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.
TTFN
