Here are a couple of fine points of retirement planning tax management. Your accountant probably knows all of this, but if you're the do-it-yourself type or you have a tax preparer who's new to you, this might be helpful.
CPA Tim Steffen, who is director of financial planning for Robert W. Baird in Milwaukee, says it's important to keep track of any nondeductible contributions you might have made to a traditional individual retirement account.
Steffen says that while nondeductible contributions have no impact on your tax liability in the year they are made, if you don't report these contributions on your return using Form 8606, it’s more difficult to claim that these amounts are not taxable when the time comes for you to withdraw them from your IRA -- sometimes many, many years down the road, well into your retirement.
Filing Form 8606 is simple. On it, you record how much after-tax money was in your account in the beginning of the year, how much you added and the total after-tax money in the account at the end of the year. "You should fill out this form every year so you don't lose track of it," Steffen advises.
Likewise, if you take out money from an IRA that has after-tax funds in it, Steffen says, make sure you or your tax preparer knows this and reports to the IRS that a portion of the withdrawal is tax-free. You'll have to prove to the IRS that taxes were previously paid on this money. If you haven't been filing Form 8606, then you'll have to find old brokerage statements showing the money going into the account and past state and federal tax returns, showing you never took a deduction, Steffen says. Ugh.
If you converted a conventional IRA to a Roth IRA in 2010, remember that taxes on half the conversion are due with 2011 taxes -- the other half will be taxable when you pay your 2012 taxes in 2013. Chances are if you forget to pay this year's half, the IRS will remind you -- and slap you with penalties and interest. So pay up, or remind your tax preparer to do it on your behalf.