RMDs to QCDs to save on taxes in retirement

Qualified Charitable Distributions May Reduce Retirement Taxes

Required minimum distributions may increase your tax bracket in retirement, but there is a way to help manage your tax exposure and help great causes: qualified charitable distributions (QCDs). At 72, you are required to take distributions from traditional IRAs to ensure you are not stockpiling the money, and that Uncle Sam gets his cut. QCDs are your ticket to reducing your retirement income taxes.

What exactly is a Qualified Charitable Distribution?

A qualified charitable distribution satisfies your required minimum distribution from your IRA directly to a qualified charity. Fortunately, the money gifted with a QCD does not count towards you adjusted gross income as it would with a regular RMD.

How can a QCD save you tax money?

They reduce your adjusted gross income but fulfilling the RMD requirement without needing to be reported as income.

How does a QCD work?

You instruct the custodian of your account to directly pay the RMD as a QCD to a qualified 501(c)(3) charity.

Are there any rules or qualifications for QCDs?

There are rules, but they are straightforward:

  • You must be 70 ½
  • To have the QCD count the funds must come from your IRA by your RMD deadline. And for most that is the last day of the year.
  • Whether one big contribution or smaller ones, QCDs have an annual max of $100,000 per individual. Meaning, married folks can donate up to $200,000.
  • QCDs cannot exceed more than what you owe in taxes or qualify for a refund.
  • IRA contributions may reduce the amount for QCD you can deduct.

Who can make QCDs?

Anyone with a traditional IRA who is over 70 ½ can make qualified charitable distributions. Note: QCDs only apply to IRAs and not 401(k)s, 403(b)s, SIMPLE, or SEP IRAs.

What charities can receive a QCD?

For tax purposes, the IRS has a defined list of organizations that can receive QCDs. Their list is here.

How do taxes work with QCDs?

Normal required minimum distributions must be reported and are taxed. No federal or state withholding tax is made on distributions to qualified charities.

Using IRS For 1099-R you report your QCD as a normal distribution. However, please note, this only works on IRAs that are not inherited. Distributions donated from inherited IRAs need reported as death distributions.

Though your QCD is not taxed, you cannot claim it as a charitable tax deduction (the IRS does not approve of double dipping). When you make the QCD make sure you get donation acknowledgement for your records.

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Roth IRA basics

Retirement Savings: Consider a Roth IRA

A Roth individual retirement account is a brilliant way to save for retirement. Much like a traditional IRA, a Roth IRA allows you to invest and for it to grow tax-free. One great advantage this type of account has is that it also lets you take tax-free withdrawals of your contributions at any age. Your earnings may have the same benefit under certain circumstances. For your earning to be withdrawn tax-free you must be:

  • 59 ½ years old
  • Disabled
  • Using the funds as first-time

Naturally, like any tax-advantaged retirement account, the IRS has stipulations and rules that cover contribution limits, income limits, and withdrawals.

Roth IRA Eligibility

The first requirement for contributing to a Roth IRA is having earned income. This could be from the income earned from working for someone else (commissions, tips, bonuses count). Secondly, this earned income could be from a self-operated business or other means of earned income such as tax alimony or even combat pay.

Earned income that does not count:

  • Rental properties
  • Nontaxable alimony
  • Child support
  • SS benefits
  • Unemployment benefits

On a plus side, there is no age limit for making Roth IRA contributions. From a teen working a summer job to someone even in their 80s can contribute. Note: someone under 18 would need to set up a custodial account.

If you are contributing towards another qualified retirement plan you are still eligible to contribute towards a Roth IRA. So, if you earn money and meet the limitations, you can contribute towards your own Roth IRA and your employer-sponsored 401(k) plan.

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Market Volatility: Invest Smart, Know the Risks

Investing into the market for retirement funds is a risky business. Retirees often purchase individual stocks or invest in financial products such as mutual funds, exchange-traded funds (ETFs), or even variable annuities. There are other options such as defined contribution plans that invest into stock market and sometimes a company’s stock. 401(k)s are a common option offered by employers with a matching percentage. Having various investments allows for a more diversified portfolio, leading to a better chance at the safe and secure retirement you have always dreamt of.

However, invest smart and know the risks: the financial markets have significant fluctuations. There is a huge chance of majorly reducing retirement funds due to a bad down in the stock market. Therefore, long- and short-term investments are encouraged.

With the roller coaster of the financial markets, timing is everything when it comes to withdrawing from retirement savings & investments. Unfortunately, what may happen with the return of these investments is more negative than anything to the investor. Meaning, more of the account or assets may need to be liquidated to ensure spending power and keep that consistent stream of income. This is called sequence of return risk. An example of this was with the 2008 Recession; where the market declined and many lost their homes, their other investments, their retirements. For those who have awhile to save and plan are able to likely recover loss. Retirees with less time or who need their income soon will have to sell their investment assets while the market is down to reduce further loss and keep that income. A great loss is encountered if assets cannot be recovered.

Diversification of these assets/investments is important. Individual assets, such as the mutual funds and ETFS, may be managed professionally. These funds may have a focus on small to larger companies, even with specific fields or industries in mind. For individually chosen stocks and annuities, consider stock investments. Within these various options, there are performance and choice risks. Investment for retirement funds is a choice that should be taken with research and guidance.

As mentioned, there is always risk with investing—especially for your dream retirement. The following are some great strategies to limit the risks.

Diversify. Hold various investments across the classes (i.e. hold bonds and stocks). The more spread out and full the investments are better at loss absorption your portfolio is. For example, loss in individual stocks can be offset by holding stocks in 15+ companies and balancing the funds throughout these. If you were to hold the same amount over 5 companies/stocks, you are exposed to a greater risk if one of those companies crashes versus if you have the funds spread over 15 or more. Even considering fixed income investments is great! These will not yield as much return, however.

Long term is best. With investments, time is typically on your side. Especially in the case of recovering losses. It is rare you will see recovery happen overnight—it takes years. Those near or in retirement will want to monitor their investments closely because if a major loss occurs, you may be better off selling. Top experts suggest relying on income-generating policies while moving funds from the stock market throughout your retirement years.

Roll with the pooled. Like carpooling to an event, a pooled investment is smaller contributions from individual to make a larger investment fund. Some examples are mutual funds and target-date funds. Oftentimes these are done with financial experts and there may be fees involved.

Remember fees. Higher fees do not necessarily mean a higher yield on investments. They reduce the overall return, so monitoring and understanding them is important for your financial wellbeing. 401(k)s and other defined contribution plans may have fees; sometimes a fee may be charged if using a financial advisor for advice and portfolio management.

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Tips and Tricks for Your Retirement Trips

It is part of the American dream to travel especially as retirement approaches. All throughout the working years, weeklong trips or weekend gateways were simply a taste. In retirement, 60% of folks make traveling a priority, but the high costs of it and health concerns hinder many retirees from taking those trips. The Baby Boomer generation alone plans 1-5 trips annually within the first several years of their retirement, with a focus oftentimes on international destinations.

The wanderlust for overseas travel comes with a high price tag. In 2013, an international 4-5-day trip averaged $3,300. As of 2021, the average cost for a similar trip was $4,500. In comparison, a domestic trip of the same length costs $630-800. International costs approximately 550% more than domestic.

To get more bang for your buck, retirees should consider Airbnb rentals. Room and cabin rentals through Airbnb are 21% less inexpensive than the traditional hotel room. Many retirees or those approaching retirement have started a second stream of income by advertising a spare room for rent through Airbnb—helping to offset their own travels. Others have become Uber or Lyft drivers on the weekends and in the evenings. Uber alone has reported that a quarter of their employees are 50+ in age.

Outside of travel costs and funds, safety and health are amongst the highest concerns for retirees. General unknowns of the travel destination contribute to this. It is reported that 31% of American retirees are terrified that health concerns will hinder travel plans and enjoyment. In addition, 15% worry about insurance coverage. Domestically, most retirees can rely on Medicaid; however, when aboard, Medicaid covers no medical or health services and supplies. In lieu of traveling, many retirees concerned with health and safety focus on local trips and dedicate more time with friends and family during their retirement.

When it comes to these fears with traveling, optimizing travel budget and time is key. It is important to plan: do research on the destination beforehand for tourist sites and other must-sees; getting costs will help with budgeting. Consider extending the trip for a longer period. Oftentimes, staying longer is more cost effective. To enjoy and take in the culture and scene, consider soft travel—have no hard leave date, give yourself a range of days to leave during. This may save on flight and other travel costs.

Think untraditional: ever consider an RV or camping (or glamping)? Long-term, these means of lodging are domestically and internationally budget-friendlier in comparison to the traditional hotel stays. An RV or camper serve a dual purpose of lodging and transportation!

Hostels are also cost-effective means of lodging. While these are most common over in Europe, in the United States, hostels are most commonly on the west coast; there are some in the southern states. If city visiting, use an Airbnb booking; longer stays typically come with discounts. For example, booking four nights would cost almost the same as three nights. Do not be afraid to shop around for availability and options. One host may offer a better discount than another. Another untraditional means of travel is a train.  Instead of renting a car or paying for a taxi service, a train—especially internationally—costs much less.

Lastly, flights are the most common means of transportation and the most expensive aspect in a travel budget. To save money on flights, use a credit card with a travel rewards system. Being able to track and save those means discounts and better prices for other trips. If doing a domestic trip, consider some of the untraditional ways to save and plan. Look into round-the-world flights. These include a set number of flights and miles but allow for more flexibility to multiple places over a longer period. If seeing as many places as possible is what matters most, a great option is retirement cruises. Oceania offers a half-year cruise to stops in countries. Most retirement cruises go for a longer time and oftentimes have all-inclusive deals.

When it comes to traveling during retirement, be mindful of health concerns and travel costs. Save where you can and opt for local or stay-at-home trips if aboard travel is risky.

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Keeping Your CPA Status in Retirement

As your retirement nears, you may be ready to also retire your CPA status. But keeping your credentials after retirement may open doors you haven’t thought of. Maintaining your CPA status after retirement allows for a host of opportunities.

If you ever want to offer services such as tax preparation, accounting, or consulting—even only occasionally—keeping your credentials open keeps those doors open also.

Even if you do not plan to offer services, maintaining the status for a little while after you retire may benefit you should you change your mind. You won’t have to reinstate it later! If you must reinstate, you will have to catch up on CPE credits or even retake the CPA exam.

Moreover, keeping your status active may present itself beneficial in your retirement if a friend or family member decides to run a business. You would benefit greatly, too, if you started your own business!

Now, why is being a tax preparer a great option after retirement?

  • You have the credentials as a CPA and the work history for it. This makes you highly qualified and already sought after.
  • Work seasonally and flexibly. You are already likely already familiar with these types of things. Working with taxes permits only working a few months a year while enjoying the rest of the year for your retirement activities.
  • You are your own boss. Thus, you can take on as much work as you wish, work when you wish.
  • Since you possess the education and credentials as a CPA, you will have a leg up on new tax preparers. In this day, you can easily take advantage of the virtual and digital means of running your tax-preparation work. Should you want to start up your own tax prep business, the cost is essentially minimal for you: professional tax software!
  • Extra income! Supplementing your retirement helps financially and may be a great opportunity to invest a little more.

Even if you are unsure of keeping your CPA status in retirement, maintain your credentials for a little while after retirement. You never know what may arise!

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2022 and You: Cause and Effect

In 2021, inflation reached a 40- year high from gas, lumber, the housing market, and even groceries. It was reported in October that the U.S. experienced an increase by 6% for the consumer price index. By November, a 7% increase was noted—the largest increase in such a short time since late 1982. Unfortunately, Americans, on average, brought more money home in their paychecks, but were not able to reap the benefits due to the inflation.

What does this mean for inflation in 2022? Economists have a gloomy outlook. With the unexpected, but impending price increases, it is important to allocate more in the budget for groceries and gas. To offset inflation, add more money to your emergency funds as you can. This will keep your retirement funds more secure.

Required minimum distributions, RMDs, had major changes in 2021 (and in 2020 when the Covid-19 pandemic started). As withdrawals for qualified retirement accounts—401(k)s, traditional IRAs, or 403(b)s—RMDS experienced a recent change that affects the age for when you can withdraw. Now it is 72 for those born after July 1st, 1949, and 70 ½ if born before then.

In 2020, RMDs were suspended under the CARES Act. This was in response to the 30% market drop that March. The hopes were to let the retirement money stay in the market and recover, but the 2020 change was short lived. RMDs resumed in 2021.

2022 Lookout:

Based on inflation rates, the IRS does make changes to tax brackets. Due to the 2021 inflation increase, the tax thresholds will drastically change.  This means more money can be earned before an individual or couple is bumped into the next tax bracket. Using tax-planning tactics during your working years and having a retirement plan in place allows for this potential risk to be easily managed during retirement.

Another major change happening this 2022 year is 401(k) contributions. The IRS is changing the max contribution for taxpayers. The increase is $1000 to $20,500. If you are age 50+, you get an additional $6500 as catchup. Unfortunately, traditional and Roth IRAs contributions are staying the same as 2021. However, high-income earners may be able to contribute to a Roth IRA. Income phase-out ranges were increased by the IRS to allow this. Ranging from $129,000 to $144,000 for single taxpayers and $204,000 to $214,000 for married and jointly filing.

**For more information on how is in store for 2022, please listen to Retirement Risk Show episode “The Know-How of Retirement Planning in 2022.” For all the challenges and changes 2022 will and may bring, register for our “Evolving Retirement Law: The Challenges, The Changes, and Your Choices” webinar.

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21st Century Planning: Risk-Based Retirement

What will your retirement look like? Do you plan to downsize your home? Stay at home more or travel more? Will you begin a new business or work part-time? Retirement prompts a lot of questions, and many challenges will be faced during those years. Planning with a risk-based mindset will make the process all that much easier.

Surprising facts about retirement:

  • Retirement will likely last longer than expected.
  • Few spend adequate time creating a plan. Most folks spend more time planning their vacations than they do retirement.
  • Many remain in the workforce in some form after retirement,
  • A lot of folks invest only in 401(k)s.

The best way to tackle the risks of retirement is diversifying your retirement portfolio.

Annuities:

Fixed or variable, annuities are a good way to add to your retirement income and diversify your funds. Fixed annuities offered guaranteed returns while variable annuities provide a higher yield but come with much more risk and potential loss. And when it comes time to retire, you can receive distributions calculated based off your life expectancy. This guarantees it for life!

Permanent Life Insurance:

Life insurance, while not often thought of, can provide tax-deferred income, and protect your family. You may access this money from your premiums in the form of cash-value such as loans or direct withdrawals. Note, however, that accessing the cash-value will reduce the policy benefit).

Long-Term Care Insurance:

Expenses may seem unforeseen, but that does not mean that during retirement planning cannot account for them. As we live longer, we are more exposed to needing long-term care. Long-term care happens when we are limited and unable to perform daily activities such as dressing or eating. And long-term care insurance can help with this!

The insurance provides coverage for at-home care, assisted living facilities, and even community-based care. Structuring of policies varies, some provide monthly benefit while others are structured with traditional life insurance (and may offer more death benefit if the long-term care is never used).

Important: planning continues and needs maintained during retirement, too.

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