by Archie M. Richards, Jr., CFP^®
November 11, 2002

Before the year ends, the following might improve your financial health:

Convert to a Roth IRA: Take advantage of low prices to convert your traditional IRA to a Roth IRA. With prices down, the tax payable on conversion is reduced. Once converted, the money avoids taxation even when withdrawn from the Roth.

Establish a Keogh Plan before Year-End: Regular IRAs you can set up as late as April 15, 2003. You can make full contributions then for both 2002 and 2003. With Keogh Plans for the self-employed, the contribution can be made in April 2003, but the paperwork must be completed by year-end 2002.

Contribution Limits: For IRAs, you can now sock away $3,000 a year. (If you're over 50, make that $3,500.) To 401(k) and thrift savings plans, you can contribute $11,000. To Keogh Plans and SEP-IRAs, you can contribute a whopping $40,000.

Charitable Contributions: If you want to give stock on which you have a profit to a charity, do not sell the stock and donate the proceeds. You'll be stuck with the capital gains tax. Instead, gift the stock and let the charity sell it. You can deduct the current market value of the stock, and the charity pays no tax.

Make charitable gifts of stocks electronically, from broker to broker. But allow plenty of time. The stock must hit the charity's account by year-end. Allow several weeks on gifts of mutual fund shares.

If you hold stock at a loss, do not gift the stock. Sell it instead. Use the loss in your return, and gift the proceeds.

Pay Your State Taxes in December: By year-end 2002, pay the state and local taxes you'll owe next spring. Estimate them if you have to. You can't deduct these taxes for the 2002 tax year unless you actually pay them in that year.

But if you know you're going to use the standard deduction, don't pay the state and local taxes in 2002 after all. Pay them as late as possible.

Also, don't bother paying state and local taxes in 2002 if you know you'll be subject to the pesky Alternate Minimum Tax. State and local taxes aren't deductible in the AMT. Oh that miserable AMT!

Bunch Your Elective Medical Costs: Medical costs are not deductible in your income tax return to the extent they're less than 7.5 percent of your Adjusted Gross Income (the number at the bottom of page 1 of Form 1040). If you have big elective medical costs, such as orthodontia bills, try to stuff them into a single year. The total costs might exceed the 7.5 percent minimum. You can then deduct them, at least in part.

Gifts to Individuals: You can give up to $11,000 to any number of people each year without paying a gift tax. If you make the gifts with your spouse, $22,000 qualifies, even if the money actually comes from one of the two spouses. The recipients don't have to be relatives; any warm body will do.

Gifts to individuals are not deductible in your income tax return. But the future earnings on the money (or the appreciation on stock you give) will be taxable to the recipient, whose income is presumably in a lower tax bracket than yours.

If you're funding a 529 Plan or a Prepaid Tuition Plan for someone's education, you can make up to five years of contributions this year without running afoul of the pesky transfer tax. If you've made no other gifts to an individual this year, for example, you and your spouse can fund a whopping $110,000 for a single person ($22,000 a year for 5 years). If you have six children, you could do this for each of them. Don't leave yourselves high and dry, of course.

If you're applying for college financial aid in 2003, postpone whatever earned income you can until January 2003. The financial aid for 2003 will be based on your 2002 income. For this year, try to appear poverty-stricken.