Good News…The American Taxpayer Relief Act (ATRA) has been passed allowing tax-free distributions from individual retirement accounts to public charities by individuals age 70 ½ or older, up to a maximum of $100,000 per taxpayer each year. The provision actually allows QDC’s for both tax years 2012 & 2013, unfortunately the Congress wisely waited until January 2013 finally pass the act.
As expected, in January 2013 Congress finally renewed the special tax break for charitable IRA rollovers known as “qualified charitable distributions” (QCDs). QCDs apply only to IRA owners and beneficiaries aged 70 ½ or older who make a direct transfer to a qualifying charity from their IRA. The transfer can satisfy the annual required minimum distribution (RMD) without the distribution being included as income to the taxpayer. QCDs are limited to $100,000 per year, per person.
Finally, have your cake and eat it too. There is a silver lining to all of this stuff. If you are older than 70 ½, have an IRA and support your church or charity, you can do it all and typically save taxes.
Example: (Young widow), Maggie, age 76, with total income of $39,700 – consisting of Social Security $21,600, Pensions and Interest of $ 10,500, IRA $7,600. On 12/31/2012, the balance in her IRA was $96,000. Her RMD (Required Minimum Distribution) is $7,559, which is 7.9% of her account balance.
Maggie’s church community is very important to her. She gladly tithes $500 each month to her church. After paying all of her monthly expenses including her gifts to the church, she has about $450 surplus. She refers to it as her special money.
Solution – Our Maggie asked to have her annual tithe commitment ($6,000) directly transferred from her IRA to her church. This is called a Qualified Charitable Distribution. It is important to remember the transfer must be made directly from her IRA Trustee to her selected charity.
Reward – Maggie will reduce her 2013 Federal Income Tax by about 27%. That tax saving is about $900. That is her money and she gets to use as she wishes, which… knowing her, she will gift to her grandchildren.
If you are charitably inclined – this is important. Thanks to many of the provisions in The American Taxpayer Relief Act (ATRA), such as ordinary income tax rate increases and phase-outs of itemized deductions and personal exemptions, our federal taxes will be increasing. The tax savings of the QCD will be even more valuable to charitably inclined tax wise in 2013. Unless revised, QCD’s will not be available after 2013.
One must coordinate the distributions between the current IRA Trustee and the selected charity. IRS rules are complex - especially when it comes to retirement plans and RMDs. It’s important to retain the services of a competent tax or retirement planning professional.
A Refresher on the RMD
If you turned 70 last year, or will turn 70 this year, and you have a traditional IRA, 401(k), Simplified employee pension plan (SEP), or SIMPLE IRA, you need to understand the IRS’s rules for required minimum distributions, or RMDs.
In a nutshell, if you have been deferring taxes on your money all this time, the IRS is shortly going to force you to start taking money out of your retirement plans - and taxing your ordinary income on the distribution. For the remainder of this article, the rules mentioned as applying to IRAs will apply to the other types of accounts, too, except as otherwise noted.
When you must take RMDs
The IRS requires that you begin drawing down your retirement plans by April 1 of the year after the year in which you turn age 70½.
The IRS, however, makes an exception to the rule for workplace-defined contribution plans such as a 401(k), if all of the following apply:
• You do not need to take them if you are still in the work force and have not retired
• You are still participating in your employer’s retirement plan
• You don’t own more than 5 percent of your employer’s company.
If you have a 401(k) and a traditional IRA, note that it is possible, under this rule, to have RMDs due from the IRA but not from the 401(k).
In subsequent years, though, after the year in which you begin to take your RMDs, you don’t have to take them by April 1. Instead, you can take them at any time during the calendar year.
For accounts not subject to RMDs
You do not have to take RMDs on Roth IRAs, designated Roth Accounts in retirement plans, assets not held within a traditional IRA, SEP, SIMPLE or other tax-deferred, qualified plan. You may have to take them, however, if you contribute to a Section 457 plan.
You do not have to take RMDs on cash value in permanent life insurance policies, such as whole life or universal life policies.
Rules for Multiple Plans
You must take the required RMD from each of your employer retirement plans. Each RMD is calculated separately, and you must take something from each account subject to RMD rules if the RMD requirement applies in your situation.
For IRAs, however, you can add up the total balances from all your IRAs and then draw them down in whatever order or combination you see fit.
There are special rules for surviving spouses and beneficiaries of retirement accounts. Spouses who are the sole designated beneficiary can choose from among the following options:
• Treat your late spouse’s IRA as your own,
• Base RMDs on your own current age,
• Base RMDs on your late spouse’s age at death, reducing the distribution period by one each year, or
• Withdraw the entire account balance by the end of the fifth year following the account owner’s death, if the account owner died before the required beginning date.
If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70½ to begin receiving RMDs. This rule prevents widows and widowers from being penalized by the death of a spouse.
Special Rules for non-spouse beneficiaries
Individual beneficiaries other than a spouse have the following options:
You can withdraw the entire account balance by the end of the fifth year following the account owner’s death, if the account owner died before the required beginning date, or
• Calculate RMDs using the distribution period from the Single Life Table.
o If the owner died after RMDs began, the longer of the: beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year, or the owner’s remaining life expectancy at death, reduced by one for each subsequent year.
• If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.
The IRS has devised one of their most severe penalties in the entire tax code for the failure to take RMDs. Specifically, if you do not take your RMD for the year, the IRS will penalize you 50 percent of the amount you should have taken. If you believe you may have failed to take an RMD, you must file a Form 5329 with the IRS with payment.
IRS rules can be complicated and A SafeHarbor, LLC can help you navigate through the complexities of all the questions or additional information you may need. Should you have any questions or require additional information please email me at [email protected] or call my office at 407-644-6466. Please consider taking advantage of the Qualified Charitable Distribution opportunity!
Bob Adams is president of A SafeHarbor, a firm specializing in assisting families in having a calm retirement when faced with stormy financial waters. Visit aSa- feHarbor.com or call 407-644-6646 for more information.