Every year in early January, a new spate of laws on the books goes into effect, and 2008 is no exception. I've listed a couple of financial-planning-related items below that have just come into effect that may have an impact on your life.
Direct conversion from 401(k) to Roth IRA. Beginning in 2008, if you hold a 401(k), 403(b), 457, or other CODA plan, and you're hoping to convert some of those funds to your Roth IRA, you can move these funds directly from one plan to the other.
The reason this is different for 2008 is that, in the past, you would need to take care of this activity in two steps: 1) rollover the funds from the 401(k) to a traditional IRA; and then 2) convert from the traditional IRA into your Roth IRA account. This removal of a step helps out with the paperwork in the process, most certainly, but it also opens up a new avenue that was previously not available. If your 401(k) or other plan has a provision for in-service withdrawals (some do, most do not), you can effectively convert some of your account to a Roth IRA while you're still working. You'll need to check with your HR representative to find out if this option is available to you. If so, it might make sense to do a partial conversion - you should check it out!
Why would you want to do this? As I've mentioned before, the Roth IRA is a very valuable asset to own. If you wait until age 59 1/2 or later, all of the funds in your Roth IRA are tax-free when withdrawn, and *under current law* they will never be taxed. In addition, the Roth IRA account is flexible, in that you can withdraw your contributions at any time for any purpose, without tax or penalty - the exception being that you must wait five years after establishing the account (in the case of a conversion) before the funds are available for use tax-free. With careful planning, this should not be a problem for most folks.
This conversion option is still subject to the $100,000 income limit as in the past. This will change in 2010, when any person, regardless of income, will be eligible to convert from either a traditional IRA or a 401(k) or other plan directly to a Roth IRA. Many of you are taking advantage of non-deductible IRAs now in order to utilize this rollover option when you are eligible in 2010. Again, there are some careful planning steps that need to be taken when working out such a plan, but it's a good way to provide yourself with tax-free income in the future.
Another benefit of the Roth IRA is that you are never required to take minimum distributions (RMD's) from the account at age 70 1/2 as you are with the traditional IRA plans. This way, if you don't need the funds, you can let the account continue to grow until you need it, or pass it on to your heirs... which brings me to a second law that recently came into effect:
Non-spouse heirs of 401(k) accounts. This rule actually came into effect previously, but has recently gotten some clarification by the IRS. In the past, spousal heirs of qualified plans were treated differently from non-spousal heirs. The spouse as an heir could rollover the plan to an IRA and "stretch" distributions out over a lifetime, whereas a non-spouse was required to take all of the funds from the account either immediately or over a five-year timeframe at most.
This new arrangement allows the non-spouse beneficiary to use the same rules as a spouse, thereby making the inherited plan much more flexible and allowing for continued tax-free growth over their lifetime. The new clarity that has been brought forth is that, previously, unless a special provision were in place, then the plan rules (not IRA rules) would still be in effect. An employer would need to specifically allow the application of the IRA rules in order for this special treatment to apply.
Exclusion of Gain on Sale of Principal Residence by Surviving Spouse. Beginning in 2008, a surviving spouse can exclude up to $500,000 in gain on the sale of a principal residence, as long as the sale occurs within two years of the other spouse's death. In the past, this was only allowed within the year of death of the spouse, which required an expedient sale in some cases, otherwise the surviving spouse was only allowed an exclusion of $250,000 in gain.
