Traditional IRAs and 401(k) and similar retirement plans have the wonderful feature of using pre-tax income to maximize the retirement nest egg. Eventually those deferrals—and their earnings—must face the tax man. For those turning 73, or those that are older than 73, Required Minimum Distributions (RMDs) must occur every year.
The minimum amount that must be withdrawn every year increases with age, and is a percentage of the account rather than a dollar amount. Here are some example percentages –
73 years old – 3.77%
83 years old – 5.65%
93 years old – 9.9%
103 years old – 19.23%
113 year old – 32.36%
These RMDs are important to take, as the penalty for not doing so is quite severe, 25% excise tax for the amount not withdrawn (10% if it’s corrected in two years).
Those who are philanthropically minded might want to consider a QCD, or qualified charitable distribution from their retirement accounts. By arranging for a direct transfer of funds from an IRA to a favorite charity, up to $100,000 per taxpayer per year, one can accomplish the move sometimes referred to as a “charitable IRA rollover.” The amount so transferred will not be included in taxable income, but it will satisfy the RMD for the year. Because there is no income inclusion, there is no corresponding charitable deduction.
Avoiding more taxable income by making a gift to charity may have other rewards, in addition to the satisfaction that comes from charitable giving. For example, those who do not itemize get no benefit from the charitable deduction. At some income levels, an increase in taxable income can boost the income tax due on Social Security benefits. Dodging the income inclusion avoids this tax boost.
Another use it or lose it year-end giving effort
Those who are making substantial gifts to family members may want to consider using the annual gift tax exclusion for all its worth every year. For 2024 the annual exclusion amount is $18,000 per recipient, and that’s going up to $19,000 for next year. Major gifts of property are subject to a federal gift tax, much as estate transfers are. However, the annual gift tax exclusion shields modest gifts from tax and filing requirements.
Generally speaking, every taxpayer is allowed to give an annual exclusion amount to each of as many individuals as he or she desires. What’s more, a married taxpayer, with the help of his or her spouse, can double the tax exclusion. (This “gift-splitting” must be reported by filing a gift tax return.)
Now, $18,000 or $19,000 may not sound like much in a multi-million dollar estate. However, consider the possibilities for married grandparents with four children and four grandchildren. As much as $288,000 can be gifted to the eight in 2024, more in subsequent years. In four years, the total would reach over $1 million. What’s more, each of the recipients (or the trustee for each grandchild) presumably will invest the amounts transferred each year so it would grow in their hands outside of the estate.
These are just a couple year-end tax moves that have to do with giving gifts. Year-end tax planning often concerns deferring income, accelerating deductions, and harvesting capital losses to offset realized capital gains. It can be complex and different for every family based on their priorities and wealth management goals, with projections of how things might play out in future years in regard to taxation. We recommend both consulting a tax advisor and an annual review with your trust or wealth management officer. If you’re interested in a consultation, please don’t hesitate to let us know.
