Things to Remember Around Tax Time if You’ve Made a Qualified Charitable Distribution

Form 1099-R is issued around tax time to report distributions you took during the previous year from a retirement account. Among other things, this form tells you and the IRS how much was withdrawn in total, how much of the distribution was taxable and whether there was any withholding for federal and state income taxes.

For those who gave part or all of their required minimum distribution directly to charity through making a qualified charitable distribution (QCD), this amount is still included in the taxable portion of your total distribution on form 1099-R. As you’ll see, the QCD is included in your gross distribution (box 1) and taxable amount (box 2a); however, the box for “taxable amount not determined” (box 2b) will be checked. Whether you work with a professional tax preparer, use software like TurboTax or prepare your own taxes by hand, it can be easy to forget that the QCD portion of your distribution should not be included in your taxable income on your tax return. It’s important to keep a record of any QCDs made during the year and hold on to the receipts or letters that you receive from the charities confirming receipt of the funds.

Below is a blank version of the 1099-R available on the IRS website.

 

This is a copy of a 1099-R issued by TD Ameritrade.

In this example, the individual had a $70,000.00 gross (line 1) and taxable distribution (line 2a). The box next to “taxable amount not determined” (line 2b) is checked. Federal income tax of $8,000.00 was withheld (line 4). The distribution was considered a “normal distribution” because the distribution code 7 was used (line 7). What this 1099-R doesn’t tell you is that $20,000 of this individual’s RMD was a QCD, while the remaining $50,000 of the withdrawal was taxable.

You should put the information from the 1099-R on the first page of your tax return (Form 1040) on line 15a and 15b (shown below). In the example, the individual had a total IRA distribution of $70,000. Of this distribution, $20,000 was a QCD. This means that the QCD won’t be included in your taxable income. If you have the option, write “QCD” to the left of box 15b on your tax return. You need to add the $8,000 federal income tax withheld from this IRA distribution to any other federal withholdings from W-2s and/or 1099s for the year on line 64 (page 2) of your tax return.

If you had basis (after-tax contributions) in the Traditional IRA from which you made the QCD and took a regular distribution, you must remember to file IRS Form 8606 Nondeductible IRAs. You must also file this form if you made a QCD from your Roth IRA. While we would not suggest making a QCD from a Roth IRA since the account is after-tax versus pre-tax, you can do that.

By reporting QCD’s correctly on your tax return, you rightfully receive the benefit of income exclusion.

A More Efficient Way to Give: Donor-Advised Funds

Being philanthropic can mean you donate your time, expertise and/or financial resources to support a charitable organization. When donating financial resources, there are ways to give that maximize the benefit of the gift. Did you write a check? If so, where did that cash come from? Did it require you to withdraw from a retirement account, or realize any capital gains to create this cash? If you have a taxable investment account, then using a donor-advised fund is a more efficient way to give.

What is a donor-advised fund? 

A donor-advised fund (DAF) acts like your own mini-charitable foundation. DAFs have been around since the early 20th century, but more recently have become the fastest growing method of giving in the United States. Grants to qualified charities in 2015 alone from donor-advised funds totaled $14.52 billion. You can donate assets to a DAF and receive the tax benefit that year, while having the flexibility to distribute the funds in increments, and over whatever period you’d like. Unlike private foundations, DAFs don’t have legally required annual distributions.

What can be put in a donor-advised fund? 

  • Cash
  • Publicly traded securities including stocks, bonds and mutual fund shares
  • Restricted and controlled stock * Privately held stock
  • Real estate
  • Proceeds from life insurance or from a full-paid policy
  • Private foundation grants or terminations
  • Bequests
  • Named beneficiary of charitable remainder trust
  • Named beneficiary of an IRA, 401(k) or other retirement account
  • Tangible personal property

Most commonly, families donate appreciated securities such as stocks and mutual fund shares from a taxable investment account to a DAF.  (more…)

The Ins and Outs of Deferred Compensation Plans

If your income is greater than $400,000 a year, does making a $18,000 deferral to your company’s 401(k) retirement plan do much toward replacing your income in retirement? This less than 5% of income deferral to your retirement plan would leave you significantly underfunded to maintain your lifestyle in retirement. While you can save elsewhere through non-retirement accounts, your company may permit you to postpone receiving income through a Section 409A deferred compensation plan.

There are no IRS limits on how much compensation can be deferred; however, your company’s plan may have a limit. You could defer a bonus, incentive, or part of your salary in the present year and receive that, plus the potential for earnings on its investments, in future stated years. To do this, you must make an irrevocable election to defer compensation prior to the year in which you expect the compensation to be earned. If you’re in the top tax bracket (39.6% in 2017), this can allow you to defer income now and receive it at a later date (such as when you retire) in a lump sum or a series of payments when you expect to be in a lower tax bracket.

The major requirement to receive this deferral status is that your funds are subject to substantial risk of forfeiture. Unlike 401(k), 403(b), and 457(b) accounts where your plan’s assets are qualified, segregated from company assets, and all employee contributions are 100% yours, a Section 409A deferred compensation plan is nonqualified, and your assets are tied to the company’s general assets. If the company fails, your assets are subject to forfeiture, as creditors would have priority. Only through accepting this risk does the IRS permit unlimited contributions to this plan. If your employer doesn’t include this deferred compensation as part of the company’s general assets, making them subject to forfeiture, the deferred compensation becomes taxable immediately, plus a 20% penalty and interest. A potential reason for this requirement of substantial risk of forfeiture is to incentivize executives and business owners to maintain the health of the company, and to ensure they don’t inappropriately withdraw too much of its resources, and then try to leave. (more…)

Why We Now Incorporate Your Held-Away Accounts in Your Investment Plan

When creating and monitoring a retirement plan, and providing advice on how to best achieve your financial goals, we often run into a roadblock on implementation when a large portion of your wealth is tied up in an employer retirement plan. This isn’t to say that participating in your employer plan is a bad thing; it’s more an issue related to investment options, fees and how to best align that account with your overall investment plan. By incorporating your outside retirement plans into your overall allocation, we can now pick the best investment options available in your retirement plan and manage your wealth like it’s one portfolio, instead of viewing accounts separately.

The benefits of incorporating your outside retirement plan into your overall asset mix include the following.

  • Higher net-of-fee, risk-adjusted expected returns through:
    • Stronger small and value tilts
    • Greater diversification with more international exposure, larger exposure to specialized risk premiums (Reinsurance and Marketplace Lending) and reduction in concentrated stock positions
    • Closing the behavior gap (reduced performance chasing)
    • Lower expense ratios
    • Disciplined rebalancing
  • Increased tax efficiency and reduced trading costs
  • More comprehensive reporting of returns and portfolio history

We can enhance what we do for you by bringing your employer retirement plan onto our Merriman web portal. This allows us to monitor your total portfolio allocation on a daily basis. By using the best of what’s available in your retirement plan and augmenting it with the accounts Merriman manages, we can estimate a net-of-fee performance improvement annually that’s specific to your situation. In many cases, there may be just two to five funds utilized in your retirement plan.

If you have a taxable account, we can move the international holdings into it, so you may be able to deduct the foreign taxes that are withheld, and place the less tax-efficient investments, like REITs, Reinsurance and Marketplace Lending, in your IRAs.

We suggest speaking with your advisor about how to incorporate your employer retirement plans into your overall investment allocation.

The Benefits of Consolidating Dormant Retirement Plans

Like most people, you’ve probably switched jobs at some point in your career. If you’ve done this a few times, you may have several outstanding retirement plans, like a 401(k), 403(b), etc. In the flurry of paperwork between leaving your former employer and starting a new job, you should have been given the option to either leave the retirement plan as-is (default), transfer it to an individual retirement account (IRA), move it to your existing employer retirement plan or cash it out. If these plans aren’t consolidated after each job change, whether to an outside rollover IRA (or Roth IRA if you made after-tax contributions), or to your current employer retirement plan, they can start to accumulate and become more of a frustration later to deal with.

Consolidating your retirement plans has several benefits:

Investments align with the asset allocation your financial plan recommends 

When you enroll in a new employer’s retirement plan, they ask how you’d like to invest the proceeds. You may not have even made a choice and were put into the default investment option. In the past, the default option was the stable value or money market fund, which is not designed to help you grow your assets; instead, it preserves the value with minimal interest. Nowadays, the default options are target date retirement funds that at least have a more diversified breakdown of assets between stocks and bonds.

Importantly, your financial plan may require that your investments be more aggressive (stocks) or conservative (bonds) than how your dormant retirement account is invested. Regardless of the account’s size, you want all of your investments functioning in a cohesive manner, as that investment allocation will drive the long-term returns necessary to achieve your financial goals. (more…)

Provide Support for Disabled Family Members with an ABLE Account

ABLE, short for Achieving a Better Life Experience Act, is a type of savings plan established in 2014 to provide support for those with disabilities. The accounts are similar to traditional 529 plans in that contributions can grow and be distributed tax-free for qualified expenses. The difference between a college savings 529 plan and an ABLE 529A savings plan is that ABLE funds can be withdrawn tax free to cover qualified disability expenses versus just qualified education expenses.

Does having assets in an ABLE account impact federal benefits?

Assets in an ABLE account won’t impact federal benefits unless the balance exceeds $100,000. Any excess beyond $100,000 in an ABLE account is considered personal assets, and once personal assets exceed $2,000 (such as in their checking account), Social Security benefits are suspended. This means that if assets in an ABLE account are $100,000 or more, plus checking or any other account surpass $102,000, Social Security benefits are halted. Social Security benefits resume once personal assets fall below $2,000 ($102,000 including $100,000 in ABLE account).

If you take distributions from your ABLE account for qualified housing-related expenses and retain them to be paid the following month (such as paying rent the following month), those distributions are countable resources for Social Security.

ABLE accounts do not impact Medicaid eligibility. However, upon the death of the recipient of aid, Medicaid can claim assets, such as those in an ABLE account, for payback. Outstanding qualified disability expenses, such as burial costs, receive priority over Medicaid claims. If Medicaid payback claims are greater than the remaining ABLE account, there is no further recourse against the disabled beneficiary’s other assets. (more…)