Financial & Wealth Services News

:: George G. Elkin, Managing Director, Financial & Wealth Services
631.923-1595 ext. 336
G. R. Reid Wealth Management Services, LLC  

 What Is the Most Tax-Efficient Way to Take a Distribution from a Retirement Plan?
 
If you receive a distribution from a qualified retirement plan, such as a 401(k), you need to consider whether to pay taxes now or to roll over the account to another tax-deferred plan. A correctly implemented rollover can avoid current taxes and allow the funds to continue accumulating tax deferred.
 
Paying Current Taxes with a Lump-Sum Distribution
 
If you decide to take a lump-sum distribution, income taxes are due on the total amount of the distribution and are due in the year in which you cash out. Employers are required to withhold 20 percent automatically from the check and apply it toward federal income taxes, so you will receive only 80 percent of your total vested value in the plan.
 
The advantage of a lump-sum distribution is that you can spend or invest the balance as you wish. The problem with this approach is parting with all those tax dollars. Income taxes on the total distribution are taxed at your marginal income tax rate. If the distribution is large, it could easily move you into a higher tax bracket. Distributions taken prior to age 59½ are subject to an additional 10% federal income tax penalty.
 

If you were born prior to 1936, there are two special options that can help reduce your tax burden on a lump sum.

 
The first special option, 10-year averaging, enables you to treat the distribution as if it were received in equal installments over a 10-year period. You then calculate your tax liability using the 1986 tax tables for a single filer.
 
The second option, capital gains tax treatment, allows you to have the pre-1974 portion of your distribution taxed at a flat rate of 20 percent. The balance can be taxed under 10-year averaging, if you qualify.
 
To qualify for either of these special options, you must have participated in the retirement plan for at least five years and you must be receiving a total distribution of your retirement account.
 
Note that these special tax treatments are one-time propositions for those born prior to 1936. Once you elect to use a special option, future distributions will be subject to ordinary income taxes.
 
 
Deferring Taxes with a Rollover
 
If you don’t qualify for the above options or don’t want to pay current taxes on your lump-sum distribution, you can roll the money into a traditional IRA.
 
If instead you choose a rollover from a tax-deferred plan to a Roth IRA, you must pay income taxes on the total amount converted in that tax year. However, future withdrawals of earnings from a Roth IRA are free of federal income tax as long as the account has been held for at least five tax years.
 
If you elect to use an IRA rollover, you can avoid potential tax and penalty problems by electing a direct trustee-to-trustee transfer; in other words, the money never passes through your hands. IRA rollovers must be completed within 60 days of the distribution to avoid current taxes and penalties.
 
An IRA rollover allows your retirement nest egg to continue compounding tax deferred. Remember that you must begin taking annual required minimum distributions (RMDs) from tax-deferred retirement plans after you turn 70½ (the first distribution must be taken no later than April 1 of the year after the year in which you reach age 70½). Failure to take RMDs subjects the funds that should have been withdrawn to a 50 percent federal income tax penalty.  
 
Of course, there is also the possibility that you may be able to keep the funds with your former employer, if allowed by your plan.
 
Before you decide which method to take for distributions from a qualified retirement plan, it would be prudent to consult with a professional tax advisor. 


Visit our website:  G.R. Reid Wealth Management Services, LLC


George Elkin is a Registered Representative offering Securities through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory products/services are offered through American Portfolios Advisors Inc., an SEC Registered Investment Advisor. G.R. Reid Consulting Services, LLC  is not a registered investment advisor and is independent of American Portfolios Financial Services Inc. and American Portfolios Advisors Inc. Unless specifically stated otherwise, the written advice in this memorandum or its attachments is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Information is time sensitive, educational in nature, and not intended as investment advice or solicitation of any security.

This material was written and prepared by Emerald.

Accounting & Tax News

G.R. Reid Associates, LLP
631.425.1800

Charitable Deductions – More Than One Benefit



Charitable giving is not only a rewarding experience, but also an excellent tax tool to reap benefits when it comes to filing income tax returns. Highlighted below are the main areas to consider when planning for charitable giving.

Cash Donations
Donations under $250 given by cash, check, credit card or payroll deduction are fully deductible as charitable contributions and can be simply supported by a canceled check, credit card receipt or written communication from the charity. Taxpayers do not attach this documentation to their return, rather it is kept in their records.

A donation in an amount more than $250 must be substantiated by the charity in writing. This letter will indicate the total amount of the donation, date donated, and the value of the donation. When donating to an event, such as a dinner, gala, golf outing or other function held for charity, the value of what you received (i.e. tickets to the event or meals and drinks provided at the event) will be deducted from the total amount donated to arrive at the value of the deduction that may be taken on your income tax return. For example, if you donate $1,000 to a charity golf outing but upon attending the outing you eat a meal worth $50 and the ticket price to the event would have cost you $100, your charitable deduction is actually $850 instead of $1,000. If instead you donate $1,000 but do not attend the outing, the full $1,000 is deductible on your return.

Donations in excess of $5,000 require a qualified appraisal in order to be deductible. Those in excess of $500,000 require that the qualified appraisal be attached to the return.

Please note that cash contributions are limited to 50% of your adjusted gross income when giving to public charities. Donations to non-operating private foundations are limited to 30% of your adjusted gross income. These amounts can also be altered if you are in AMT (subject to Alternative Minimum Tax). Consult your tax advisor to be sure that your donations are in your best tax planning interests. Donations that exceed these limits may be carried forward for five years (for individuals), but will be lost after that time.

Property Donations
Donations of property, such as stock or securities, are another excellent way to give to charity. Property held long-term (longer than one year) is deductible as a donation at its current fair market value, thus by giving the property away you avoid paying the capital gains tax that you would have incurred if the property was sold. These donations are limited to 30% of adjusted gross income if given to public charities and 20% if given to non-operating private foundations. There are some limitations regarding basis in making property donations so please consult your tax advisor when considering such donations. Generally speaking, you should not donate property that has a fair market value less than your basis as this is technically a loss to you. In this scenario you should sell the stock and deduct the loss since only the lesser of fair market value or basis is deductible. You may then donate the proceeds to a charitable cause.

Another consideration in donating property is that donations of tangible personal property are limited to basis in the property, unless the property is directly related to the charity’s tax-exempt function in which case you may deduct the fair market value. Donation of services are not deductible as charitable contributions, although you may deduct mileage and out-of-pocket expenses related to the donation.

A donation of a car or truck cannot be deducted unless the charity is specifically using the vehicle. The amount that might be deductible in this case is the total that the charity receives after selling the vehicle.

Other Considerations
Taxpayers over the age of 70 ½ can donate directly from IRA funds to charitable organizations. This can help satisfy minimum distribution requirements and the portion that would not otherwise have been taxable may be a deduction. This is an excellent planning tool in that the charitable amount will be excluded from your adjusted gross income and thus save taxes in addition to the charitable deduction.

Donations of clothing to charity must be in at least “good condition” to be deductible. Clothing and similar household goods donated must be measured by standards provided by the charitable organization.

Charitable remainder trusts are another option for charitable giving (also known as CRTs). CRTs are tax exempt. This type of investment benefits both the taxpayer and the charity in that it pays an amount (that will be taxable to you) to you each year and at the end of its term distributes remaining assets to charities. When funding the CRT, the donor receives a current year deduction for the present value of the assets designated to charity. This is also practical in estate tax planning as the funds placed into the CRT are removed from the estate.

Charitable lead trusts help benefit charity while transferring assets to loved ones. Also known as a CLT, the trust pays amounts to charities over time and at the end of its term its remaining assets pass on to the beneficiaries of the trust. In funding the CLT, donors make a taxable gift equal to the present value of the amount that will be distributed to beneficiaries. Again, this is also an estate tax planning technique as these funds are removed from the estate.

When donating please confirm that the charity is a qualified charitable organization.

Please visit the G.R. Reid website for contact information or to arrange a consultation.