Wednesday, May 11, 2016

Too soon old. Too late smart.

Learned a few things about IRAs this week:
1) Once you take an IRA distribution, it's ALL taxable, and as ordinary income, because it went in pre-tax.
2) If that makes you want to undo the distribution, a) you must do so within 60 days, and b) you can only undo 1 IRA distribution per 365 days.
3) There's no longer multi-year income averaging for anyone but farmers and fishermen.
4) You can only deduct up to half of your adjusted gross income as a charitable contribution in any one year. (The rest can be deducted in a future year.)
5)This is not a problem when you rollover money from one IRA directly to another IRA, even with different companies.
6) It's also not a problem with Roth IRAs, which are taxfree when distributed. (However, unless you need the money, a Roth may be even more useful as a way to benefit grandkids.)
7) Once you reach age 70-1/2, you have to take a required minimum distribution, but you can take it from any of your IRAs, so long as you take enough to meet the requirement for all IRAs (about 3.65% in the first year, rising slowly thereafter under an IRS-supplied formula.)
8) If you don't need part or all of your RMD, you can have your IRA donate it directly to a 501(c)(3) charity, which
a) avoids all taxes on up to a $100K donation per year for both you and the charity, and
b) cannot also be declared as a tax deduction (because it's not part of your income.)
9) The charity you can designate for this may [Update: NOT] be a donor-advised fund, such as VanguardCharitable.org or T Rowe Price's ProgramForGiving.org. That way, you can give the RMD immediately, but decide later which specific 501(c)(3) charities get donations from the donor-advised fund, on what schedule and for what purpose. Better yet, once set up, such funds can continue for generations. [Update: Still a great way to channel charitable contributions, but cannot yet be legally used to receive RMDs.]
Long story short: As of today, "The Strasma Family Fund" at VanguardCharitable.org now exists as a way to help our church and favorite charities benefit more, both now and into future generations, while lowering our tax bracket from a too-large initial IRA distribution that can no longer be undone.
Yep, this is deep stuff, covered nicely in a "It's Your Wealth" class a neighbor and I are taking at the local senior center sponsored by feelincontrol.org I only wish I'd known all this before taking any IRA distributions. Oh well. "Too soon old. Too late smart."
(Note: also posted on Facebook and Google Plus.)

Update 12/10/17: I just discovered one further consequence of the unfortunate home purchase IRA withdrawal that led to the above post: If you take enough out of an IRA that it puts you in a high income bracket one year, you also get hit a year later with a much increased cost for Medicare for the next year, in my case up more than double. Overall, an expensive lesson. It would have been better to buy the home with a 5 year loan than IRA cash, as that would have had the effect of income averaging the IRA withdrawals.