Business I finance
The Tax Efficiency Of IRAs
Dealing with Internal Revenue's
mandatory distributions.
M
"I've gained so much"
Robb Lippitt is a local Internet entrepreneur. He
knows a thing or two about what it takes to build
a successful organization. It's more than nuts and
bolts or bricks and mortar. It's about passion,
about clear goals and teamwork.
Robb sees a lot of that in Federation. As a member
of Federation's Jewish Business Leaders he's been
able to expand his leadership skills and work with
incredible people. He encourages others to get
involved. "Whether it's working with our older
adults, with families in need, in support of Israel
or just writing a check, Federation does a great
job of finding the best fit for each individual':
Most importantly, Robb feels his work with
Federation has helped daughters Molly and Eryn
understand how fortunate they are and how
important it is to give back to their community.
IIII Jewish
Federation
of Metropolitan Detroit
jewishdetroit.org
1278690
B8
February 14 • 2008
illions of Americans have
individual retirement
accounts (IRAs) subject to
complex taxation for withdrawals and
distributions made during their life-
times. Fortunately, these assets make
tax-efficient charitable gifts upon the
IRA owner's death.
Since IRAs grow on a tax-deferred
basis, the government does
not realize any revenue
until funds are withdrawn.
To ensure that these funds
are not deferred in perpe-
tuity, the IRS established
rules requiring manda-
tory distributions when
an IRA holder reaches a
certain age. Then he or she
is subject to the required
minimum distribution
(RMD) rules and must
begin receiving amounts
from all of his or her IRAs or face a 50
percent IRS penalty tax on the amount
that should have been distributed, but
was not. The IRA holder can always
withdraw more than is required, but
must take the minimum to avoid the
penalty.
The required beginning date for an
IRA owner to receive the first distribu-
tion is April 1 of the year following the
year the account holder reaches age
701/2 . This is the first distribution for
the year the account holder reaches
701/2. The second required distribu-
tion is then due by Dec. 31 of that
same year, and each subsequent year's
distribution is due be Dec. 31. If the
IRA owner delays receipt of the first
distribution until April 1 of the year
after turning 701/2 , two distributions
must occur in that same calendar
year, which may not be wise from an
income tax perspective.
The amount of the required mini-
mum distribution is determined by
the Uniform Lifetime Table (which
your accountant or financial advisor
can provide), without regard to who is
named as the beneficiary. The excep-
tion to this is if the IRA owner is mar-
ried to someone who is more than 10
years younger than himself or herself
and has named that person as the sole
beneficiary.
While the U.S. Treasury has sim-
plified the rules for determining
minimum distribution amounts, it has
also aided the ability to enforce the
distribution rules. Every IRA adminis-
trator is required to report to the IRA
owner and the IRS the amount of the
required minimum distribution for
each calendar year.
Minimum distributions are required
even after the death of the IRA
holder. The amount of the distribu-
tion depends on whether the owner
died prior to or after his or
her beginning date and if
the account listed a desig-
nated beneficiary or not.
Only a surviving spouse
can roll over an inherited
distribution to his or her
own IRA, called a spousal
rollover IRA, and further
delay receiving required
distributions until his or
her own required beginning
date; all other beneficiaries
must take distributions and
are taxed according to the Required
Minimum Distribution Upon Death
rules which your accountant of finan-
cial advisor can provide.
To make a charitable gift from an
IRA, the IRA owner must request a
distribution from the IRA, deposit the
distribution and then write a check
for the amount of the charitable gift.
The withdrawal is subject to ordinary
income tax and, of course, a 10 per-
cent penalty tax if the IRA owner is
younger than age 59 1/2 .
As a second transaction, the IRA
owner can then take a charitable con-
tribution deduction for the gift, but
only if he or she itemizes his or her
deductions. The deduction is subject
to a ceiling of 50 percent of the adjust-
ed gross income (AGI). Because of this
limitation, if the IRA owner withdraws
too much from the IRA, it can cause
him or her to pay more in income
taxes than if there was no gift at all.
As always, contact your tax adviser
or financial professional before mak-
ing any financial or charitable plan-
ning decisions. ❑
Norton Stern is a registered principal with
Franklin Financial Investments, Southfield.
(248) 262-8810. Investments are offered
through Wachovia Securities Financial
Network, LLC. This informational material
is not a solicitation of an offer to buy any
security or instrument or to participate in
any trading strategy.