7 retirement-planning strategies to wrap up the year

October 4, 2018

By Ed Slott at Financial Advisor on October 1, 2018

We’re getting close to the time of year when advisors can really show clients their value, especially when it comes to retirement and tax planning. It’s a time when a lot of poor decisions can be made about required minimum distributions, asset appreciation and Roth conversions. Important exemptions are forgotten. People confront penalities for bad behavior. They miss deadlines and important opportunities on things like charitable deductions.

Advisors can demonstrate their value as the year winds down by addressing these seven items in particular.

1. Required minimum distributions (RMDs)

This is an annual IRA ritual well known to financial advisors, but I still get the calls when the distributions fall through the cracks or there are computational errors. Remember that clients who miss their required minimums get hit with a costly 50% penalty on any distribution amount they should have taken.

It’s true that the penalty can often be waived by the IRS. But who needs that anxiety in the first place?

Advisors should know every client who is subject to RMDs by year’s end. You’ll have your regulars—those clients over 701/2 years old who take their RMDs each year. But you should also look out for other clients who may fall into this category who might not be as obvious, including those who fall into the category for the first time. This group includes newcomers to the 701/2 club, or sophomores who suddenly have two RMDs this year (their first and second) and required distributions for IRAs or Roth IRAs that they have inherited (these include trusts that are IRA beneficiaries). Roth 401(k)s are also subject to required minimum payouts (though Roth IRA owners aren’t).

2. Qualified charitable distributions

The Tax Cuts and Jobs Act of 2017 gave taxpayers help in the form of an expanded standard deduction. But at the same time, many clients will now no longer be able to deduct their charitable contributions because they will probably not itemize their deductions. If your clients with IRAs subject to a required minimum distribution have not yet taken it for the year (which is likely since many clients take their RMDs near year’s end), contact them immediately to advise them to use the qualified charitable distribution (QCD) provision and make their contributions directly from their IRA.

The amount contributed will count toward your clients’ RMD and be excluded from income, creating an “effective” tax deduction in addition to the standard deduction. The QCD only applies to IRAs, not to plans, and only IRA owners or beneficiaries who are at least 701/2 qualify. Donor-advised funds and private foundations are not eligible for the qualified charitable distribution, and nothing can be received in return for the gift. The annual limit is $100,000 per person, per year.

If your clients are contemplating a onetime large donation, they can still do the QCD even if the gift exceeds the required minimum distribution amount, as long as it stays under the $100,000 limit. In this case, giving more than the RMD removes more IRA funds that will then not fall under income. QCDs also lower adjusted gross income, which in turn may help you with other tax benefits or deductions. Qualified charitable distributions lower tax bills. But to count for 2018, a QCD must be completed by year’s end.

3. Roth conversions

The biggest IRA planning change in the new tax law was for Roth conversions. Beginning in 2018, conversions can no longer be reversed. They will be permanent and the tax will be due once the funds are converted. Roth conversions are still valuable for the right client, but now any conversions contemplated for 2018 must be carefully planned and the tax bill accurately projected. Unlike an IRA contribution, which you can make until April 15th of the next year, to qualify for a Roth conversion this year the funds must leave the IRA or plan by year’s end.

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