a borrower can participate in the program. However, borrowers may be eligible for H4H if they meet the following criteria: they are at risk of foreclosure on their primary residence, and they own no other residential property. Their mortgage must have originated before January 1, 2008, and they must have made at least six payments on it. Mortgage payments must either represent more than 31 percent of their income or be likely to do so because of a mortgage interest rate reset. Loans may not exceed $550,440. Homeowners may not intentionally default on a mortgage. They also may not have been convicted of fraud under federal or state law within the last 10 years and may not have provided materially false information to obtain the mortgage being refinanced. This program is authorized to insure up to $300 billion in mortgages, which should allow it to assist an estimated 400,000 homeowners. A list of participating H4H lenders is available at www.fha.gov.

Some banks and private label lenders have announced their own programs for modifying mortgages. Each has its own criteria to qualify borrowers for mortgage modification, how their mortgages may be reworked, and whether the bank will delay foreclosure proceedings for borrowers operating in good faith. Modifications involve reducing monthly mortgage payments to some percentage of the household's monthly income, usually ranging from 31 percent to 40 percent.

If you are experiencing problems with your mortgage loan, consult your friendly home town banker for ideas on how to get some help. Remember, most situations are not hopeless, but all are helpless if you don’t get out and ask for assistance.

12/11/2008

The Scoop on Roth IRA Conversions

There are currently two ways to fund a Roth IRA--you can contribute directly, or convert all or part of a traditional IRA to a Roth IRA. Generally, you can contribute up to $5,000 to an IRA in 2008, whether it is traditional, Roth, or a combination of both. This amount increases to $6,000 if you're age 50 or older. But your ability to contribute directly to a Roth IRA depends on your "modified adjusted gross income," or MAGI. If you file single/head of household, you can’t contribute to a Roth in 2008 if your MAGI equals $116,000 or more. If you file married filing jointly, you can’t contribute to a Roth if your MAGI equals $169,000 or more. If you file married filing separately, you can’t contribute to a Roth if your MAGI equals $10,000 or more.

Regardless of your MAGI, you can convert an existing traditional IRA to a Roth IRA, but, you'll have to pay income tax on the taxable portion of your traditional IRA at conversion. If you're married filing separately, or your MAGI exceeds $100,000, you currently aren't allowed to convert a traditional IRA to a Roth IRA.

The Tax Increase Prevention and Reconciliation Act (TIPRA) of 2006 allows taxpayers, regardless of your filing status or income, to convert a traditional IRA to a Roth IRA. However, this provision doesn't take effect until 2010. But, there are steps you can take now if you want to maximize the amount you can convert in 2010. Simply start making the maximum annual contribution to a traditional IRA, and then convert that traditional IRA to a Roth in 2010.

Remember that deductible contributions to a traditional IRA may be limited if you or your spouse is covered by an employer retirement plan and your income exceeds certain limits. But any taxpayer, regardless of income level or retirement plan participation, can make nondeductible contributions to a traditional IRA until age 70½. And because nondeductible contributions aren't subject to income tax when you convert your traditional IRA to a Roth IRA, they make sense for taxpayers considering a 2010 conversion, even if they're eligible to make deductible contributions.

SEP and SIMPLE IRAs can also be converted to Roth IRAs. Consider maximizing your contributions to these plans now, and then converting them to Roth IRAs in 2010. If you've made only nondeductible contributions to your traditional IRA, then only the earnings will be subject to tax at conversion. The IRS has proration rules that apply to Roth conversions consisting of both deductible and non-deductible contributions. One way to avoid the prorating requirements is to first roll over all of your taxable IRA money. This will leave only the nontaxable money in your traditional IRA, which you can then convert to a Roth IRA tax free. Even if you have to pay tax at conversion, TIPRA allows you to make a conversion in 2010, and report half the income from the conversion in 2011 and the other half in 2012.

In 2008, you can roll over your employer 401(k) plan distribution directly to a Roth IRA. You'll still be subject to income limits for 2008 /2009 and you'll still need to pay income tax on any taxable dollars rolled over.

So, is a Roth IRA right for you? The answer depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, state tax laws, and how you'll pay the income taxes due at the time of conversion.

Consult your friendly home town banker to help you determine if opening or converting to a Roth IRA will benefit you now and in 2010.

12/04/2008

2008 Year-End Tax Planning Tips

Year-end tax planning is as much about the 2009 tax year as it is about the 2008 tax year. There's a real opportunity for tax savings when you can predict that you'll be paying taxes at a lower rate in one year than in the other. If that's the case, some simple year-end moves can pay off in a big way.

If you think you’ll be in a lower bracket next year, look for opportunities to defer income to 2009. You may be able to defer a year-end bonus, delay the collection of business debts, rents, or payments for services. You may also be able to accelerate deductions into 2008 by paying some deductible expenses such as medical expenses, interest, and state and local taxes before 12/31/08.

If you're subject to the alternative minimum tax (AMT), deferring income and accelerating deductions can actually hurt you. The AMT-- a separate federal income tax system with its own rates and rules-- disallows a number of itemized deductions, making it a significant consideration when it comes to year-end strategy. For example, if you're subject to the AMT in 2008, prepaying 2009 state and local taxes won't help your 2008 tax situation, but could hurt your 2009 bottom line.

Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2008 income. Contributions you make to a Roth IRA or a Roth 401(k) aren't deductible, so there's no tax benefit for 2008, but qualified Roth distributions are completely free from federal income tax--making these retirement savings vehicles very appealing. For 2008, the maximum amount that you can contribute to a 401(k) plan is $15,500, and you can contribute up to $5,000 to an IRA. If you're age 50 or older, you can contribute up to $20,500 to a 401(k) and up to $6,000 to an IRA. The window to make 2008 contributions to your 401(k) closes at the end of the year, but IRA contributions can be made until April 15, 2009.

The Emergency Economic Stabilization Act extended several tax provisions that were set to expire. To the extent that they apply to you, be sure to factor these items into your year-end strategy:

For 2008 and 2009, you'll continue to have the option to deduct state and local general sales tax (instead of state and local income tax) on your Schedule A.
The $4,000 above-the-line deduction for qualified higher education expenses, and the $250 above-the-line deduction for of out-of-pocket classroom expenses paid by education professionals, are also extended through 2009.
Taxpayers age 70½ or older now have through 2009 to make charitable contributions of up to $100,000 directly from an IRA to a qualified charity, without including the distribution in income.
Beginning this year and for 2009, individuals who do not itemize deductions are able to claim an additional standard deduction of up to $500 ($1,000 for married couples filing jointly) for real estate property taxes paid.

A credit of up to $500 for the purchase of energy efficient home improvements and energy efficient property expired at the end of 2007, but the Emergency Economic Stabilization Act reinstated the credit only for property placed in service during 2009. If you're eligible for the credit, and plan on making a qualifying improvement or purchase, waiting until 2009 to do so might make sense in order to qualify for the credit.

When it comes to year-end planning, talk to your friendly home town banker who can help you evaluate your situation and determine which year-end moves make the most sense for you.

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