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 Since IRAs grow on a tax-deferred basis, the government does not realize any revenue until funds are withdrawn.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. 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