A Tax-Optimized Strategy for RMDs
If you are age 70½ or older, and you have an IRA, 401(k) or other tax-deferred retirement account, government regulations require you to take out a minimum amount of that account each year.
ALL OF THE REQUIRED DISTRIBUTION IS TAXABLE, BUT HERE IS HOW YOU CAN AVOID PAYING TAXES ON ALL OR PART OF IT.
The tax law allows you to donate directly to a charity from your IRA (not from your 401k or 403B). If you usually make charitable contributions each year to a qualified charity, then you should call us to arrange to have those contributions made out of your IRA. If you do, then none of the charitable contributions that come directly out of your required minimum distribution (up to $100,000 per year) are considered taxable income! This is one of the great tax breaks that a retired person can get. Period.
It is very important to note that:
- These distributions must come directly out of your IRAand cannot be done out of your 401k or 403B. If appropriate, all or a part of the 401k and/or 403B can be converted to an IRA; and
- Wemust send the contribution for you, directly from the IRA. You cannot send the contribution to the charity and then get reimbursed, as the distribution from the IRA will be taxed in that case; and
- All you need to do is to provide to us with this information:
The name and address of the charity; and
The amount you wish to send; and
When you would like the contribution sent (monthly, quarterly, one-time).
We have many generous clients who are in retirement and take advantage of this wonderful tax break. If you don’t utilize it, then, frankly, you are missing out on one the best parts of the tax code. Please contact our office for further information and to get this set up.
They Are Only Gains if You Sell
One of the more difficult things to accept is that you have made wise investment choices, and then as a result may have to pay taxes on the capital gains when you sell those investments that have increased in value (note that this is NOT an issue if the investments are held in an IRA, 401k, or other retirement account). I agree. It’s not fair; but it is the tax code. I suggest that, instead of worrying about the taxes on the gains, you concentrate on the fact that you get to realize GAINS!
'Think of it this way: I have an account worth $400,000 with a gain of $100,000. If I have to pay, for example, 20% on my gains then I “lose” $20,000. However, if the investment declines in value by 20% and I haven’t sold, then I “lose” $80,000 (= $400,000 X .20). And if I have sold and taken the gains, I now have $380,000 with no taxes attached to invest into something else that may be more appropriate for my current needs and/or current market conditions.
This may be worth a discussion with us given the still strong US stock market.
by Ronald Donato, Jr., CFP®, MBA
Director of Financial Services