When year-end approaches, most of us focus on taking care of last-minute tax related items for the year and preparing for the upcoming tax season. However, procrastination can result in missed opportunities and, in some cases, penalties for missing deadlines. To help you stay on top of year-end retirement matters, here is a list of related items that must be completed by year-end.
1. Establishing a Qualified Plan
Qualified plans that operate on a calendar year basis must be established by December 31 of the year for which contributions are to be deducted. This includes completing the necessary documentation and notifying employees about the plan. Contributions may be made by the employer's tax-filing deadline, including extensions. (For more information about establishing this type of plane, see the Qualified Plan Tutorial.)
A Roth conversion may be accomplished in one of three ways:
1. Conversion within the same financial institution
This kind of conversion takes place if the non-Roth retirement account and Roth IRAs are maintained at the same financial institution. If the delivering account is a non-Roth IRA, the custodian may either require the IRA owner to move the assets from the non-Roth IRA to the Roth IRA, or may change the non-Roth IRA to a Roth IRA to accomplish the conversion. For qualified, 403(b) and governmental 457(b) plans, the assets must be moved to a Roth IRA as changing the account to a Roth IRA is not permitted. (For more insight, check out The 4-1-1 On 457 Plans and The Top 9 Benefits Of A 403(b) Plan.)
2. Trustee-to-trustee transfer
Here the conversion occurs between two financial institutions. Generally, the Roth IRA owner will instruct the Roth IRA custodian to submit a request to the non-Roth IRA custodian or plan (qualified, 403(b) or governmental 457(b) plan) trustee to deliver the assets to the Roth IRA. To ensure proper tax reporting, the instructions should clearly indicate that the transaction must be processed as a Roth IRA conversion. (For more insight, read The Simple Tax Math Of Roth Conversions.)
3. Distribution and rollover (60-days)
A Roth conversion may also be accomplished by means of a distribution and 60-day rollover. The Roth IRA owner may distribute the assets from the non-Roth retirement account and rollover the assets within 60 days to a Roth IRA.
The Roth conversion applies to the year in which the assets are distributed from the non-Roth retirement account. For instance, assume you convert your traditional IRA by means of a 60-day rollover, distribute the assets in December 2013 and roll over the amount to your Roth IRA in February 2014. The conversion is applicable to 2013 and must be reported on your income tax return for 2013. The tax-reporting forms will be issued for the year the applicable transaction occurs; therefore, your custodian should mail your year-2013 Form 1099-R by January 31, 2014, and your 2014 Form 5498 should be mailed by May 31, 2015.
Be sure to check the tax-reporting documents you receive for your Roth conversion. If you are unsure of the tax reporting requirements, consult with your tax professional. You may also want to check the activity and description on your account statement prior to receiving these forms, so that you are able to resolve any discrepancy with your custodian/trustee before your tax forms are issued.
3. Make Required Minimum Distributions
If you reached age 70.5 prior to the applicable calendar year, you must distribute your required minimum distribution (RMD) by December 31 of that year. If you are an IRA owner who is subject to this requirement, be sure to contact your IRA custodian/trustee as soon as possible in order to help ensure that the that funds will be distributed by December 31, as some custodians/trustees require IRA owners to request their RMDs by a deadline prior to December 31. To determine whether an RMD amount should be distributed this year, qualified plan participants must consult with their employers or plan administrators, as some plans allow participants to defer starting RMDs until after retirement, even if this occurs after age 70.5. (For more insight, see Strategic Ways To Distribute Your RMD.)
If you are a beneficiary who is required to distribute retirement assets using the life-expectancy method, you may need to distribute a minimum by December 31. (For more insight, see How should I distribute my inherited Roth IRA?)
Talk to your tax professional, employer and financial service providers about these and other deadlines and financial matters that require action by the end of the year, as well as for next year. Taking care of these items will help ensure a smooth financial transition from year to year and give you an upper hand with your financial planning and tax preparation.