Financial Planning with Your Retirement Plan – Support Charities and Lower Your Taxable Estate

Authored by George Paulsen, Tax Partner

For older adults with a taxable estate (assets over $22 million), consider giving IRA donations rather than appreciated property. You will lower your taxable estate, reduce Required Minimum Distributions (RMD) and reduce income taxes for your heirs, while giving them more appreciated assets that they can sell without income tax. Read more about this strategy:

In late 2019 Congress passed the Secure Act, which raised the age to 72 from 70 1/2 for required minimum distributions from IRAs and pension plans. In March, Congress passed the CARES Act to allow people older than 70 1/2 to defer RMD for this year. If you don’t need the money, you can leave it and let it grow in the plan. This change opens up opportunities for older adults with some flexibility.

The smart reason to not take a 2020 distribution is that your Adjusted Gross Income (AGI) will decrease. This means your estimated tax payments can be lower this year. First if your Medicare part B or D premiums are near a threshold, you may get a reduction in your Medicare payments in 2021. This can also lower the 3.8% surtax on investment income. It also lowers the all-important AGI number which is used to calculate medical deduction thresholds and other potential deductions.

Many of my individual clients who are retired now use the standard deduction as tax deductions were limited to $10,000 when the Tax Cuts and Jobs Act went into effect. I have advised clients to use Qualified Charitable Deductions (QCDs) from RMD IRA withdrawals. This year, clients don’t have to take the withdrawal, so what should they do? Consider doubling up next year. If you normally have an RMD of $50,000 and donate $10,000 to charity using the QCD, then skip the RMD this year and early next year have the IRA donate $20,000. Then, instead of $40,000 of new taxable income, you will report $30,000 and step back up slower with the tax benefit of the deduction.

There is an interesting quirk in the law change. When they raised the age for RMDs to 72, they left the $100,000 QCD age at 70 1/2. So, if you are 71 and want to give $10,000 to charity, use the QCD to lower your IRA base for future RMD calculations. You can’t donate these to donor-advised funds, but you can always donate appreciated stock to gain a similar result. However, if you keep the stock and leave it to your spouse or children, there is a step-up in basis and no tax if they sell at that time. Your IRA will be taxed eventually to your children as income at their rates even if there is no estate tax. Also, the Secure Act removed the popular “Stretch IRA,” which allowed your heirs to stretch the withdrawals over their lifetime – they now have to take it out over 10 years. Spouses are the exception to this rule.

In Conclusion

The planning strategies outlined above are meant to help you maximize Roth contributions and use existing tax laws to your advantage. Please contact your Hood & Strong LLP tax advisor to help you with your plans.