by Jack Campbell, ARCRA Treasurer

Many retirees have wrestled with tax planning issues, especially as we enter our mid-sixties and seventies.  I am not a tax professional but my financial planning adviser has been very helpful in pointing out things to consider in order to simplify family finances and reduce income taxes.  My situation may be similar to some of you so here are a few things to consider. 

!.  Consider consolidating multiple tax deferred accounts.  When I left Red Cross in 2004 I had accounts with several investment companies by virtue of participating in various 403(b) and 401(k) tax deferred savings programs.  The same thing occurred with my subsequent employer.  When I retired, I continued to get statements from each vendor.  In addition, depending on when each account was established, there were different asset allocation strategies (higher to lower investment risk) which did not reflect my current appetite for market risk.  Consolidating all of your tax deferred accounts into one IRA, with an updated asset allocation strategy, should be considered.  In addition, it can simplify withdrawals, especially once you hit 70 ½, when Required Minimum Distributions (RMD) kick in.

In your first RMD payout year, you have the option of delaying your payment until April 1 of the following year.  Example:  I turned 70 1/2 in 2019 so I had to withdraw a prescribed percentage of my tax deferred account(s) value as of December 31, 2018.  People like me, who were taking their first payout, had until April 1, 2020 to do so.  However, think twice before delaying that first payout since you can’t delay future payouts beyond December 31, which would result in two payouts in one year, (in this example, 2020). 

Also, if you have hit 70 ½ and still have multiple IRA and 401(k) accounts, payout criteria can be different.  Remember that 401(k) payouts cannot be aggregated like IRA payouts can.  If you have multiple IRA accounts, you can take all of your IRA RMDs from one IRA account versus a little bit from each one.  If you have two or more 401(k) accounts, you have to take the required amount from each one based on their values on December 31 of the prior year.

2.  Consider reducing your taxable RMD withdrawals with Qualified Charitable Distributions (QCD).  Each person’s financial situation is different but if you have been fortunate enough to still have significant tax deferred account balances (whether you consolidated or not), you can reduce the amount of the annual RMD by a contribution to a 501(c)(3) charity.  This allows you to reduce the taxable amount of your RMD by the donation, and still take the full standard deduction.  Also, by reducing your Adjusted Gross Income, you may be able to lower your Medicare premiums if you are paying in excess of the standard monthly amount due to your income level.

Let’s say that you give periodic contributions to a religious institution or charity during the year.  With the new tax law in effect in 2018, including higher standard deductions, you may not get any tax benefit from those contributions, because the standard deduction is higher than your total itemized deductions.  Enter the QCD!  You can direct some or all of your annual RMD, up to $100,000 annually, to one or more charities.  Instead of weekly or monthly contributions to the same charity with no tax benefit, send them one donation from your RMD and reduce your taxable income. 

Just be aware of several things about QCD’s:

a.  As noted before, you can only distribute to 501(c)(3) charities.

b.  You can only do this with distributions from IRAs.  QCDs can’t be used to reduce income from pension payments or 401(k) payouts.

c.  The 1099-R you will receive from your IRA provider will not reduce your RMD amount by the QCD.  You have to do this yourself before entering the amount on your tax return.

d.  Most importantly, consult with your tax preparer or advisor regarding how to distribute the QCD and disclose it on your return.

Let me stress that some of the considerations above were a result of advice I received from a financial planning professional, but everyone’s tax and financial situations are different.  Consult your adviser to discuss these and other options that will fit your particular situation.