Wednesday, December 2, 2020


A married couple who is a few months from retirement, long-time friends and 1040 clients, recently met with a new Financial Advisor and emailed me for my advice on issues that had been discussed.  Here are the issues they identified and my responses.
1) Donor Advised Funds – Earmark an amount for immediate income tax deduction and donate to our usual 501C3 organizations with payments out of this fund.
Answer:  This is a good tax planning option when you are unable to itemize but relatively “close to the edge”.  It will allow you to perhaps itemize every other year.  Remember that the tax benefit of any charitable contribution is based on the extent your total itemized deductions exceeds the Standard Deduction amount for your filing status.  See here for an explanation of Donor Advised Funds -FYI, you can also contribute stock to a Donor Advised Fund (see answer to Question #2).
2) Donating Stock – Take current stock holdings and donate to charitable organizations for a tax write off.
Answer: This is also a good option, providing a tax benefit if you can itemize.  However, even if you cannot itemize this option does save capital gains taxes.  See here for an explanation of the rules for donating stock to a charity
3) IRA Beneficiary – We were told that money passed to beneficiary from an IRA is now made taxed over 10 years.
Answer:  Thanks to the SECURE Act, starting in 2020, for IRAs passing to a “non-spouse” beneficiary, the entire amount of the account balance must be distributed to the beneficiary (or beneficiaries) by the end of the 10th year following the year after the account owner’s passing.  There are 3 exceptions –
* the beneficiary is a minor child of the account owner,
* the beneficiary is not more than 10 years younger than the account owner, or
* the beneficiary is disabled or chronically ill as defined by the Internal Revenue Code
See the topic “Definition of Disabled or Chronically Ill” here.
4) ROTH IRA Our Financial Advisor suggested we begin converting IRA money from our current Standard IRA accounts into Roth IRAs. 
Answer:  The amount you convert will be taxed in the year of the conversion, except for any recapture of “basis” (non-deductible contributions).  Converting a portion of traditional IRAs to a ROTH annually over a period of years is a good idea, with the goal of keeping the annual cost of the conversion within a low marginal tax bracket.
5) 401(k) Beneficiary – The Advisor also suggested listing beneficiaries on our 401(k) accounts because this has nothing to do with the will and takes the process outside of probate.
Answer:  The named beneficiary or beneficiaries on a 401(k), IRA, or other retirement savings account automatically gets the money in the account directly from the account trustee on your passing.  It has nothing to do with your will or probate.  It is a good idea to name beneficiaries on your retirement savings accounts, and review the beneficiary designations every few years. 
6) Savings Bonds – We recently reviewed our inventory of US Savings Bonds and the interest was quite high.  We would appreciate your thoughts on liquidating bonds based on most recent purchases vs older bond purchases to reduce taxes.
Answer:  The first consideration in choosing which bonds to cash-in first is whether or not the bonds are still accruing interest.  As with the ROTH conversions, the liquidation of bonds still earning interest can be done over a period of years, cashing in older bonds first and keeping the interest reported each year within a low marginal tax bracket.  FYI, savings bond interest is never taxed on the state return. 

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