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%).

Don’t Sweat the Market Drop

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:

  • Consider total gains, not just how much shares have lost since their high.  Unless you purchased all your stock on September 19, 2014, when the Dow reached an all-time high of 17414.44, most of your shares are probably still in the black.

  • Take a deep breath and wait.  Market swings are not unusual.  If you give in to crowd mentality and sell on a dip, you’ll miss out when the shares start climbing again and may pay more when you get back into the market.

  • Unless your shares are all in tax-sheltered accounts like IRAs and 401(k)s, there may be capital gains tax to pay.  If you bought stock at $10 per share, watched it climb to $50 per share, but sold when it dropped to $40, you’ll owe capital gains tax on a $30 per share profit.  Even if you only pay capital gains at a 15% rate, that’s still $4.50 per share that you’ll lose to the IRS.   If stock prices fall below your purchase price, you might consider selling some shares that are not in tax-sheltered accounts in order to offset other gains or ordinary income.  Another option: sell loss stock to secure a capital loss deduction, then contribute the proceeds to charity and get a charitable deduction.

  • Take a long-term view.  Ask your financial adviser to review your portfolio to see that your investments are still in balance.  Keep in mind that some stocks, even if they decline in value, nevertheless pay attractive dividends, which contributes to your total return.

Wealth Transfer Tsunami Ahead?

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?

  • Although an inheritance is generally income tax free, there may be income taxes to pay on certain assets such as qualified retirement accounts, U.S. savings bonds and other assets that have never been subject to tax.  Taxes reduce the value of the inheritance and may push heirs into higher income tax brackets, resulting in more taxes owed on other income.

  • Heirs may need to review their own estate plans.  An inheritance may push the recipient’s gross estate beyond the $5.34 million that is sheltered from estate tax (2014 amount).

  • An investment portfolio may be thrown out of balance with the addition of new assets.  Thanks to the step-up in basis at death, heirs can sell securities and other assets without worrying about capital gains tax on the appreciation.  It’s a good idea for a financial adviser to review the investments after an heir receives an inheritance.  An increase in net worth may mean larger income tax bills in future years.


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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.