Charitable donors can get larger amortizations with funds in the retirement account


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The pandemic has triggered charitable giving among wealthy families, and some who are keen to give more may get a larger write-off in 2021 by leveraging money from pre-tax retirement accounts.

Here’s how it works: Some retirees with a pre-tax retirement savings surplus – that is, they’ve saved more than they expect to need – can withdraw the funds and donate the money to a qualified charity. There are payout taxes, but retirees can offset some levies with a higher charitable deduction.

Donors can claim tax relief of up to 100% of their adjusted gross income for cash donations in 2021, a measure under the CARES Act intended to boost charitable giving during the pandemic.

However, they must itemize the deductions to claim the write-off, which means their total tax breaks exceed the standard deduction, which is $ 12,550 for individuals and $ 25,100 for married couples who file together for 2021.

In addition, the strategy only makes sense to some retirees, according to financial experts.

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“First of all, you have to be charity inclined,” said JoAnn May, certified financial planner and CPA at Forest Asset Management in Berwyn, Illinois.

Tax incentives are not the main motivation for most high net worth donors, says Bank of America to study on the philanthropy of the rich. Yet those looking to donate generally prefer tax-efficient ways of transferring the money.

One option, Qualified Charitable Distributions, allows tax-free transfers from an individual retirement account up to $ 100,000 per year. This withdrawal can also count as the minimum annual distribution required of the retiree.

However, taxpayers must be at least 70 and a half years old to make qualifying charitable distributions, and donations over $ 100,000 per year will not be eligible for the tax exemption.

People aged 59 ½ to 70 ½ and those over 70 ½ who wish to donate more than $ 100,000 in 2021 can benefit from withdrawing money from another retirement account before taxes.

Risks of increased adjusted gross income

Retirees need to know how additional income can affect their overall tax situation, said David Foster, CFP and founder of Gateway Wealth Management in St. Louis.

“You could screw up some of the other deductions,” he said.

For example, if a person’s adjusted gross income is $ 100,000 and they itemize the deductions, they can claim a deduction for eligible medical expenses greater than 7.5% of their AGI. So with $ 10,000 in expenses, they can deduct $ 2,500.

There are so many unintended consequences when you start to change adjusted gross income.

JoAnn May

Director at Forest Asset Management

However, increasing the AGI with distributions from the pension plan may eliminate that deduction, Foster said.

The increase in income can also affect the cost of health insurance premiums. Although most retirees do not pay for Medicare Part A, the price of Health insurance part B may jump based on income, with the highest earners paying $ 504.90 per month in 2021.

“I think there is no such thing as running the numbers,” May said. “There are so many unintended consequences when you start to change adjusted gross income. “

When to consider this strategy

These giveaway tactics can pay off for a limited number of people, Foster said.

The strategy may work for someone who plans to make a large charitable donation in 2021. For example, it may be appealing to a philanthropic retiree with excess money in pre-tax retirement accounts.

“All you do is accelerate future income in the present,” Foster said.

Someone must be at least 59 and a half years old to avoid early withdrawal penalties. But if they are still under 70 and a half, they can use other retirement account funds as they are not yet eligible for qualifying charitable distributions from an IRA.

It may also make sense if they are over 70 and a half and want to donate more than their qualifying $ 100,000 charitable distribution from an IRA.

Of course, retirees need to see how the extra income affects their tax situation, Foster said.

But someone who ticks all the boxes can benefit from the larger charitable deduction for cash in 2021. Plus, they can withdraw money from pre-tax retirement accounts, their least tax-efficient source of future income. he added.

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