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Individual Retirement Accounts

It’s Back! The Tax-Free IRA Charitable Rollover

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Thanks to the Protecting Americans From Tax Hikes Act of 2015 (“PATH”), signed into law on December 18, 2015, Section 408(d)(8) of the Internal Revenue Code once again provides a $100,000 annual exclusion from gross income each year for qualified charitable distributions (QCDs) made directly from a traditional IRA by donors aged 72 or older.

Donate HereFurthermore, this IRA “charitable rollover” provision was made permanent (meaning it would take a vote of both Houses plus a presidential signature to change it), retroactive to January 1, 2015. This makes it much easier to plan for charitable rollover donations and make them without the year-end uncertainty that has plagued senior donors for the past several years.

IRAs Only

As in past years, distributions from 401Ks, 403Bs, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, you usually can roll assets from those plans into IRAs and then donate them if you begin the process early enough in the year.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds (such as those offered by Fidelity Charitable and Vanguard Charitable) and supporting organizations are not eligible recipients.

And, as in the past, distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Under a special and favorable IRS rule under the charitable rollover provisions, distributions from an IRA to charity are deemed to come first from the taxable portion of the IRA account, and then from any non-taxable portion. This is a distinct benefit to taxpayers who made non-deductible IRA contributions during their working years.

You May Not Receive Anything Of Value In Return

This rule can be harsh, so be careful. Any quid pro quo benefit or thing of value received by the donor in return for the charitable rollover distribution – even the value of a dinner, a sports ticket, or other seemingly trivial benefit, may disqualify the entire distribution, not just a portion equal to the benefit received, from QCD treatment.

Therefore, a careful donor will first advise the charity well in advance that: (1) a distribution will be made from an IRA account to the charity and that it is intended to constitute a qualified charitable distribution under IRC § 408(d); and (2) that no goods, services, or benefits of any kind are to be provided by the charity to the donor or any other person in consideration for the distribution. (Charities usually know this well, but it never hurts to remind them.) In addition, a wise donor will request in advance that the charity provide a letter to the donor acknowledging the amount of the distribution that it received and confirming that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in exchange for the distribution. If you don’t receive such a letter within days of making a QCD, you should remind the charity that you need one.

[Updated: December 16, 2021]

Your Estate Plan, Your Trusts, and Your Retirement Accounts

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You should read this excellent short column by financial writer Arden Dale of The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” on integrating IRAs, 401(k) plans, federal employee Thrift Savings Plan (TSP) accounts, and similar retirement savings accounts into estate and trust plans. The article deals primarily with choosing primary beneficiaries in a way that will minimize estate and income taxes. For most married retirement plan beneficiaries, that will mean choosing their spouses to receive the plan proceeds outright and free of trust, via a rollover after the first spouse’s death.Safeguard Your Retirement Plan For Children

However, trusts continue to be important contingent, or secondary, beneficiaries, especially for larger plans. The ability of your children or grandchildren (and in some cases, your spouse) to compound retirement plan investments over a long period of time makes IRAs and similar plans one of the most valuable tools for wealth succession planning for your family. Well-drafted retirement plan trusts help ensure that such plan “stretch-outs” will be administered property. I will normally recommend a separate IRA Inheritance Trust if you wish to

  • preserve and guard retirement plan assets from your beneficiaries’ “predators and creditors” – including remarriage spouses, your children’s and grandchildren’s creditors, and their improvidently-chosen spouses;
  • control distributions after your death (discourage or prevent a beneficiary from withdrawing all of the assets he inherits from you at once, absent a very good reason);
  • direct otherwise-reluctant retirement plan administrators to divide an account into separate accounts for your children;
  • limit payouts to any special-needs beneficiaries (including those who become disabled after your death) to protect ongoing government benefits; and
  • ensure that your retirement plan money stays in your family.

Generally speaking, if you and your spouse’s combined retirement plan assets exceed $250,000, it will be cost-effective for us to create stand-alone IRA Inheritance Trusts for each spouse in addition to your Revocable Living Trust. If you’d like to arrange an appointment or a phone call, or receive more information via email, please call or email me, or use the contact tool in the sidebar.

(Updated: December 2020)

How Old is Your Durable Power of Attorney?

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When you created and signed your General Durable Power of Attorney, you did it to make sure that a person chosen by you could take care of financial and personal matters for you if you were to become incapacitated.

However, as this 2016 New York Times article explains, when an Agent takes a power of attorney document to a financial institution, the institution might not accept the document. Instead of honoring the power of attorney, some banks and investment houses have been known to insist that the account owner or owners sign the institution’s own power of attorney form, despite Virginia law apparently to the contrary.

Durable Power of AttorneyIt’s usually easiest in such a situation just to go ahead and fill out the bank’s form. However, that’s not always possible if you or your relative has developed dementia, or there’s another emergency and time is of the essence.

Unfortunately, these are not rare occurrences. Estate planning and elder law attorneys often encounter financial institutions unwilling to honor valid powers of attorney. Even though Virginia law requires institutions to accept a durable power of attorney, and insulates them from liability when they do accept one, attorneys have seen some institutions resist. The usual reasons are because Agents’ IDs don’t exactly match the names on the powers of attorney (think marriage, divorce, or other name change – or use of a nickname instead of a “driver’s license name”), or because a power of attorney is deemed “stale” — signed too many years ago to be accepted without additional assurances under the bank’s or investment company’s internal rules.

And in many cases, the brokerages or banks have valid concerns. They are concerned about potential financial exploitation of their customers, particularly seniors, and are on their guard when Agents whom they have never met walk in with powers of attorney that enable them to control substantial sums of money. When they insist on using in-house forms, or obtaining updated powers of attorney or recently-dated doctor’s letters, it’s usually because they’re concerned about their potential liability to the account owner.

Fixing the Problem Before It Happens

What can you do? First of all, if your (or your loved one’s) General Durable Power of Attorney is more than five years old, come in and see me to have it updated. The fresher the power of attorney, the less likely it is to be challenged. Equally important, transfer your individual, non-retirement accounts to your Living Trust, if you have one. Banks are much more willing to deal with Successor Trustees than they are with Agents under powers of attorney, because the rules for trusts are much more manageable, and the bank’s exposure to liability therefore is lower.

(The Durable Powers of Attorney that I am currently drafting specifically authorize Agents to complete financial institutions’ in-house power of attorney forms on behalf of the principal.)

As a backup, you can ask your brokerage or bank if it requires its own durable power of attorney document. If it does, take home a copy, or have the institution email me the form or a link to it online. I’ll look it over for you, warn about any problems it could raise (and indeed there might be none — but the print is likely to be small) and advise you on what to do next.

Finally, if your Durable Power of Attorney requires a doctor’s letter for it to “spring” into action, consider whether you would prefer to have it immediately effective. A middle ground is to make your power immediately effective, but also to hang onto it yourself (in a safe place known to your Agent) until it is actually needed.

It may seem like extra work, but by preparing ahead, and reviewing and updating your powers of attorney now, you will be ready if and when you need to represent a loved one as Agent, or a loved one needs to represent you. To get started, you can call or email me right now.

Sure Enough, Congress Took Away Your Kids’ Stretch IRAs

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On December 20, 2019, President Trump signed into law the “Secure Act,” which eliminated the benefits of “Stretch IRAs” for non-spouse beneficiaries of IRAs, 401Ks, Thrift Savings Plans, and other qualified retirement plans.

Today, rather than being able to stretch annual required minimum distributions (RMDs) over their projected lifespans, nonspouse beneficiaries of inherited IRAs will be required to withdraw the entire amount of an inherited IRA within ten years. There are no specific RMD requirements within the ten-year period, but the entire balance must be distributed by the last day of the period.

This is bad news for beneficiaries in their peak earning years, when their marginal tax rates are likely to be at their highest. Limiting the period in which a beneficiary must take his or her distributions from an inherited plan means potentially magnifying the tax burden on those distributions.

On the plus side, the Secure Act increased the age at which an IRA owner/beneficiary must begin taking RMDs from the previous age 70-1/2 to age 72. Folks who turn 72 years old in 2022 will not need to make their first withdrawal until April 1, 2023. They’ll then have to take another RMD by December 31, and by every December 31 thereafter.

UPDATE: The “Cares Act” of 2020, enacted to ease the financial burdens of the Chinese coronavirus pandemic, allowed all retirees who would otherwise be required to take an RMD for 2020, plus all beneficiaries of inherited IRAs, to skip the RMD just for that year. The one-time RMD exemption has not yet been extended for tax year 2021.

[Updated: December 15, 2021]

Congress is Coming for Your IRA

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Philip DeMuth writes in the Wall Street Journal (behind its paywall) that the “SECURE Act” now under consideration in Congress “would upend 20 years of retirement planning and stick it to the middle class.” It’s good reading, and explains how the proposed law’s authors believe that owner/beneficiaries of inherited IRAs (and 401Ks and Thrift Savings Plans) should no longer be permitted to withdraw plan funds over their actuarial lifetimes, but instead be forced to withdraw them within 10 years of the original owner/beneficiary’s death.

This is not a good deal, and would make inherited IRAs subject to higher taxes sooner. Folks hoping to keep inherited IRAs as nest eggs for their own retirements would instead be forced to withdraw the assets and pay taxes while still young.

DeMuth’s article is well-done and accurate in detail. For those without a WSJ subscription, a recent article in Barron’s, titled The Stretch IRA Is About To Snap Under the Secure Act, provides a broad summary.

Congress Procrastinates Again on Tax-Free Charitable IRA Rollovers

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Once again, a special provision of the Tax Code offering older owners of individual retirement arrangements (IRAs) an advantageous way to make charitable donations, is scheduled to expire on December 31. For the remainder of 2013, a traditional IRA owner, age 70½ or over, may transfer directly, tax-free, up to $100,000 per year to an eligible charity, regardless of whether he or she itemizes income-tax deductions.

IRAs Only

Donation can and heartDistributions from 401Ks, the TSPs of federal employees and military retirees, and other employer-sponsored retirement plans (such as SIMPLE IRAs and SEP plans) are not eligible. However, if you hurry, you may be able to roll assets from those plans into IRAs and donate them before the giving deadline expires.

To qualify, the funds must be transferred directly by your IRA trustee to an eligible charity. Not all charities are eligible. For example, donor-advised funds and “supporting organizations” are not eligible recipients.

The distributed amounts don’t qualify for deductions (since they were never taxed in the first place). Instead, they may be excluded from your income — giving you a smaller Adjusted Gross Income on your Form 1040.

Charitable Rollovers Are MRDs

Amounts transferred to a charity from an IRA are counted in determining whether you have met the IRA’s required minimum distribution (MRD) requirement. And if you have made both deductible and nondeductible contributions to your traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions made to you.