Tax Tips
Self-directed IRA withdrawals

For 2009, required minimum distributions (RMDs) from IRAs and other retirement accounts have been suspended for people age 70¹/₂ and older. For many, skipping this year’s RMD is a good idea because investments might have to be sold at distressed prices to generate the cash needed to make the distribution.

If you have a self-directed IRA, however, you may be better off taking a distribution this year, even if it’s not required. Why? Because you’re permitted to make withdrawals from a self-directed IRA “in kind” — that is, by taking possession of the assets rather than converting them to cash. For example, if your self-directed IRA holds stock, it can simply transfer some of the stock directly to you rather than selling it and making a cash distribution. The amount of the distribution for tax purposes is based on the asset’s depressed value; plus, you get to hold on to your investment.

A good time for a QPRT

A qualified personal residence trust (QPRT) allows you to transfer a principal residence or vacation home to loved ones at a reduced tax cost and retain the right to live in the home for a specified term. The home is removed from your estate, so any future appreciation in value goes to your beneficiaries estate-tax free, provided you survive the trust term.

Typically the best time for a QPRT is when interest rates are high. That’s because when you transfer your home to the trust you make a taxable gift equal to the present value of your beneficiaries’ future interest. The higher the interest rate, the lower the present value and, therefore, the lower the gift tax.

Even though interest rates are relatively low, you may still be better off establishing a QPRT now, while real estate values are depressed, because that will also reduce your gift’s value. The right timing depends on your particular situation but, in many cases, if you wait for interest rates to rise, the tax advantages of a higher interest rate may be erased by rising home prices.

Get your refund early

Has your corporation overpaid its estimated taxes? If so, it can request a “quick refund” if its excess estimated tax payments are more than $500 and more than 10% of its expected tax liability for the year. To request a quick refund, file Form 4466 before the 16th day of the third month after the end of the tax year, and before the corporation files its income tax return. •