Page 12 - NC Triangle Vol 7 No 6
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PATRICK H. YANKE, CFP | Financial Little-Known Ideas for IRAs
Individual Retirement Accounts (IRA) can be powerful tools for retirement savings but using them
e ectively can present complex chal- lenges.  e  rst step is knowing these strategies exist.
SOME IRA BASICS
Money contributed to traditional IRAs are not generally taxed in the year of contribution unless the contributor also participates in a quali ed retirement plan at work (with income limitations).  is pre- tax money will be tax-deferred as long as it remains in retirement accounts— all taxes are due when distributed.
Roth IRAs are funded with a er-tax dollars instead. Contributions have the potential to grow tax-deferred like the traditional IRAs however, if the rules are followed in retirement, the distributions are tax-free.  ere are income limitations on contributors to Roth IRAs regardless of participation in quali ed retirement plans.
ROTH IRAS FOR THOSE WITH HIGHER INCOMES
Depending on a number of factors, an IRA participant may receive a greater tax bene t either deferring taxes during working years or receiving tax-free income in retirement. Once retired, most participants enjoy tax-free income. For one thing, quali ed Roth IRA distributions aren’t counted for taxation of Social Security bene ts. However, income limitations prevent most high earners from participating.
Everyone, regardless of income, may contribute to traditional IRAs. However, as mentioned above, when participating in quali ed business
retirement plans, contributions to traditional IRAs are not tax- deductible for high-earners. Due to recent changes
to tax codes, these a er-tax dollars may be converted immediately to Roth IRA assets—monthly, if desired.  ose with high incomes are now able to build Roth IRA balances.
DELAYING SOME RMDS WITH THE QLAC
Required Minimum Distributions, o en referred to as RMDs are amounts the federal government requires investors to remove from traditional IRAs and employer-sponsored retirement plans a er reaching the age of 701⁄2. Investors can always take more than the minimum but will be heavily penalized if required amounts are not removed. RMD rules do not apply to Roth accounts unless inherited.
A participant may be able to use up to 25% of non-Roth IRA and retirement plan account balances (up to a maximum of $130,000 from all accounts, indexed for in ation) to purchase a quali ed longevity annuity contract (QLAC). A QLAC is a deferred income annuity and the value of the QLAC is disregarded when calculating annual RMDs. Payments from the QLAC may be delayed up to age 85 and are treated as satisfying RMD rules when paid out.
QUALIFIED CHARITABLE DISTRIBUTIONS-QCD
 e Pension Protection Act of 2006  rst allowed taxpayers age 701⁄2 or older to make tax-free charitable donations directly from their IRAs.  ese taxpayers were allowed to exclude from gross income otherwise taxable distributions from their IRA (“quali ed charitable distributions,” or QCDs), up to $100,000, that were paid directly to a quali ed charity.  ese gi s are also known as “Charitable IRA rollovers.”  e law was originally scheduled to expire in 2007, but was extended periodically through 2014 by subsequent legislation, and  nally made permanent by the Protect
Americans from Tax Hikes (PATH) Act of 2015.
 e IRA trustee makes a distribution directly from the IRA (other than SEP and SIMPLE IRAs) to a quali ed charity.  e distribution must be one that would otherwise be taxable. Up to $100,000 of QCDs may be excluded from gross income each year, thereby avoiding taxation on those amounts. If  ling a joint return, a spouse may exclude an additional $100,000 of QCDs. Note: QCDs may not also be deducted as charitable contributions on federal income tax returns—that would be double- dipping.
QCDs count toward satisfying RMDs that would otherwise have to be received from an IRA, just as if an actual distribution had been received from the plan. However, distributions actually received from an IRA (including RMDs) subsequently transferred to a charity do not qualify as QCDs.
MAKING A TAXABLE INHERITANCE TAX-FREE
All distributions from traditional IRAs and quali ed business retirement plans are fully taxable to the recipient.  is means bene ciaries of these accounts will have a signi cant tax bill if large amounts are removed each year.
If the original owner of the IRA doesn’t need the income from RMDs and desires to pass on a legacy, consider buying life insurance with annual distributions. At death, heirs will receive what remains in the IRA and a tax-free insurance bene t.  is strategy only works for those who qualify for a ordable insurance coverage.
 ese strategies are more complex than space allows. Applying them to particular situations is a conversation to have in a consultation with a quali ed professional.
Patrick Yanke is a Raleigh  nancial planner with a national business. He delivers newsletters and speaking programs on a wide range of  nancial topics and regularly presents at the NCBA and NCAJ on  nancial topics. Opinions ex- pressed here are Patrick Yanke’s and not necessarily those of Raymond James. Please consult your tax advisor if you have questions about these examples and how they relate to your own  nancial situation. www.yanke nancial. com.
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