Retirement Plans Provide Both Risk and Opportunity

December 5, 2018

According to the American Benefits Council, nearly 100 million Americans participate in “qualified”, pre-tax retirement plans, such as IRAs, 401(k)s, SEPs, SIMPLEs, or if you have worked in a non-profit environment, 403(b)s.  If you are one of them, and are age 70 ½ or older, or know someone who is both, you will want to keep reading.  Your retirement plan comes with a serious tax risk for you, but also presents a wonderful opportunity.

You may have heard about the “required minimum distribution” or “RMD”.  That is the amount you are required to withdraw from your qualified retirement account each year beginning with the year you reach the age of 70½.   You can take this amount in a lump sum, or in distributions at least annually based upon your life expectancy.  My mom takes hers monthly to help her with her budgeting.   But some people, hoping to keep their retirement money invested as long as possible, forget to take this distribution.  The consequences can be severe – a possible tax penalty of up to 50% of the amount of the distribution you should have taken.  Ouch!

If you are someone who is 70½ with a retirement account, you can avoid paying any taxes on your RMD by donating the RMD to a worthy charity – like Chatfield College.   You will need to arrange to have your RMD transferred directly from your IRA (or inactive SEP or inactive SIMPLE) to Chatfield.  (Although you cannot make these distributions from your 401(k) plan or other qualified plans, you can roll over your plan balance to an IRA, and then make the transfer of your RMD from your IRA).

This way, none of the RMD is taxable income.  Your donation will not affect your Social Security taxes or Medicare premiums.   This is an especially attractive tool for people who have regularly given to charity in past years, but now with 2017 Tax Cuts and Jobs Act in effect, will no longer be able to receive a tax deduction for those December donations.  The new tax law has increased the standard deduction, so many more taxpayers this year will not be itemizing deductions, like charitable contributions.

If you think you might be in this situation, and would like to learn more about your options, you should contact your accountant, attorney or tax advisor. (Chatfield College does not offer tax or legal advice or counsel, and this blog is not intended to do so.)

And if you would like to make a direct donation from your IRA to Chatfield College, please know your gift is very much appreciated, and will be used judiciously in the best interest of our students.

As always, thank you for your loyal support of Chatfield College.

-John P. Tafaro, president

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