Cramer: My End of Year Tips for IRA Investors

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The media is going around comparing president-elect Barack Obama to Abraham Lincoln. Hey, like most Americans, I’m rooting for Obama to succeed, but let’s not get hysterical.

After all, it was Lincoln who saved the Union, freed the slaves, and passed along one of the wisest pieces of investment advice I’ve ever heard. “Prosperity is the fruit of labor,” he said. “It begins with saving money.”

That’s a home run in my book. If you work hard, plan ahead, do your homework, and save money, then retirement isn’t such a stove-pipe dream, even in an economy that looks like General Sherman just marched through it.

One place to start is with your retirement savings, specifically your IRA. I’ve come up with a list of moves that IRA investors can make that will save taxes, save money, and give you some good cash-out options after a rough 2008.

Let’s take a look:

The clock is ticking – Technically, this isn’t a money-saver unless you blow the deadline. But know that IRAs and 401(k) plans have different contribution deadlines per the IRS. For your 401(k), your contribution deadline for 2008 is December 31. For IRA investors, you get more time – your contribution deadline is tax day, April 15, 2009.  That means you can open a new account or contribute to an old one, just do it by April 15. For 2008, the maximum contribution you can make is $5,000, or $6,000 if you are over 50 years-old.

Different rules for on IRA minimum contributions – IRS rules in the past state that IRA investors must take required minimum distributions, or RMD’s, each year after turning 70 and-one-half years-old. If you don’t, then Uncle Sam slaps you with a big excise tax. But 2009 should offer you some relief. Under HR 7327, the Worker, Retiree and Employer Recovery Act, the RMD is suspended for 2009. That’s a big advantage considering so many IRA investors lost money in their accounts in 2008. It’s arcane stuff  but the RMD money adds up - IRA distribution calculations are based on myriad benchmarks and actuarial tables. In one example, a 76-year-old man with a $200,000 IRA balance in 2007 must, by law, withdraw at least $9,091 by the end of the year, based on a 22-year life expectancy. Now that mandate is off the table, at least for 2009 (2008 RMD rules still apply).

Switch to a Roth IRA – One way to make lemonade out of your IRA lemon is to switch your traditional IRA to a Roth IRA. Why? You can earn a smaller tax bill and set yourself up for some tax-free retirement income down the road. Here’s the skinny: To convert to a Roth IRA, your adjusted gross income can’t exceed $100,000 annually, no matter if you’re single or married. If you can convert by December 31, you’ll only owe the IRS on taxes at your regular tax rate on the amount converted to an IRA. The move enables investors whose traditional IRA’s that were hit hard by the stock market tsunami of 2008 to move to a Roth IRA at a lower tax rate than you would have paid from your old IRA.

New charitable contribution tax break – I know, following changes in the tax laws is like a root canal. But doing so can save you money. Take the new rule that lets IRA investors directly transfer – tax-free – up to $100,000 annually to an approved charity. The new rule applies to IRA holders regardless of whether or not you itemize deductions on your taxes. Any funds contributed directly from your IRA to a charitable group (careful, some groups like donor-advised funds, aren’t eligible) are okay by Uncle Sam. As the IRS Publication 590 puts it; “Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.” For more detail, visit the IRS Publication 590, Individual Retirement Arrangements (IRAs), on qualified charitable distributions. Find it under “Are Distributions Taxable?”

Double down in down markets – I like to make monthly contributions and double down if there is a month where the stock market is off more than 10%. Let’s say that January through April are decent months marketwise, so I’ll contribute the same amount each month. But if May sees a drop in the Dow more than 10%, I’ll double my monthly contribution, and keep doing that until the market picks up again. Then I’ll go back to my regular monthly contribution that I started out with in January.

Open an IRA for your kids - Last week I gave out some great gift ideas for the holidays. Here’s one more for the list, because birthdays count, too: open an IRA for your child and put them on the path to financial prosperity. There are some restrictions in making this move. Your child must have some earned income, like from mowing lawns, delivering newspapers, or filling banana split orders down at the Dairy Queen. If your child made $2,000 working last year, and you have the W-2 or other pertinent record to prove it, you can contribute up to the same amount – $2,000 – in an IRA for your child. Charles Schwab (Stock Quote: SCHW) has a decent program that lets you open an IRA account for $100.

 

They say Honest Abe could split a chunk of wood with one whack of an axe. You can be like Lincoln, too, by chopping some IRA tax dollars away from the IRS and putting them back into your own pocket.

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