Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

not offset by the charitable deduction, because the distribution increases his adjusted gross income (AGI) and the charitable deduction does not decrease AGI. For example, the plan distribution could decrease his medical expense deduction (limited to expenses in excess of 7.5% or 10% of AGI; see § 213 ) and miscellaneous itemized deduction (limited to expenses in excess of 2% of AGI; see § 67 ); increase his Medicare premiums (42 U.S. Code §1395r (I)); decrease his eligibility to contribute to a Roth IRA (see ¶ 5.3.04 ); increase his income countable as part of the “threshold” for determining how much of his net investment income is taxable ( § 1411 ); and/or increase the taxability of his Social Security benefits (see § 86 ). E. Split-interest gifts are only partially deductible. If the gift is made to a charitable remainder or lead trust, to a pooled income fund, or in the form of a charitable gift annuity, the amount of the deduction is only part of the total gift (since a portion of the gift is benefitting individuals), even though all of the plan distribution was includible in income. F. Penalty for pre-age 59½ distributions. If the participant is under age 59½ at the time of the distribution, there is a 10 percent penalty on the distribution unless an exception applies. § 72(t) ; see Chapter 9 . The charitable deduction has no effect on this penalty. See ¶ 7.6.03 for a lifetime charitable giving strategy for under-age-59½ individuals. This penalty does not apply to beneficiaries. § 72(t)(2)(A)(ii) ; ¶ 9.4.01 . G. State income taxes. In a state that allows no charitable deduction in computing its income tax, the participant would pay state tax on the distribution but get no offsetting deduction. H. Nonitemizers. An individual who uses the “standard deduction” rather than itemizing his deductions would see no income tax benefit from the charitable contribution. Some drawbacks can be minimized by using smaller distributions and smaller gifts (see ¶ 7.6.02 – ¶ 7.6.03 ). Also, certain forms of distributions (see ¶ 7.6.04 – ¶ 7.6.06 ) are not subject to full normal income tax, and so may offer an opportunity for more tax-effective charitable giving. 7.6.02 Give your RMD to charity A retirement plan participant generally must start taking required minimum distributions (RMDs) annually (except in 2009) from his IRAs and other plans after age 70½ (or after retirement in some cases). See Chapter 1 . If the participant does not need his RMDs for other purposes, this would be an appropriate source of charitable gifts. The drawbacks listed at ¶ 7.6.01 still apply, but since he has to take the unneeded RMD anyway, he might as well give it to charity; and in most cases he will receive some income tax benefit from the charitable gift. A pledge to “give my RMDs to charity” would especially make sense for someone who is planning to leave the balance of the account to charity at his death. A beneficiary who has inherited a retirement plan is also generally required to take annual RMDs from the plan. If a beneficiary does not need the distributions from an inherited retirement plan, he might consider giving them to charity. Ideally, the participant should have left the benefits directly to charity in the first place, rather than leaving them to a rich beneficiary who does not want them. However, if that did not happen, and the beneficiary is receiving a stream of unneeded RMDs, the beneficiary could reduce his income tax liability by giving the distributions to his