Military Officer - February 2007 - (Page 63)

The Pension Reform Act of 2006 Signed into law Aug. 17, 2006, this law offers several provisions of interest to currently serving and retired military servicemembers. Those called to active duty from Sept. 11, 2001, to Dec. 31, 2007, may take penalty-free withdrawals from IRAs, 401(k)s, and similar tax-deferred savings accounts (thus escaping the 10-percent 1 early withdrawal penalty for those under age 59⁄ Withdrawals 2). are taxable during the year withdrawn, but servicemembers have up to two years from the end of their active duty period to re-contribute any withdrawals and avoid paying income taxes altogether. Several popular tax provisions due to expire in 2006 were made permanent by the Pension Reform Act, including tax-free treatment of qualiﬁed Section 529 college savings plan withdrawals (of particular importance to parents and grandparents saving for college) and the Roth 401(k) option. The Roth 401(k) option is somewhat intriguing for military retirees in their second career and probably worth a look. The MOAA Degrees of SuccessSM 529 College Savings Plan also merits review; ﬁnd more online at www.moaa.org/529. Conventional wisdom holds that most retirees will be in a lower tax bracket in retirement than they are during their working years, so tax-deductible traditional 401(k) contributions make the most sense. However, some military retirees will have military retired pay, Social Security, and possibly another pension (private, federal civilian, or state) providing income during retirement and might be in the same (or even higher) tax bracket. Therefore, it is worth exploring the Roth 401(k) option if your company offers it. MOAA’s “Roth 401(k) or Traditional 401(k)?” calculator can help you make the choice: www.moaa.org/ﬁnancialcenter/calculators/rothvstradi tional401k.html. Finally, the Pension Reform Act offers a one-year window 1 (through Dec. 31) for retirees over age 70⁄ (subject to the required 2 minimum distribution rules) to make tax-free contributions of up to $100,000 from IRAs directly to charity. Tax Tactic: An activated Guard or Reserve servicemember can take advantage of this provision to withdraw money from an IRA or similar tax-deferred account at a very low tax rate. If the servicemember were deployed in a combat zone and receiving no taxable income for the year, this penalty-free withdrawal would result in very low taxes on withdrawn amounts. However, it probably makes sense only for those relatively close to retirement already (age 55 or older). 3 Tax-Time Must-Knows The tax-filing deadline is Monday, April 16. Filing Form 4868 provides an automatic six-month extension to file — not an extension to pay. All taxes owed still should be paid by April 16. ■ You have up to three years to file an amended tax return (Form 1040X). Common reasons for servicemembers and retirees to file an amendment include backdated VA disability awards and contributions to 2004 or 2005 IRAs under the new HERO law. Make sure you file an amended return for tax years 2003, 2004, or 2005 prior to filing your 2006 taxes. ■ If you qualify to make contributions to a traditional IRA, a spousal IRA, or a Roth IRA, be sure to do so before filing your taxes. Contribution limits for 2006 are $4,000 a person, plus an additional $1,000 if you turned 50 in 2006. ■ Parents do not have to live under your roof to be considered dependents. Increasingly, baby boomers are providing support for elderly parents, and you are entitled to claim them as your dependents if you have provided 50 percent or more of their living expenses during 2006. ■ Even if you use a paid preparer, you still need to review your return before submitting it to the IRS. Common problems, especially for paper returns, are missing signatures and incorrect SSNs. ■ ON THE WEB ■ MOAA 2007 Tax Guide: www.moaa.org/2007_tax_guide ■ IRS: www.irs.gov FEBRUARY 2007 MILITARY OFFICER 63 http://www.moaa.org/529 http://www.moaa.org/financialcenter/calculators/rothvstraditional401k.html http://www.moaa.org/financialcenter/calculators/rothvstraditional401k.html http://www.moaa.org/2007_tax_guide http://www.irs.gov

Table of Contents Feed for the Digital Edition of Military Officer - February 2007

Military Officer - February 2007 Contents From the Editor From the President Your Views MOAA Directory Rapid Fire Washington Scene Financial Forum Ask the Doctor Chapter Activities Cover Story: Building Stability Reaching Out, Reaching Up 5 Tax-Season Strategies A Capital Event MOAA Member Services Pages of History Information Exchange Advertising Index Member Books Sounding Taps MOAA Calendar Encore

Military Officer - February 2007

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