Category: Planning

2 Great Ways to Give to Charity That Can Help Save on Taxes

With year-end tax planning looming in the next few months, we are bringing you two ideas for donating to charity that could save you additional money at tax time.

Donate Appreciated Stocks or Mutual Funds

The first idea is to donate appreciated stocks or mutual funds from your taxable accounts.  Donations of highly appreciated securities actually receive double tax savings.  First you get to deduct the full market value of the donation, up to 30% of your adjusted gross income, which can help to reduce your taxable income.  Second, the donation of securities also allows you to avoid paying the state and federal capital gains taxes that you would have owed if you had sold the stock.

Qualified Charitable Distribution

The second idea is something called a “Qualified Charitable Distribution.”  A few years ago, Congress passed a law that allows those who are over 70 ½ years old to give up to $100,000 to charity directly from your Individual Retirement Account (IRA).  You may use these qualified charitable distributions (QCDs) to satisfy all or part of your annual required minimum distribution (RMD).  Those who give to charity using this method get special tax treatment of their gift.

Typically, taking money out of your IRA is a taxable event – the withdrawal adds to your taxable income and inflates your adjusted gross income (AGI).  However, QCDs do not count as taxable income and therefore have no effect on your AGI.  This is significant because your AGI determines a number of things, including Medicare premium costs, the net investment income Medicare surtax, the taxability of Social Security income, itemized deduction phase-outs, and exemption phase-outs, to name a few.

So making a qualified charitable distribution allows you to satisfy all or part of your RMD without increasing your taxable income or your adjusted gross income.

What are the rules?

  • You must be over 70 ½ on the date of distribution.
  • QCDs are limited to $100,000 per person per year.
  • Only distributions from a Traditional IRA, Rollover IRA or Inherited IRA (where the beneficiary is over 70 ½) are eligible. You may not make QCDs from SEP or SIMPLE IRAs, nor from any type of employer retirement plan; those types of accounts must be rolled over into a Rollover IRA before they may qualify.
  • Your QCD must go to an organization designated by the IRS as a “qualified charity.” This list includes all 501(c)(3) public charity organizations, but explicitly excludes donor-advised funds, private foundations and other grant-making organizations, as well as “split-interest” charitable trusts (such as charitable lead trusts or charitable remainder trusts).
  • The QCD must be made directly to the charity. This is non-negotiable.  The distribution will not qualify if the check is made out to you, or if the money is first transferred into a non-IRA account of yours before it goes to the qualifying charity.  The IRS does not provide a way to correct mistakes.  Most trustees and custodians already have forms and procedures in place to help you make these transfers; make sure you are specific with them about your intent, and that they know how to handle your request.  (Checks should be made out directly in the charity’s name and mailed to the charity’s address.)
  • Ensure that no tax is withheld from your QCD to the charity (no withholding is necessary since this is a non-taxable distribution).
  • Make sure to alert the charity that you are making a QCD to them, as some custodians may not put any information on the check or wire transfer that would personally identify you.
  • Make sure you get a confirmation letter from the charity acknowledging your gift and stating that you received no goods or services in exchange for it.
  • To report a QCD on your Form 1040 tax return, you generally include the full amount of the charitable distribution on the line for total IRA distributions (15a). On the line for the taxable amount (15b), enter zero if the full amount was a QCD (or calculate the taxable amount if your QCD was less than your total required minimum distribution) and write “QCD” in the blank space next to the line.

With either of these charitable donation and tax-saving strategies, it’s always a best practice to let the organization that you’re making the gift.  This way they will know who to send the record of receipt to, so that you will have documentation to hold on to for your tax returns.

As we’ve mentioned before, we are not accountants and therefore suggest that you consult with your accountant to see if either of these ideas would make sense for your particular situation.

DIY Retirement

The Risks of Do-It-Yourself Retirement Plans

Do-It-Yourself Retirement Planning?

A report recently published by the Federal Reserve Bank on the economic well-being of U.S. households discusses what people have saved for retirement versus what they will actually need, commonly known as the “retirement gap.”  The survey found that only 47 percent of DIY investors were comfortable with handling their own 401(k)s, IRAs or other outside retirement accounts.

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Financial Planning is the New Employee Benefit

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Some of the most progressive companies are introducing a new employee benefit: company-paid financial guidance.

Concerned about their employees’ retirement funds, and acknowledging the increasing scarcity of skilled employees, companies are looking for a benefit that is relatively inexpensive while making a big difference in employee satisfaction.

Financial insecurity troubles most people, from the entry-level employee to the highly compensated professional. Half of U.S. households are at risk of being unable to maintain their standard of living in retirement, according to one study. For most people, financial stress is a distraction from work and leads to lower productivity.

Money is the single largest source of stress for employees, ahead of work, relationships or health.
Employers are concerned about the impact employees’ financial problems are creating problems at work. Here’s what employers say they are most concerned about:
• Lack of retirement readiness 16%
• Paying down debt 15%
• Lack of emergency savings 13%
• Other 3%

Without professional guidance, most people take a seat-of-the pants approach. But that leaves them and their families wondering how they will survive the decades that they will spend after leaving the work force.

Many companies offer a retirement program, like a 401k, but are ill-equipped to do more than provide a menu of investment choices. To fill the information gap, more companies are offering financial-wellness programs. Others are considering such a move.

A program offered by Korving & Co. is a series of programs, provided by a CFP® (Certified Financial Planner™) professional. These are designed to educate participants about debt, investing, and retirement income planning.

Providing employees with professional education about these issues, on company time, in a relaxed setting is an economical way for companies to help their employees reduce stress. It also creates a great deal of good will and loyalty on the part of employees.

Written Retirement Plans Double Your Chance of Success

A study by the Charles Schwab brokerage firm found that people with a written retirement plan are 60 percent more likely to increase their 401(k) contributions and twice as likely than others to stick to a monthly savings goal. But only 24 percent of Americans have a financial plan in writing, according to the study. Those with a plan are also more likely to have a budget and an emergency fund.

Call us for a customized written retirement plan just for you.

Saving and Retirement

The Center for Retirement Research (CRR) at Boston College, found that 52 percent of working-age U.S. households are at risk of being unable to maintain their standard of living in retirement. Many recognize the possibility of a shortfall but 19 percent do not. Contributing factors include increased life expectancy, declining Social Security income replacement, and the shift from pensions to defined contribution savings plans. Older Americans are entering retirement carrying more debt. According to a paper by the Retirement Research Center at the University of Michigan, more Americans between ages 56 to 61 are carrying more debt than any time in recent history. Another retirement problem receiving increasing attention is the social isolation of retirees, which has been deemed a risk equal to or greater than major health problems such as obesity.

Studies about retirement savings plan contributions indicate a lack of participation by many American workers. A study by the PEW Charitable Trusts found that 25 percent of millennial adults participate in employer-sponsored defined contribution retirement plans versus 40 percent of Generation X and 43 percent of baby boomers. Stated another way, a large majority of millennials have no retirement savings plan.

If you are concerned about having the money to retire, call us.

Protecting and Growing Wealth when Nearing Retirement

This was a question asked by a visitor to Investopedia.
Several other advisors responded.  Here’s my contribution to the discussion.
 

You have gotten some good advice from the others who have responded.  The only advice I would add to theirs is that the years just prior to retirement and the first few years of retirement are the most critical years for you.  These are the years when significant investment losses have the biggest impact on your retirement assets.

That’s because of something referred to as “sequence of returns.”  “Sequence of returns” refers to the fact that market returns are never the same from year to year.  For example, here are the returns for the S&P 500 from 2000 to 2010.  That was a dangerous decade for retirees.

2000 -9.1%
2001 -11.9%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%
2006 15.8%
2007 5.5%
2008 -37.0%
2009 26.5%
2010 15.1%

When you are accumulating assets, the sequence of returns has no impact on the amount of money you end up with.  But when you are taking money out, the sequence becomes very important.  That’s because taking money out of an account exaggerates the effect of a market decline.

If you retired in the year 2000 with $100,000 and took out 4% ($4000) to live on each year, by 2010 your account would have shrunk to about $66,200 and, if you continued to withdraw the same amount each year you would now be taking out 6%.  If you have another 30 years in retirement, that rate of withdrawal may not be sustainable.

For that reason, most financial advisors recommend creating a portfolio that can cushion the effect of poor market performance near your retirement date.

How to Avoid Fumbling Your Retirement Money

NFL football player Marion Henry retired from football at age 28.  Professional athletes usually begin a second career after they give up the game, most because they have to.  Here’s his admission:

Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.
I was one of them.
Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.

 

He goes on to make the point that:

When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.

 

People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, nor have they considered the effects of inflation on the cost of living as they get older.  They also assume that their investments will continue to grow at the same rate as they have in the past.  And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.

A good retirement planning program will take these issues into consideration.   Visit an independent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.

Retirement Planning 101

An Investopedia reader from Indiana asks this question:

 I have $1,000,000 in my 401(k) and am 48 years old. My wife and I have a $550,000 house paid off with no debt. We have $200,000 in CD’s and cash. I have a pension that assures I will receive $1,200 per month for life. Currently, I maxed out on my 401(k). We save $35,000 per year on top of both of our 401(k)’s. My wife is 50 and she also maxed out her 401(k), but plans to retire at 52. My question is when can I or should I retire? 

Here’s my answer:

That is a great question.  Congratulations on having accumulated much more savings than most people your age.  To answer your question I would have to know a great deal more about you.   For example:

  • How much does it take you to live the lifestyle you would like in retirement?
  • How long will you and your wife live?
  • How do you plan to pay for medical expenses?
  • When will you and your wife apply for Social Security benefits and how much will those be?
  • What is your estimate for inflation as it affects the cost of living?
  • Is your pension fixed or indexed for inflation?
  • How will you invest your savings?
  • Can you live in your pension and savings until you are 59 ½ and begin drawing on your 401(k) without a penalty?

These are just a few of the questions that need answering.

A million dollars is quite a bit of money.  At your age your life expectancy is 36 years.  Using the inflation rate (2.9%) for the past 36 years, something that costs $1.00 today will take $2.80 by the end of you actuarial life.

There are a lot of factors that need to be considered before you can get a good answer to your question.  I would strongly recommend that you sit down with a financial planner who will provide you with a realistic retirement projection.  The last thing you want to do once you retire is to find out that you have to go back to work to make ends meet.

If you are thinking about retiring, doing some serious planning is an absolute must, especially if you plan to retire early.  Call us for an appointment.

Beware the Quirks of the TSP in retirement

The TSP (Thrift Savings Plan) is a retirement savings and investment plan for Federal employees. It offers the kind of retirement plan that private corporations offer with 401(k) plans.

Here is a little information about he investment options in the TSP.

The TSP funds are not the typical mutual fund even though the C, F, I, and S index funds are similar to mutual fund offerings.
The C Fund is designed to match the performance of the S&P 500
The F Fund’s investment objective is to match the performance of the Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.
The I Fund’s investment objective is to match the performance of the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index.
The Small Cap S Fund’s objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.
The G Fund is invested in nonmarketable U.S. Treasury securities that are guaranteed by the U.S. Government and the G Fund will not lose money.

One advantage of the TSP is that the expenses of the funds are very low.  However, if you plan to keep your money in the TSP after you retire you need to understand your options because there are traps for the unwary.

The irrevocable annuity option.  

This option provides you with a monthly income.  You can choose an income for yourself or a beneficiary – such as your spouse – that lasts your lifetime or the lifetime of the beneficiary.  The payments stop at death.  Once your annuity starts, you cannot change your mind.

Limited withdrawal options. 

You can’t take money out of your TSP whenever you want.  When it comes to taking money out you have two options.

  1. One time only partial withdrawal. You have a one-time chance to take a specific dollar amount from your account before taking a full withdrawal.
  2. Full withdrawal.   You can choose between a combination of lump-sum, monthly payments or a Met-Life annuity.

Limited Monthly Payment Changes

If you take monthly payments from your TSP as part of your full withdrawal option you can change the amount you receive once a year, during the “annual change period” but it takes effect the next calendar year.  If you choose this option, make sure that you know how much you will need for the coming year.

Proportionate distribution of funds

When you take money out of your TSP you have no choice over which fund is liquidated to meet your income needs.  It comes out in proportion to which your money is invested.  This means you can’t manage your TSP and decide which of the funds you will access to get your distribution.

If you want to give yourself greater flexibility once you retire you have the option of rolling the TSP assets into a rollover IRA without incurring any income tax.

 

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