Domicile is a technical legal term. But you need to learn the basics of it. Your income will be taxed by the state in which you are domiciled. The state of your domicile also will require your estate to be probated there and subject to its estate or inheritance taxes. Here are the major steps you need to take to clearly abandon an old domicile and establish a new one. You don’t have to take each step, and there is no one step that is vital. A state will look at the preponderance of the steps you took to determine if you abandoned your old domicile.

1. Spend less than 180 days annually in the state of your old domicile.
2. Move most non-real estate assets to your new state.
3. Maintain a permanent home address in the new state.
4. Sell your home and other real estate in the old state.
5. Apply for and obtain a homestead exemption in the new state, if one is available.
6. End business relationships in the old state by selling businesses, retiring from jobs, etc.
7. Change financial accounts to the new state.
8. Terminate voter registration in the old state and register in the new one.
9. Shift any safe deposit boxes and personal storage to the new state.
10. If the new state provides an affidavit of domicile, file one as appropriate in the new state.
11. Have your will and estate plan updated to comply with the new state.
12. File all tax returns with the new state listed as your address. File all local tax returns in the new state.
13. Change registration of automobiles and other personal property to the new state. Cancel registration in the old state.
14. Obtain a driver’s license and library card in the new state.
15. Changing your mailing address on everything, especially credit cards, bills, Social Security and other pension checks, financial accounts, and all business and financial correspondence.
16. Terminate all religious and club affiliations and memberships in the old state; establish new ones in the new state.
17. Consider obtaining a cemetery plot in the new state.

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As you are painfully aware, the before-tax money you’ve put away for retirement, and which has been growing tax deferred, has a co-owner: Uncle Sam. The tax laws say you must start withdrawing and paying taxes on this money when you reach age 70½. If you fail to take the Required Minimum Distribution (“RMD”) there is a penalty tax of 50% on the amount you should have taken and did not. The reason the government mandated the RMD is to assure they get their share in taxes before you expire. For 2009, the government will not impose a penalty for skipping the RMD, because withdrawing money would compound the market losses suffered by many. But, in 2010 you will again be required to withdraw from your qualified retirement money if you are 70½ or older. What can you do if you don’t want to take withdrawals?

The only solution is to convert some or all of your qualified retirement to a Roth IRA if you can qualify. If you make more than $100,000 in taxable income during 2009, you cannot convert money to a Roth IRA; however, in 2010 this income limit will be suspended and you can qualify. When you convert your retirement money to a Roth IRA, you will pay income taxes on the amount converted, but the converted amount will not be included in the $100,000 income qualification limit. Thereafter, all the principal converted and future earnings will be 100% tax-free to you and whoever inherits the money after your death. What’s more, annual distributions from a Roth IRA are not required. You can let it accumulate tax-free, or you can make tax-free withdrawals: your choice. There is one small drawback: even if you’re over 59½, you cannot withdraw earnings tax-free until after five years. You will still have immediate tax-free access to 100% of the money converted to a Roth, but withdrawn earnings will be taxed during this five-year period. Withdrawals come from converted money first.

If you cannot now qualify for a Roth IRA conversion due to your annual income, you will qualify in 2010. If you convert in 2010, you will get all the benefits discussed above, but you will have to take your RMD for 2010 prior to converting. You can stretch the taxes on the amount converted over the following two tax years. One-half of the taxes will be due with your 2011 return filed in 2012 and the remainder with your 2012 tax return. Best of all, you can change your mind on a Roth conversion up until the time you file your tax return for the year in which you converted, including extensions. This means that if you convert in 2009, you can change your mind, undo the conversion anytime before October 15, 2010, and avoid the taxes. If you think you could benefit from a Roth, you should convert knowing that you can change your mind anytime up to the tax filing deadline for the year of conversion.

Other than avoiding the RMD, why would you want to convert to a Roth IRA? First of all, the IRS now owns a percentage of your qualified retirement money, and the best time to buy them out is when the price, and tax, is the lowest. If you have suffered market losses – and who hasn’t – your tax bite will be less than if you wait until after the market recovers. What’s more, if you expect future tax rates to rise – and that is the consensus forecast – you’ll want to pay now in advance of the tax hike. Additionally, if you move retirement money from the “taxable” category to “tax-free” you will probably pay fewer taxes on your Social Security benefits since Roth IRA income is not counted when computing taxes on SS benefits.

Converting to a Roth IRA is not for everyone, especially if you’ll need to use part of your qualified retirement money to pay the associated taxes. If you have investment losses to offset the taxes associated with Roth conversion, you certainly need to consider converting some retirement money to a Roth IRA. You’ll want to work with your financial advisor to make sure you can benefit. If converting to a Roth makes sense for you, it can be done easily, without delay and at no cost other than the taxes. The Roth IRA conversion is undoubtedly one of the best ways to lower taxes and manage your estate without giving up flexibility. If you haven’t already, you need to investigate this opportunity immediately.

Shelby J. Smith, Ph.D.