Jason Stipp: I am Jason Stipp for Morningstar. You may not know that your tax-filing deadline is April 18th this year. You have a few more days to get those taxes in to the government. You might also not realize that April 18th is an important deadline for some other important financial-planning considerations.
Here with me to explain is Morningstar's Christine Benz, director of personal finance. Thanks for joining me, Christine.
Christine Benz: Jason, great to be here.
Stipp: The April 18th deadline, it's more than just taxes. There're a few other important decisions you should make by this time this year. The first one has to do with the special type of account for health-care spending. Can you explain what that is, and how you should think about it in your planning process?
Benz: So this is for people, who have a high deductible health-care plan. They can save within one called, a health savings account. And essentially, this functions a lot like an IRA and that you are the owner of this account and you actually get to select investments. Once you have funded with assets, you get to decide how those assets are invested. And then, you can use those assets to fund qualified medical expenses. The assets are not taxed going in, and they are not taxed provided you use them for qualified medical expenses. One thing to know about 2011 if you have an HSA is that drug and over-the-counter drug expenses will not be covered unless you have a doctor's prescription.
Stipp: So, these accounts obviously have a great tax benefit and also for very important expense for some folks who do have those high deductible plans. How much can you put in to this plan each year?
Benz: So it's $3,050 for individuals, or folks who are using an HSA for the whole family can fund it with $6,150 for the 2010 tax year.
Stipp: So, definitely with the investment options that you can pick up from a nice advantage, also these funds will roll over, correct? If they don't, it's not like you use it or lose it?
Benz: Right. Unlike a flexible spending account with your employer, this will be able to roll over and an interesting thing, one thing you often hear about HSA is that they are appropriate for the healthy and the wealthy. So if you are putting money in your HSA every year. And it's growing and building and you are not using it because you are healthy. By the time you retired you can actually take out that money for retirement-related expenses. So, it's a nice side benefit as a retirement savings vehicle for some folks.
Stipp: A great, flexible vehicle.
Stipp: So, a lot of individuals might consider plan like this. There is also retirement plans for different people, who don't have a traditional 401(k) through a company, for example. What are the deadlines for those and what should you keep in mind?
Benz: So also April 18th is your deadline for funding a SEP-IRA or a Solo 401(k), those are vehicles that are for self-employed individuals. I really become a fan of the Solo 401(k) for a lot of reasons, but in essence, it functions a lot like a 401(k), it's pretty simple. You can set it up with any number of investments inside it. It's flexible and relatively low cost. So April 18th is your deadline for the 2010 tax year.
Stipp: 2010 tax year, OK. And it's also a deadline for regular IRAs, as well.
Benz: It is.
Stipp: So, what are the contribution limits there, and what should you keep in mind about keeping those funded?
Benz: Yeah. So, there are 5,000 and 6,000 again and there are income thresholds that you must fall below if you want to make a deductible IRA contribution or Roth IRA contribution. One thing a lot of folks have been not able to qualify to make a Roth IRA contribution, so they may have been tuning out this whole issue because the traditional nondeductible IRA didn't appear to have all that much appeal versus say a tax-managed mutual fund or an index mutual fund, which would be pretty tax-efficient in and of itself.
Now that the conversion limits have been lifted for converting one of those traditional nondeductible IRAs to a Roth, I think it's really attractive to think about funding the traditional nondeductible IRA going through what we've been calling the backdoor IRA conversion and then ending up with some Roth IRA assets. So I wouldn't ignore this April 18th deadline, if I am a high=income earner who has not been able to qualify for Roth contributions in the past.
Stipp: So, a little bit of workaround to get into that Roth, it's definitely worth considering in those few days that you have left before April 18th for the 2010 year.
Benz: Right. And another thing that I would point out Jason is that if you've got a lot of traditional IRA assets and you're considering this maneuver, we've been writing about this and hearing about this from our users. You can inadvertently trigger a big tax bill upon that conversion. So check with the financial advisor or tax person if you have say rollover IRA assets sitting there, you could inadvertently find yourself paying a lot more in taxes upon conversion than you would want to do.
Stipp: So it sounds like this conversion is definitely something you should be careful in undertaking, but it's certainly worth considering at the very least.
Stipp: So, Christine, the last thing that there is a April 18th deadline for, it has to do with a right really to folks who are in retirement. What is that, and what should they keep in mind?
Benz: Right. That's the estimated quarterly tax deadline, as well. So if you are in retirement and you're pulling from your retirement accounts, you'll owe those quarterly estimated payments, April 18th will be your deadline for that, as well.
Stipp: So, that will be your first quarterly estimate for the 2011 tax year.
Stipp: So, you already have to look ahead.
Stipp: All right. Christine, well, thanks for all the important updates on the several deadlines on April 18th and for joining me today.
Benz: Thank you, Jason.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching