McKonomics

New Law Extends IRA Donation Tax Break: Can You Benefit?

There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.

Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.

Here is a detailed explanation of the qualified charitable distribution privilege, which was extended in the latest tax law.

Buckets of Money for Retirement

 You've diversified your investment portfolio. But have you diversified your tax burden? Making sure that the after-tax value of your savings isn't riding on just one tax rate doesn't get a lot of attention. But make no mistake: failure to diversify your tax exposure before you retire could reduce what you have to live on later.

Many people plan for retirement by contributing diligently to 401k and other tax-deferred accounts such as traditional IRA's. That makes sense because they may be receiving matching contributions from their employer and the gains compound without the drag of taxes. However, withdrawals from these accounts will be taxed as ordinary income which can take the biggest tax bite out of your savings. When you consider that your withdrawals must be large enough to cover your expenses plus the taxes on the withdrawals, you may find yourself in a higher tax bracket than you think.

So, how should you cope with this dilemma? Diversify. One sound strategy is to fund three buckets of money-tax-deferred, tax-free, and long-term capital gains. Having three buckets will give you some maneuvering room when it comes to funding your retirement.

Reducing Your Workforce? Don’t Forget Your 401k Plan

In today's economic climate, many companies have taken, or are planning to take, steps to reduce payroll costs including layoffs. Most employers are aware that they may fully terminate a 401k plan at their discretion; however, layoffs or other employer initiated actions may trigger a partial plan termination. Upon the full termination of a 401k plan, all affected participants become fully vested in their account balances. The same is true for a partial plan termination.

 

A partial plan termination typically occurs when an employer reduces its workforce and related plan participation by 20%. The timeline to consider the reduction will depend on specific facts and circumstances. However, in general the reduction rate is determined by dividing the number of participating employees who were affected by an employer initiated reduction by the number of all employees participating in the plan at the beginning of the applicable period (generally the plan year). This means that all matching contributions and other employer contributions become fully vested for all affected participants, regardless of a vesting schedule.

Easing into Retirement

For most of your working life, you've looked forward to the day when you can quit your job and start enjoying retirement. But in recent years, talk of longer life expectancies, uncertain Social Security benefits, declining pension benefits, unknown inflation rates, and low retirement savings made retiring at a relatively young age seem difficult. Then, in the past couple of years, declining investment and home values made it seem even more difficult to retire at any age. More and more people are coming to the conclusion that either retiring later or continuing to work during retirement is necessary.

 

Working doesn't necessarily mean that you have to stay with your current employer. Rather, many individuals are taking on totally different jobs, which can allow them to try something new, provide more free time by working less, or ensure less stress. Besides the nonfinancial reasons for working, there are several financial reasons:

 

· You have more time to save. Each additional year you work is an additional year you can continue to save for retirement. Those age 50 and over have additional means for saving, with annual catch-up contributions of $1,000 for individual retirement accounts and $5,500 for 401(k) plans in 2010.

· You shorten your retirement period. The longer you work, the less time you'll spend in retirement, which means you need less money to fund that retirement.

· You can delay Social Security benefits. Each additional year you wait to take Social Security benefits, up to age 70, will permanently increase your monthly benefit.

· You keep health insurance benefits. One of the most significant costs in retirement is health care, and you can delay that cost by working at a job that provides this benefit.