Generally speaking, investors have separate retirement and non-retirement accounts. In most cases, the retirement accounts are split between Traditional IRAs (i.e., Rollover, SEP, Simple, 401(k), 403(b), 457, etc.), which are pre-tax dollars, and Roth IRAs, which are after-tax dollars. Non-retirement accounts include trusts, individual accounts and joint accounts.
Upon the owner passing, non-retirement accounts usually receive a step-up in their cost basis, meaning long-term capital gains are wiped out for that person’s heirs. In most circumstances, heirs could rebalance or cash out the portfolio and owe little or no capital gains taxes.
Roth IRAs maintain their tax-free growth and withdrawal nature, but do require annual required minimum distributions (RMDs). Pre-tax IRAs, however, behave differently. While they will maintain their tax-deferred growth advantage, their annual RMDs are 100% taxable as ordinary income. If the beneficiary is in the 25% marginal tax bracket, for example, then a $20,000 Traditional (Beneficiary) IRA distribution will owe $5,000 in federal income taxes. Often these distributions push the beneficiary into a higher tax bracket.
Since non-retirement accounts and Roth IRAs are more tax-friendly for heirs, it may be worth considering the possibility of naming a nonprofit organization, like an alma mater or favorite charity, as the beneficiary of Traditional IRA assets. Instead of heirs paying ordinary income taxes on future distributions, the nonprofit organization will be able to utilize 100% of the assets for their organization’s purposes because they are tax-exempt and won’t owe any taxes on distributions. This is especially attractive for those who are charitably inclined and are trying to determine which asset is best. Other benefits include that your estate will be reduced by the amount of the bequest (possibly reducing or removing any estate taxes owed), and your heirs will receive the most tax-friendly assets.
Each client’s circumstances are different, so we recommend you discuss this with an advisor to see if it makes sense for you and your family.
When Joe Allen, CEO of Strikes For Kids, reached out to us and asked if we would like to sponsor their bowling tournament for the second year in a row, we were delighted to say yes. Strikes For Kids organizes bowling tournaments across the country to benefit different nonprofit organizations. This year, the event was hosted by Seattle Seahawks Earl Thomas & Marshawn Lynch, and benefited the Guardian Angel Foundation and Fam 1st Family Foundation. We were happy to support these great nonprofit organizations!
During this exciting evening, a few Merriman clients and employees bowled and hung out with Earl and Marshawn, and Russell Okung even dropped by. ESPN’s sports journalist Kenny Mayne got a lesson from Pro Bowler Norm Duke and knocked down a strike. Seahawks mascot Blitz was also there showing off his bowling skills for the kids. There is no better feeling than you get when you see excited kids meeting their favorite Seahawks players and having fun with their family.
You can watch some video coverage of the event here. Next time you are in our office, be sure to check out our autographed Seahawks bowling ball at the front desk!
With the recent tornado in Oklahoma we are reminded of the importance of charitable giving. In fact, since the tornado, over $15 million has been donated to the American Red Cross. According to the Giving USA Foundation, individuals gave over $217 billion dollars to charitable causes in 2011, a 3.9% increase over 2010. As charitable giving increases, I want to make sure you know not only how to maximize your charitable contributions from a tax standpoint (see my post about using the donor advised fund), but also that you are informed about the effectiveness of the charities you choose.
There are a couple resources available now to help understand how effective a charity is with the money you donate. Charity Navigator has been around since 2001 and now assesses over 6,000 charities. Its goal is to provide one overall rating based on two areas of effectiveness: 1) their financial health and 2) their transparency and accountability. For example, the American Red Cross, a popular one at this moment, shows a total score at 59.64 out of 70 as of fiscal year end in June of 2011.
Another website, CharityWatch.org, also rates different charities’ effectiveness. While they rate only 600 or so of the largest charities, they tend to dig much deeper into the inner workings of the organization than Charity Navigator. They study the individual finances of every charity to give a clear picture on what the money is actually being used for. Instead of taking the information at given at face value, they try to determine if the donors’ objectives are actually being met. Because their analysis is more in-depth, Charity Watch charges $50/year for access to their Charity Rating Guide, which provides financial data and a rating from “A+” to “F” for each charity.
We all want to make sure the money we give generously is used effectively. Whether you’re giving funds to aid with large natural disasters or donating to your local food bank, donations are needed and greatly appreciated. Now, in addition to maximizing the tax effectiveness of your charitable donations through donor advised funds, these tools can help you choose organizations that will help your dollar have maximum impact.
We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.
For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.
Here’s how it works:
For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.
As with many IRS provisions there are a number of fine print items to keep in mind.
You are only eligible to make a QCD if you are 70-½ or older.
Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.
At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!
I volunteer once a week for Seattle Children’s Hospital in the Child Life Department. Part of my job as a volunteer is to visit inpatient children in their hospital rooms. The volunteer shift can include anything from holding a baby while the parent is away, playing Legos or coloring with a child, to reading and playing games with teenagers. If the child/teen is feeling well enough, we can bring them to the playroom where there are a variety of activities available for them.
Volunteering with Children’s hospital has really opened my eyes to how brave these children are. They are in a new place with new people coming in and out of their rooms, and sometimes their parents have to go to work so they are alone in their rooms for a good part of the day. Recently I was with a little girl who was very happy to have someone come to her room with coloring books, crafts, and a movie. For two hours we colored, made snowman crafts, and giggled at the silly Sponge Bob movie. Being able to give back and volunteer at Seattle Children’s hospital means so much to me. Every week I get to visit a different patient with a different circumstance and the fact that I have the privilege to bring some happiness into a sick child’s day by bringing them a toy, a game, a book, or just sitting and talking with them is one of the most rewarding feelings.
The motto at Seattle Children’s Hospital is “Hope. Care. Cure.” These words are not just words; they have built a culture for the people that work at the hospital. There is an incredible vibe throughout the hospital that these doctors, nurses, volunteers, and employees are dedicated to bringing hope to the lives of these children and families. As we approach this holiday season, I am thankful for good health in the lives of those around me and send thoughts of hope and happiness to those who may have to spend their holidays in a hospital with their loved ones.