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You Have Charitable Options for Your Required Retirement-Plan Distributions

Posted October 2016

For those of you who are at least 70½—and beginning this year there are more and more of you—you have reached the age at which required minimum distributions (RMD) must be taken from your IRA and 401(k).

These distributions are generally fully taxable at ordinary-income tax rates—and while many individuals will need income from their retirement accounts for living expenses, you may be among those who wish you could avoid paying tax on income you are required to take but don’t necessarily need at the present time. Fortunately, for those of you who are philanthropically minded, there are several options available to reduce or even eliminate federal income taxes on your RMD.

Swelling the ranks of those subject to RMD

In 1946 more babies were born (3.4 million) in this country than ever before. The baby boom was under way, and by the end of 1964 Baby Boomers accounted for almost 40 percent of the population. This is the year that the first of those Baby Boomers turn 70½—and must begin taking required minimum distributions for each year.

It’s significant to note that this generation was the first to truly benefit from the introduction of individual retirement accounts (IRAs) in 1974 and 401(k)s in 1978. Today it is estimated that there is more than $14 trillion in IRAs and 401(k)s.

Option 1: IRA charitable rollover

The popular IRA charitable rollover at long last was permanently enacted into law in 2015. The rollover allows individuals aged 70½ (the same age at which RMDs must be taken) to directly transfer up to $100,000 in cash from their IRAs to charity without having the transfers included in gross income. Consequently, transfers are not subject to federal income tax and will also qualify for RMD treatment.

Option 2: Charitable remainder unitrust

If you feel you may need additional income in the future and don’t wish to make an outright gift, a contribution to a new or existing charitable remainder trust can provide tax benefits, a future stream of income, and a charitable gift. The trust can be set up so that it pays little or no income initially but then pays you a fixed percentage of the trust’s annual value at some future date. And while the charitable deduction allowed for the unitrust contribution will not completely offset the tax on the RMD amount (e.g., a 71-year-old could deduct approximately 54 percent of the contribution), it does result in considerable tax savings—and the contribution can continue to grow tax-free in the unitrust.

Exploring charitable options for your RMD with your financial advisors and a member of our staff could point the way to increased financial security for you and your family as well as future support for us and other charitable organizations that are important to you.

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