When to Take Distributions?
Withdrawals from IRAs and 401(k) accounts prior to age 59½ generally will be subject to both income tax – at ordinary income rates – and a 10% penalty. After age 59½, the penalty no longer applies, although income tax will still be owed (except for qualified withdrawals from Roth IRAs). At age 70½, required minimum distributions must begin from traditional IRAs and most 401(k) accounts. Failure to take required withdrawals can result in a 50% penalty. While many people postpone withdrawals as long as possible to avoid the income tax, there may be instances where taking a little now can avoid taking a lot later.
Taking withdrawals prior to age 70½ doesn’t mean that you have to spend the money. The distribution can be invested in a brokerage account, where it can continue to grow. If and when assets are sold in the brokerage account, there may be favorably taxed capital gains on any growth (generally 15% or 20%, although taxpayers in the 10% and 15% income tax brackets will pay zero capital gains tax). Assets remaining in the brokerage account at death receive a stepped-up basis, allowing those who inherit to sell with no capital gains tax. An IRA or 401(k), on the other hand, is subject to income tax when withdrawals are made after the owner’s death.
If you’re already over age 70½ and subject to required minimum distributions, ask your financial adviser whether you should make your gifts to charity directly from your IRA this year. Although the law allowing tax-free distributions up to $100,000 to charity expired at the end of 2013, it may be renewed prior to year’s end.
Motivations for Giving
Why do you make gifts to charity? According to the 2014 U.S. Trust® Study of High Net Worth Philanthropy, the overwhelming percentage of respondents said it was because they believe that their gifts can make a difference (73.5%) or for personal satisfaction (73.1%). The study asked high net worth donors – defined as those with household incomes greater than $200,000 annually or net worth of more than $1 million (excluding the value of their homes) – a variety of questions on their giving habits.
Not all gifts come from donors who are high net worth, of course. In fact, many generous individuals fall below those thresholds. But the motivation is probably the same for most donors. Not surprisingly, only about one-third (34.4%) listed tax benefits as a motivation. While income tax charitable deductions are available for gifts to charity, millions of people who don’t itemize their deductions – and who therefore receive no tax benefit – give to charity every year.
High net worth individuals, like many other donors, give primarily by cash or check (78.8%), although 20.7% report that they have or plan to make gifts of stock or mutual fund shares. Nearly half of respondents report that they either currently have a will with charitable provisions (36.8%) or plan to establish one within the next three years (6.6%).
The stock market went for a wild ride last month, but that’s not a signal to start panicking. When stocks are on a roller coaster, there are certain things not to do:
A recent report by the Center on Wealth and Philanthropy at Boston College estimates that $59 trillion will be transferred from estates by 2061. Part of this will pass from the Baby Boom generation – those born between 1946 and 1964 – to Gen Xers (born between 1965 and 1982) and Millennials (born from the early 1980s to the early 2000s). This figure includes not only amounts that will pass to heirs and charity, but also amounts that will be paid in estate costs and estate taxes.
What are some of the issues facing heirs in the coming years?
The materials contained on this website are intended only to show some ways by which you can make a charitable gift or bequest and thereby minimize federal tax liabilities, as authorized by the Internal Revenue Code. All examples are of a general nature only and should not be applied to your specific situation without first consulting your attorney or other advisers.