Retirement planning: the charitable giving strategy you should know about(Read article summary)
Retirement planning has a strong ally in qualified charitable distribution (QCD), a gifting strategy that has been availably to retirees since 2006. QCD is up for renewal in Congress, and its extension (or not) could have a major impact on retirement planning,
Since 2006, retirees have had access to a charitable strategy called a qualified charitable distribution (QCD) that trumps all other gifting strategies in retirement planning. As of now, the QCD has not been renewed by Congress; however, we are very hopeful for the extension of it by the end of the year. I will talk a little more about this in a bit, but I want to first explain the benefits.
First of all, when individuals reach the age of 70 ½, they must begin taking required minimum distributions (RMD) from Traditional IRAs and Traditional 401(k) accounts. Because these accounts received a tax deduction on the way into the account, they are fully taxable on the way out. The IRS has a life expectancy table that determines the percentage of the account that must be withdrawn each year. Because this mandated withdrawal is a percentage of the total value of all IRAs in the individual’s name, the amount can vary greatly from person to person.
Retirees who have primarily had a defined benefit plan, or pension, often do not have large IRAs; therefore their required withdrawals are smaller. Retirees who were covered under a defined contribution plan — 401(k) or 403(b) — often have large IRAs as a result. Looking at the table below, you can see the effect of an individual’s age on their RMD.
|Account Value||% of Account||RMD|
|Age 70 1/2||$ 500,000.00||3.649%||$ 18,245.00|
|Age 80||$ 500,000.00||5.347%||$ 26,735.00|
These increasing withdrawals run counter to retirees’ lifestyles. Most new retirees fill their time with expensive activities like traveling and hobbies. As they get older, these activities begin to wane, and their lifestyle expenses fall. At the same time the IRS is sending their income in the opposite direction, typically resulting in higher tax rates. To make matters worse, the retirees don’t spend the money and shuffle it back around into their non-qualified investment account. As a result, they end up with even more taxable income in the form of capital gains and dividends. Now, don’t get me wrong, I actually like the idea of individuals paying more taxes because this means they are making more money.
What I want to focus on is how to have the best results when filing a tax return on April 15. From 2006 until 2013, the law allowed individuals to gift up to $100,000 of their RMD to a tax-exempt organization, reducing the amount of income that can be taxed. You may ask, “What is the big deal? I can just write off my charitable deduction on my itemized deductions.” This is very true, but the problem is that there are potentially limitations to that tax deduction. In addition you could actually wind up with more taxable income if your IRA withdrawal causes more of your Social Security to be taxable. Lastly, Medicare Part B premiums are based on adjusted gross income (your income before deductions such as charitable donations). Therefore, the greater your AGI, the more likely you are to have higher than necessary Medicare premiums.
Lastly, I want to refocus on the legislation that could possibly bring this beneficial tax law back. There are two headliner bills, one in each house of Congress. The first is the EXPIRE Act, coming out of the Senate Finance Committee. This bill extends the law for two more years, as all other iterations of this law since 2006 have done. In the House, there is a bill named America Gives More Act of 2014 from the Ways and Means Committee. This bill has passed the House with practically full Republican support and 56 of 199 Democrats. This bill moves to make the QCD a permanent fixture in the tax code.
There is a wide consensus that some combination of these two bills is likely to be passed into law. We will all be keeping a close eye on this issue to see if the QCD is brought back.
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