Ever since 2006, individuals age 70½ or older have been able to transfer up to $100,000 annually from their IRAs to qualified charities. These transfers are referred to as qualified charitable distributions (QCDs), and here is how this provision, if utilized, plays out on a tax return:
(1) The IRA distribution is excluded from income;
(2) The distribution counts toward the taxpayer’s required minimum distribution (RMD) for the year; and
(3) The distribution does NOT count as a charitable contribution.
At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer with itemized deductions lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as for medical expenses, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.
If you are suddenly in need of a substantial amount of cash, probably the last thing you should do is tap your retirement funds. They are the key to a financially comfortable retirement. The younger you are, the less likely you are to think about saving for retirement, but you certainly don’t want to end up living off of only Social Security. However, there are times when there might not be any other alternative than dipping into your 401(k), IRA or other retirement plan. In that case, you have to be concerned not only with any tax liability, but also early withdrawal penalties if the funds are withdrawn before reaching age 59 1/2 Plus, some distributions may only be partially taxable and some not taxable at all, while others are fully taxable.
Like everything in the U.S. tax code, the rules relating to pension or other retirement plan distributions are complicated and governed by a variety of provisions. This article describes these various rules so you can see how they would apply to a withdrawal you might be contemplating.
The Social Security Administration (SSA) recently announced the inflation-adjusted increase in benefits for 2019. SSA’s announcement states that Social Security beneficiaries should expect a cost-of-living increase of 2.8%. However, the same announcement says that for those who are retired at full retirement age, the maximum monthly benefit will go from $2,788 to $2,861, a 2.62% increase of $73 a month. Either 2.62% or 2.8% isn’t much in the overall scope of things, considering part of that increase goes to pay for Medicare premiums and copays for medication. Those retired with only Social Security income struggle just to survive month to month.
This should be a wakeup call for still-working individuals who are living (and spending) for the moment and have no, or minimal, retirement plans or retirement savings. It’s almost imperative that individuals include contributions into retirement savings in their budgets, in one form or another, or the inevitable golden years won’t be so golden.
If you have an IRA account or are considering one, there are a number of potential missteps you will want to avoid. Some of them can lead to unwanted taxes and penalties, and of course, we are talking about your retirement funding, so it is an important issue. Here are a number of issues to keep in mind:
The individual retirement account (IRA) is one of the favored ways to save money for retirement. There are two types of IRAs: the traditional IRA and the Roth IRA. The annual maximum that an individual can be contributing between the two types of IRAs is $5,500, unless the individual is 50 years of age or older, and then the maximum is increased to $6,500. The basic contribution amount is inflation adjusted annually and the amount quoted is for 2017, while the additional amount for those 50 and older is fixed at $1,000. Contributions to an IRA may or may not be tax deductible depending on the type of IRA and, in some cases, the amount of the taxpayer’s income for the contribution year and whether the taxpayer participates in an employer’s retirement plan.
When you convert a traditional IRA to a Roth IRA, you have to pay the tax on the conversion. However, individuals frequently do that this so they can take advantage of future tax-free accumulations. Distributions from Roth IRAs are generally tax free, including any earnings (accumulations) while the account is a Roth account.
Are you considering converting your traditional IRA to a Roth IRA in 2017? Are you hesitant to do so because of uncertainty about the timing and specifics of the Administration’s and Congress’ proposal to cut tax rates for individuals? Have no fear, because you can convert your traditional IRA to a Roth IRA this year, and if tax reform passes with lower tax rates effective next year, you can undo the conversion for 2017 and then re-convert for 2018.
Some retirees are faced with mounting debt and inadequate income. What options do these seniors have, especially if they have a mortgage on their home and their retirement income is too low to cover the mortgage payments and have enough left over to have some enjoyment in their golden years?
One option that you see promoted on television is the “reverse mortgage,” which allows a homeowner to borrow against the equity they have built up in their home over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the heirs can pay off the debt by selling the house, and any remaining equity goes to them. If at that time the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home’s worth.
If you have questions about reverse mortgages and the mortgage interest deduction, please give us a call.
If you are looking for cash for a specific purpose, your retirement savings may be a tempting source. However, if you are under age 59½ and plan to withdraw money from a traditional IRA or qualified retirement account, you will likely pay both income tax and a 10% early-distribution tax (also referred to as a penalty) on any previously untaxed money that you take out. Withdrawals you make from a SIMPLE IRA before age 59½ and those you make during the 2-year rollover restriction period after establishing the SIMPLE IRA may be subject to a 25% additional early-distribution tax instead of the normal 10%. The 2-year period is measured from the first day that contributions are deposited. These penalties are just what you’d pay on your federal return; your state may also charge an early-withdrawal penalty in addition to the regular state income tax.
Thus, before making any withdrawals from an IRA or other retirement plan, including a 401(k) plan, a 403(b) tax-sheltered annuity plan, or a self-employed retirement plan, carefully consider the resulting decrease in retirement savings and increase in taxes and penalties.
If you are one of the boomer generation, and if you find that your required minimum distributions (RMDs) from qualified plans and IRAs are providing unneeded income (along with a high tax bill), or if you are afraid that the government’s RMD requirements will leave too little in your retirement plan for your later years, you can use a qualified longevity annuity contract (QLAC) to reduce your RMDs and extend the life of your retirement distributions.
Taxpayers can take a distribution from an IRA or other qualified retirement plan and if they roll it over (put it back) within 60 days they can avoid taxation on the distributed amount. (This provision does not apply to required minimum distributions for taxpayers who are 70.5 years of age and over.) In addition, taxpayers are limited to one IRA-to-IRA rollover per year.