As we approach the end of the year, there are a few special considerations regarding your IRAs that are unique to 2020. And they're all good ones (this may also be unique to 2020).
First, required distributions from IRAs have been waived. This waiver was included in the COVID Relief Bill signed earlier this year.
And, another useful opportunity. If you are not financially dependent on your IRA distribution, and you claim the standard deduction on your tax return, then it may be advantageous for you to make all charitable gifts directly from your IRA. The benefit to you is that charitable gifts paid directly from your IRA go toward satisfying your required minimum distribution but are not treated as a taxable distribution to you. What's this mean? Your taxable income will be lower.
Here's an example of what this would look like.
Let's say your required minimum distribution is $20,000. You're planning on giving $5,000 to your church and you're claiming the standard deduction on your taxes.
If you simply write a check to the church, the gift offers no tax benefit to you because you did not exceed the standard deduction limit for your household. You still must take the $20,000 required distribution, which is taxed as ordinary income. However, if the $5,000 is distributed directly from your IRA to the church, it leaves you with $15,000 to be distributed from your IRA. Therefore, you are taxed only on a distribution of $15,000, not the $5,000 given to church. You still claim the standard deduction; the benefit is you effectively reduced your taxable income by $5,000.
Pretty perfect, right?
But wait! If this rule is applicable to you, it may be advantageous to delay your 2020 charitable giving until January 2021. A few weeks of difference won't affect your church significantly, but it will certainly make a big difference for your personal finances.
Here's why. Because the required distributions have been waived for 2020, giving directly from your IRA in 2020 offers no benefit, nor does writing a check from your personal account (again, this assumes you claim the standard tax deduction). Rather, it is advantageous to push your charitable giving into a year in which it will offset your taxable income.
Lastly, I want to remind folks of a rule change enacted in 2019 which pushed back the first year one is required to take a required minimum for their IRA. Your first required minimum distribution is now required at age 72. Please note, if born before July 7, 1949 you must adhere to the old rule of taking your first distribution the year you turn 70 and one half years old.
Reach out to us with your biggest questions and we'll do our best to answer them.
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Universal Life Insurance
A type of permanent life insurance. As permanent life insurance, it includes cash benefits to the covered person, but the amount of the benefit to the policyholder relies on market performance. The death beneficiary receives a set amount.
Permanent Life Insurance
A category of life insurance that doesn't expire. It also accrues cash value over time which the covered person may use at a later date.
Term Insurance
A type of life insurance that covers a person for a set period of time.
Annuity
An annuity is an insurance product that's used as an income stream for retirees.
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