Statisticsmaybehardtofindbutit’sagoodbetthataverylargepercentageofIRA owners name their spouse as theirIRA beneficiary. As a result, advisorsseespousesinheritingIRAsonaregularbasis. This makes knowing the rulesessential.Awrongmovecouldbecostlyfor your clients. Here are ten thingseveryadvisormustknowwhenaspouseinheritsanIRA.

1. How to Ensure All Options for a Spouse Beneficiary

Spouseshaveoptionsnotavailabletootherbeneficiaries.Thefirstcriticalstepfor ensuring those options isforthespousetobenamedasthe beneficiary on the IRA’sbeneficiarydesignationform.If an IRA owner names hisestateasthebeneficiaryofhisIRA and his spouse receivestheIRAfundsunderhiswill,theestateandnot thespousewould be the beneficiary ofthe IRA. This would mean the spousewould not have the special optionsavailableonlyforspousebeneficiaries.

Therehavebeenmanyprivateletterrulings (PLRs) over the years where atrustoranestatewasnamedastheIRAbeneficiary and surviving spouses havegonetotheIRStorequesttheabilitytodoaspousalrollover.WhiletheIRShasallowed such requestswhen the spousehas complete control over the trust orestateanditsdistributions,reliefcomesatahighprice.Allofthiscanbeavoidedif the spouse is simply named on thebeneficiarydesignationform.

Tohavealltheoptionsavailable,thespousemustalsobethesolebeneficiary.What does sole beneficiary mean?

Many married couples willname each other as theirsole beneficiary on theirrespective IRA beneficiarydesignation forms. In thosecases, the sole spouserequirement is already met.Sometimes, however, aspousewillbenamedasoneofseveralbeneficiaries.

If the right moves are taken afterdeath,evenifaspousehasbeennamed

© 2017 Ed Slott, CPA February 2017

ED SLOTT’SIRA ADVISOR

Tax & Estate Planning For Your Retirement Savings

To Order Call: (800) 663-1340 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 1

WHAT’S INSIDE?

10 Things Every Advisor Must Know When a Spouse Inherits an IRA1. HowtoEnsureAllOptionsfor

aSpouseBeneficiary2. StrategiestoConsider3. SpousalRollover4. WatchoutforaDefaultSpousal

Rollover5. WhenanInheritedIRAMakes

Sense6. SpecialRulesforSpousal

BeneficiariesofInheritedIRAs7. SpousalRolloversAre

Irrevocable8. NeverTooLateforaSpousal

Rollover9. TitlingMatters10.RemembertheRMD - Pages 1-3

The Missed RMD for a Non-Spouse Beneficiary• DesignatedBeneficiary• StretchPayout• 5-YearPayout• Non-DesignatedBeneficiary• MissedRMDsAftertheFirstYear’sDistribution

• ReportingMissedDistributions• IRSInformationLetter• BeneficiaryForms

-Pages 3-5

10 Things Every Advisor Must Know When a Spouse Inherits an IRA

Spouses have options not available to other

beneficiaries.

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Pages 6-8

2 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 To Order Call: (800) 663-1340

alongwithothersasabeneficiary,thespousecanbetreatedasasolespousebeneficiary.TheotherbeneficiariesmusteithercashouttheirsharesortheIRAmustbetimelysplitinto separate accounts.Thedeadline to timely cashoutisSeptember30oftheyearaftertheyearofdeathoftheaccount owner.The deadline for separate accounting isDecember31oftheyearaftertheyearofdeath.

2. Strategies to Consider

What are the special options available to a spousebeneficiary?Well,therearetwostrategiesforadvisorstocarefullyconsider.AspousebeneficiarycankeeptheIRAasaninheritedIRAordoaspousalrollover.Many clients will benefit from a spousalrollover. . . but not all. Some are better offstickingwith a beneficiary IRA, at least forawhile.Don’t jump thegunwith a spousalrollover until you are sure that is the rightoption for the client.This decisionmakes abigdifference indeterminingwhenrequiredminimum distributions (RMDs) begin, howthey are calculated, and whether the 10%earlydistributionpenaltyapplies.

3. Spousal Rollover

Aspousalrolloveriswhenthesurvivingspousemovesa deceased spouse’s retirement account into their ownIRA.The term“spousal rollover” is a littlemisleading.A spousal rollover canbedoneby a 60-day rollover, atransfer,orby thesurvivingspouseelecting to treat theIRAastheirown.

After a spousal rollover, the funds in the survivingspouse’sIRAare treatedas thoughtheywerealwaysinthesurvivingspouse’sIRA.Inotherwords,thespouseisnolongertreatedasabeneficiary.

Formany spousebeneficiaries, the spousal rolloverwillbeagoodstrategy. Itcanallowthe inheritedIRAsto be consolidated with other IRAs that the spousebeneficiarymayhave.Formany,itwillresultinsmallerRMDs.ThisisbecauseRMDsfromaninheritedIRAarecalculatedbasedonasinglelifeexpectancywhileRMDsfrom the spouse’sown IRAarecalculatedusinga jointlife expectancy. For some clients, the spousal rolloverwillevenallowRMDstobedelayedforyears.

Example:Doug,age65, inheritedan IRAfromhiswife Debbie who was age 75 when she died. If DougdoesaspousalrolloveroftheinheritedIRA,hecandelayRMDsuntiltheyearheturnsage70½.

4. Watch out for a Default Spousal Rollover

Youmight thinkof a spousal rollover as a strategythat is affirmativelyelectedby the surviving spouse. Inmanycasesthisistrue.However,sometimestheIRAcan

becomethesurvivingspouse’sownIRAbydefault.Onecommonway this could occur is if a surviving spousefailstotakeanRMDfromaninheritedIRA.Whenthishappens,theinheritedIRAbecomesthespouse’sownIRAbydefault.AnotherlesscommonwaythiscanhappenisifthespousemakesacontributiontotheinheritedIRA.

5. When an Inherited IRA Makes Sense

ForsomeclientskeepingthefundsinaninheritedIRAwillbeagoodplanningstrategy.Why?Well,distributionsfrominherited IRAsareneversubject to the10%earlydistribution penalty. If the spouse beneficiary is under

age59½andwantstoaccesstheIRAfunds,stayingwithaninheritedIRAwillmakethatpossible. If on the other hand, a youngerspouse beneficiary does a spousal rollover,theaccountisnolongeraninheritedIRAanddistributionswillbesubjecttothe10%earlydistributionpenalty.

Example: Larry, age 52, inherited anIRAfromhiswife,Louisa.Louisadiedatage50.IfLarrykeepstheinheritedIRA,hecan

take penalty-free distributions. If Larry does a spousalrollover, the withdrawals from his IRA will be earlydistributionssubjecttothe10%penalty.

6. Special Rules for Spousal Beneficiaries of Inherited IRAs

WhenasurvivingspousechoosestokeepaninheritedIRA, they are not subject to RMDs until the later ofDecember31oftheyearfollowingtheyearofdeathorDecember 31 of the year their deceased spouse wouldhavebeen70½.ThisallowsthespousebeneficiaryofanIRAownerwhodiedatayoungagetopotentiallydelayRMDsfordecades.ThiscanbeagoodplanningstrategybecausewhilenoRMDsarerequired,ifthespouseneedsthemoney,theycantakedistributionsfromtheinheritedIRAwithouttheearlydistributionpenaltyapplying.

Example:Bendiedatage30.Hiswife,Allie,age28,ishisbeneficiary.IfAlliekeepsthefundsinaninheritedIRAshewillnotneedtotakeRMDsforfortyyears.Thatwouldbe theyear thatBenwouldhavebeen age70½.Alliecantakedistributionsatanytimewithoutthe10%earlydistributionpenaltyapplying.IfAlliedoesaspousalrollover, shewillbe subject to the10%penaltyonanydistributionshetakesfromherIRA.

Spouse beneficiaries also have the advantage ofbeingabletorecalculatetheirlifeexpectancy.Thismeansthat spouse beneficiaries should look at theSingleLifeExpectancy Table each year to determine their factor.Non-spousebeneficiariesareneverallowedtorecalculatetheir life expectancy. This may seem like an obscurerulebutitgenerallyresultsinsmallerRMDsforspousebeneficiaries.

A spousal rollover can be done by a 60-day rollover, a

transfer, or by electing to treat the IRA as

their own.

To Order Call: (800) 663-1340 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 3

Hereisashockingconcept.Non-spouse beneficiaries do NOT automatically get a stretch IRA.

A non-spouse beneficiary who is able to stretchdistributions must take their first required minimumdistribution(RMD)intheyearafterthedeathoftheIRAowner. What happens when a non-spouse beneficiarymissestheirfirst,andperhapsseveral,requiredminimumdistributions on their inherited IRA? There are severalpossibleoutcomesdependingonhowtheyinherited theIRA and the policies of the IRA custodian holding theinheritedIRA.

The first thing to determine is exactly how thebeneficiary inherited theIRA.Abeneficiarywillalmostalwayssay“I inheritedanIRA.”Thequestiontoaskiswhethertheywerethenamedbeneficiaryonthebeneficiaryform,whichmakes themadesignatedbeneficiary,or iftheyinheritedtheIRAthroughanestatewhichmakesthem

The Missed RMD for a Non-Spouse Beneficiary

anon-designatedbeneficiary.Therulesareverydifferentforthesetwotypesofbeneficiaries.Ifthebeneficiaryformdefaultstoaliving,breathingbeneficiarysuchasaspouseorchildren,thentheyarealsodesignatedbeneficiaries.AbeneficiaryformthatdefaultstotheestateleavestheIRAwithanon-designatedbeneficiary.Note: These rules are for non-spouse beneficiaries only. Spouse beneficiaries have different rules.

Designated Beneficiary

Let’sassume thatwehaveadesignatednon-spousebeneficiary. The general rule for inherited IRAs is thatdesignated beneficiaries, those that were named on thebeneficiary form, can stretch distributions over theirlifetimes.However,theIRAcustodianisnotrequiredtooffer this option to all beneficiaries. So, the next thingthat has to be determined is whether or not the IRAagreementdefaultstoastretchoptionortothefive-year

7. Spousal Rollovers Are Irrevocable Thereisnogoingbackwithaspousalrollover.Thisisanirrevocabledecision.Oncetheinheritedfundshavebeenrolledortransferredintoasurvivingspouse’sownIRAbyaffirmativeactionorevenbydefault,thereisnomagic“undo”buttonthatcanbepressed.TheIRScan’thelpbecauseithasnoauthoritytoundothistransaction.

8. Never Too Late for a Spousal Rollover

On the other hand, the decision to stick with aninheritedIRAisNOTirrevocable.Aspousebeneficiarycan elect a spousal rollover at any time. There is nodeadline.ItmaymakesenseforsomeclientstokeeptheIRAasan inherited IRAforavery long timeand thenyears later do a spousal rollover.Aclientmaywant tokeepthefundsinaninheritedIRAwhentheyareunderage59½andthendoaspousalrolloverwhentheearlydistribution penalty is no longer an issue. A spousebeneficiary through oversight or bad advicemay havesimplykeptaninheritedIRA.Evenyearslaterit isnottoolatetodoaspousalrollover.

Example:Fiveyearsago,Jane,age60,inheritedherhusbandJason’sIRA.Jasondiedatage72.JanehasbeentakingRMDsfromtheinheritedIRAforfiveyears.Shecanstilldoaspousalrolloveratanytime.Bydoingso,shecandelayRMDson the fundsuntil she reaches theyearsheturnsage70½.

9. Titling Matters

Thetitlingontheaccountisimportant.Usuallywhenthe IRA custodian is informed of the death of the IRA

owner,thecustodianwillchangethetitlingontheIRA.The account will be retitled as a beneficiary IRA. Forexample, the account would be titled “Martin Malloy(deceased3/12/2016)IRAFBOMaryMalloy.”

IfMaryasthesolespousebeneficiarydecidestodoaspousalrollover,theIRAwillbetitledinhernamealone.The accountwill no longer be a beneficiary IRA.ThismayseemlikeaminordetailbutthetitlingwillbeusedonalltherequiredreportingtotheIRSfromthecustodianandwill dictate how IRSwill treat the account for taxpurposes.

10. Remember the RMD

IfaspouseinheritsanIRAfromaspousewhodiedafter their required beginning date (April 1 of the yearfollowing the year they reach age 70½), the inheritingspousemusttaketheRMDfortheyearofdeathiftheirdeceasedspousehadnotalreadytakenit.TheRMDcanbetakenfromtheinheritedIRA,orifthespousebeneficiaryelectstodoaspousalrolloverbytransferringthefunds,theRMDcanbetakenfromthespouse’sownIRA.TheIRSdoesnotcareaslongasitcomesoutduringtheyear.IftheclientinheritsaRothIRAoranIRAfromaspousewho has not reached their required beginning date, noRMDisrequiredfortheyearofdeath.

An RMD can be transferred to another IRA, butit cannot be rolled over in a 60-day rollover. Whena surviving spouse receives a check payable to thempersonally, they must keep the RMD amount and canonlyrollovertheremainingbalanceofthedistribution.A60-dayrolloveroftheRMDamountresultsinanexcesscontributioninthereceivingIRA.

4 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 To Order Call: (800) 663-1340

payoutrule.TheIRAcustodianshouldbeabletoanswerthisquestion.Iftheycannot,thenaskthemforacopyoftheIRAagreement.Thisisthemulti-pagedocumentwithall the small print. In the section under distributions tobeneficiariesyoushouldbeabletofindtheanswer.

Stretch Payout

When the IRA agreement defaults to a stretchpayout for non-spouse designated beneficiaries, thenthe beneficiary who has missed his first RMD and/orsubsequentRMDscanmakeupthemisseddistributionsandcontinuewithstretchdistributionsgoingforward.

Thebeneficiary’slifeexpectancyfactorisdeterminedbasedontheageheturnsintheyearaftertheIRAowner’sdeath.ThatageislookedupontheSingleLifeExpectancyTabletogetthebeginningfactor.Thisfactorwillbereducedbyoneforeachsubsequentyear’sRMD.

TheRMDisalwaysbasedon theyear-end account balance for the year prior tothe year of the distribution. For example,an RMD for 2017 is always based on the12/31/16 IRAbalance.Thisbalance isonlyadjustedfor funds thatare in transitatyearend – they have left one account but havenot yet been received by the new account,for Roth IRA recharacterizations, or for excess QLACpremium adjustments. Generally, a beneficiary is notdoing a Roth recharacterization or an excess QLACadjustment,buttheymaybedoingdirecttransfersatyearend.ThebalanceisnotadjustedfortheamountsofanymissedRMDs.

The actual calculation is simple. You take theappropriateyear-endaccountbalanceanddivideitbytheapplicablelifeexpectancyfactor.

Example:Pamisanon-spousedesignatedbeneficiary.SheinheritedherIRAin2014andhasnottakenRMDsfor2015and2016.PamhasjustbeeninformedthatshemusttakeRMDsfromherinheritedIRAbeginningintheyearafterthedeathoftheIRAowner.ShehastwomissedRMDs that she must make up. Pam will find her lifeexpectancyfactorbygoingtotheSingleLifeExpectancyTable(youmayviewthischartintheResourcessectionof IRAhelp.com) and looking up the age she turned in2015, theyear of herfirstRMD.Shewouldhavebeen60thatyearsoherfactoris25.2.Pamwillneedtheyear-endaccountbalancesoftheinheritedIRAfor2014and2015.Her2015RMDiscalculatedbydividingher2014year-endaccountbalancebyherfactorof25.2.The2016RMDiscalculatedbydividingher2015year-endaccountbalance by her new factor of 24.2 (25.2 – 1). PamcancontinuetotakeRMDsforthenext23years.Thisallowshertodeferincometaxesover23yearsandalsoallowstheIRAtocontinuetogrowformanyyears.

5-Year Payout This is a drastic payout option, but unfortunatelymanynon-spousedesignatedbeneficiarieswhomisstheirfirst distribution will find themselves with this defaultoption.

Themechanicsaresimple.ThereisnoRMDforanygivenyearexceptthefifthyear.TheIRAaccountmustbeemptiedbytheendofthefifthyearaftertheyearofdeath.TheRMDforthelastyearistheentireaccountbalance.TheentireIRAaccountbalancemustbedistributedandtaxed within five years. Everyone should be checkingtheirIRAbeneficiaryformstobesurethisdoesn’thappentotheirbeneficiaries.

Example: Betty is a non-spouse designatedbeneficiarywho, likePam above, inheritedherIRAin2014andhasnottakenRMDsfor2015and2016.UnfortunatelyforBetty,thecustodianholdingherinheritedIRAdefaultsto the 5-year payout rule. Betty has until12/31/19toemptyherinheritedIRA.Shehasno requiredRMDs for anyyear except thefifthyear.Shecan takeasmuchoras littleasshewantsoutoftheinheritedIRAforthenext twoyears,andshewillneedtoemptythe account in 2019. Shewill owe incometaxontheentireinheritedIRAbalanceinthe

nextthreeyears.

Non-Designated Beneficiary

A non-designated beneficiary, one who inheritsthrough the estate, will have only limited distributionoptions. The RMD calculationwill depend onwhethertheIRAownerdiedbeforeorafterhisrequiredbeginningdate(RBD).TheRBDisApril1oftheyearaftertheIRAownerturnsage70½.

Example:Craigdiesintheyearhewouldbeage75.HehasdiedafterhisRBD(April1of theyearafterheturned70½).

Marydiesintheyearshewouldbeage70½.ShehasdiedbeforeherRBD(April1oftheyearaftersheturned70½).

Death After the RbD Craig’s non-designated beneficiaries, who haveinherited through his estate since his beneficiary formcouldnotbe found,willbeable to stretchdistributionsfromtheinheritedIRA,buttheywillhavetouseCraig’sremaininglifeexpectancy.Theycannotusetheirownlifeexpectancies.Craigattainedage75 in theyearhedied.Thelifeexpectancyfora75yearoldfromtheSingleLifeExpectancyTableis13.4.ThatfactorgetsreducedbyoneforeachsubsequentyearsoCraig’sbeneficiarieswillstarttheirRMDswithafactorof12.4.

A non-designated beneficiary, one

who inherits through the estate,

will have only limited distribution

options.

To Order Call: (800) 663-1340 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 5

Death before the RbD Mary’s non-designated beneficiaries do not fare aswell.MarydiedbeforeherRBDsoherbeneficiariesmustusethe5-yearrule.TherearenoRMDseachyear,buttheentireaccountbalancemustbepaidoutbytheendofthefifthyearafterMary’sdeathasexplainedabove.

Missed RMDs After the First Year’s Distribution

Oncethenon-spousebeneficiaryhastakentheirfirstRMD,theyaregenerallydeemedtohaveelectedtotakestretchdistributionsandadefaultoptionofthefive-yearrule will no longer apply. Note: There are some IRA agreements that will allow only a five-year distribution and those beneficiaries will be locked into that option no matter what they do in year one.Abeneficiarymustnowtakeatleasttherequiredminimumamounteachyearbyyearend.Anymisseddistributionscanbemadeupatalaterdate,buttheyaresubjecttoapenaltyof50%oftheamountnottaken.DistributionsfromanIRAarealwaysincludableinincomefortheyearinwhichthedistributionismade.

Reporting Missed Distributions

Thereisapenaltyof50%oftheamountofanRMDthatisnottakenfortheyearinwhichitisdue.Thispenaltymust be reported to IRS onForm5329. It can befiledwithanindividual’staxreturnorasastand-alonereturnsinceithasitsownsignatureline.IRShastheauthoritytowaivethispenaltyforgoodcauseafterthemissedRMDhasbeentaken.Themethodfordoing this is included in the instructions forthe form.A notemust be includedwith thereturn explaining the circumstances of themisseddistribution,lettingIRSknowthatyoufoundthemistakeandhavecorrectedit,andthatitwillnothappenagain.

Itisrecommendedthattheformbefiledanytimethere isamissedRMD.Whentheformisnotfiled,thestatuteoflimitationsdoesnotstarttorun.IfIRSfindstheerroratalaterdate,thenthe50%penaltyisowed,plusinterest,failuretofilepenaltiescanbeassessed,plusinterest,andaccuracyrelatedpenaltiescanbeassessed,plusinterest.Itiscleartoseethatthepenaltiesandinterestcantotaluptoasubstantialamount.

IRS Information Letter

2016-0071ReleasedbyIRSon9/30/2016

From the IRS website: An information letter provides general statements of well-defined law without applying them to a specific set of facts. They are furnished by the IRS National

Office in response to requests for general information by taxpayers, by congress-persons on behalf of constituents, or by congress-persons on their own behalf.

Inthisletter,requestedbyoronbehalfofataxpayer,IRS addressed the concerns about the consequences ofmissing thefirstRMDfroman inheritedRoth IRA.Asa reminder,while therearenoRMDsfromaRoth IRAduring the account owner’s lifetime, there are RMDswhennon-spousebeneficiariesinheritaRothIRA.

BecausetheRothIRAownerneverhasanRMD,theynever reach their requiredbeginningdate.Adesignatedbeneficiary will have the options of life expectancy(stretch) distributions or the 5-year rule as describedabove. A non-designated beneficiary will only qualifyfora5-yearpayoutbecausetheRothIRAownerhasdiedbeforehisRBD.

The IRS letter states: “The determination of which distribution period applies is made in accordance with these rules, and is not based on whether distributions in fact begin timely under the applicable rule.”

Thisisagreatconfirmationofthedistributionrulesastheyhavebeenusedsince2003.Beneficiarieswhowouldqualify to use stretch distributions from their inheritedIRAsdonotlosethatabilityiftheyhappentomisstheirfirstRMD.

Beneficiary Forms

It is clear that the beneficiary form isa crucial piece of an IRA owner’s estateplan.When an IRAownerwants his or herbeneficiariestobeabletostretchdistributionsfrom an inherited IRA over their ownlifetime, the IRA owner needs to have acompleted beneficiary form on filewith the

IRAcustodianthatclearlynameshisorherbeneficiariesandthesharethattheyaretoinherit.

Unfortunately,wecannotcountonanIRAcustodiantosafelykeepthatcopyofthebeneficiaryformthatwassocarefullycompletedlastweek,lastmonth,lastyear,orseveralyearsago. IRAownersneedtocheckwith theircustodiansperiodicallytomakesurethattheformisstillonfile.Ifthecustodiancannotfindit,anewbeneficiaryform needs to be completed. Keep a copy of the formbeforeitissenttothecustodianandfollow-upinamonthor two to be sure that they have received it and theirrecords reflect thecorrectbeneficiaries. It isbest togetthatconfirmationinwriting.Itisalsoagoodideatoletthebeneficiariesknowwheretheycanfindthecopiesofthebeneficiaryforms, just incase theyareneededaftertheIRAowner’sdeath.

Mary died before her RBD so her

beneficiaries must use the 5-year rule for distributing the

inherited IRA.

6 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 To Order Call: (800) 663-1340

Guest IRA ExpertJoe Clark, CFP, RFCFinancialEnhancementGroupLafayette,IN

Helping Clients Get More Bang for Their Charitable Bucks Manypeoplebecomemoreinterestedinphilanthropyas they near and go through retirement. By then, theexpenses of raising a family may be behind them,their career goals have been realized, and they’d liketo do something meaningful with the wealth they’veaccumulated.

Forsuchclients,thetaxcodemaynotbeparticularlyhelpful.Iftheirincomehasdroppedinretirement,movingthem into a lower tax bracket, the value of deductingcharitablecontributionsisreduced.

Inaddition,takingmoneyfromtheirtraditionalIRAsand other retirement accounts to make donations willtriggertaxableincome.Qualifiedcharitabledistributions(QCDs)fromIRAsmayprovidesomerelief,butQCDsaren’t allowed until age 70½ (you mustactuallybe70½).

With a QCD, IRA owners forgo a taxdeduction for the charitable contribution,but they also satisfy minimum distributionrequirements without picking up taxableincome for the withdrawal. The tradeoffmayofferseveralnet-taxbenefitsforcertainclients, such as holding down reportedadjustedgrossincome(AGI).

RMDs are Taxable

TheexampleofJeffandJackieSmithcan illustrateone potential problem. Both university educators, theyhave donemost of their investing in their 403(b) plansandaccumulatedsubstantialamounts.Nowage67(Jeff)and64(Jackie),theyarereadytoretire.

Acting without input from an advisor, the SmithshavebeguntocollectSocialSecuritybenefits,receivinga combined $45,000 a year. Once they’re retired, theyestimateaneedfor$30,000peryearfromtheirrolloverIRAstomaintaintheirlifestyleandanother$25,000forthecharitablegiftsthey’dliketomake.

Atfirstglance,withdrawing$25,000fromtheirIRAaccounts and donating $25,000 to charity should be a

wash,aftertax.Inreality,though,theincometheSmithsrecognizefromtheIRAdistributionsraisethetaxontheirSocial Security benefits, so that the maximum 85% ofthosebenefitsarenowtaxable.Thatdoesnotmakethemhappy. What’smore,whenJeffreachesage70½,andrequiredminimumdistributions(RMDs)begin,hisIRAaccountisprojectedtohavenearly$1,800,000.Ifso,hewillhavetowithdrawmorethan$60,000ayear,whetherheneedsthatmoneyornot.

Jackiewillbeinasimilarsituationthreeyearslater,whenshestartsRMDs.Altogether,allofthatRMDincomewillpushuptheSmiths’AGI,creatinganenormoustaxobligation.

Maximizing Charitable Giving

Now that the Smiths are working with an advisor,theirbestplanmightbe to takemoremoneyfromtheirIRAseachyear,inadditiontothe$55,000theywishtowithdraw,toreachthetopoftheircurrenttaxbracket.TheadditionalIRAwithdrawalsmightbeconverted toRothIRAsatanadditionaltaxcost,butthiswillreducefutureRMDsfor theSmithsandcreateasourceoffuturetax-freecashflow.

OncetheSmithsreachage70½,theycando$100,000worthofQCDtransactionsperyear($200,000whenboth

JackieandJeffareeligible).Eventually,thatwilltrimtheirIRAsandreducetheirhighly-taxedRMDs.

The catch is that the Smiths onlywanttodonate$25,000peryear,not$100,000or$200,000.Deferredgiftingusuallyisavailablethrough donor advised funds, but QCDs todonoradvisedfundsarenotpermitted.

The workaround here is to send QCDstoa“restricted fund.”With such funds, thedonormustspecifywhich charity or charitieswill be supported, aswellasthetimingoffuturedistributions,beforetheQCDiscompleted.

A QCD to a restricted fund requires a writtenagreementbetweenthedonorandthecharityorcharities.SuchanagreementmayenableanIRAownertoremovemoney from the account now, untaxed, yet pledgephilanthropiccashflowtodesignatedrecipientsforyearsinthefuture.

This solutionmight help, but it is not ideal. Goodplanning - perhaps taking more money from theirretirement accounts earlier, instead of starting SocialSecurity-mighthavegiventheSmithsabetterretirement.Moreretirementsareharmedbytaxcodeprovisionsthanbypoorinvestmentdecisions.

With a QCD, IRA owners forgo a

tax deduction for the charitable contribution,

without picking up taxable income.

To Order Call: (800) 663-1340 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 7

Top-Bracket Tax Deductions Foranexampleofhowgoodplanningcanproducebetter results, consider Bill and Jean Johnson. Theirincome had been in the $125,000-$150,000 range foryears,butthenitjumpedtomorethan$500,000,puttingtheJohnsonsinthetop39.6%taxbracket.

Atthatlevel,manyoftheiritemizeddeductionshavebeenphasedout,underprevailingtaxrules.TheJohnsonswereshockedathowmuchtheyeffectivelyhadtopayintax,inthistaxbracket.

Going forward, theJohnsonsexpected their incometodropsharplywhenBill retires.They likelywouldgobacktothe25%taxbracketandmightnotbeabletodonateasmuchtocharityastheyhadbeengiving,withmuchlowerincome.

The solution, for the Johnsons, was togive$250,000toadonoradvisedfund,eachyear, for twoyearsbeforeBill retired.Thiswas50%oftheirAGI,themaximumthattheJohnsonscoulddeductcurrently.

Thesegifts took theJohnsons from thetop bracket down to one that was muchlower, reducing the amount sent to the IRS. Makingthese charitable contributions in thehighest taxbracketprovidedthemostbeneficialphilanthropictaxdeduction.

Now that they are retired, themoney in the donoradvisedfundcanbedoledoutbytheJohnsonsfordecades,$25,000ayear,tocharitiesoftheirchoosing.Iftheywanttomakeadditionaldonations,they’llbeabletouseQCDsfrom their IRAsafter age70½and thusavoidboostingtheirtaxableincome.

Meanwhile,withouttax-deductiblecontributions,themortgage-freeJohnsonshavefewitemizeddeductionssotheyaretakingthestandarddeductionontheirtaxreturns.(Thestandarddeductionmightbedramaticallyincreasedinthefuture,underproposedtaxchanges.)Evenwithoutcurrent donations, the Johnsons still can make thecharitable contributions they’d like, using grants fromtheirdonoradvisedfund. ThisplanhasallowedBill toleave work without concern over funding the couple’sfavoredcharities,onceheretired.

Maximizing QCDs

Not every client will have multiple millions in aretirement fundor incomeover$500,000ayear.ThosewithsmallerIRAscanalsobenefitfromsavvyplanningfortheirdonations.

Forexample,RogerandEliseBrownareage70and67respectively.Theyhavebeengivingover$100,000peryeartocharity.

Rogernowhas$400,000inhisIRAwhileElisehas$200,000inhers.OnceRogerreaches70½,hecanbeginmakingthose$100,000annualdonationsviaQCDs.

Afterfouryears,Roger’sIRAwillbedepleted,andhe’ll no longer faceRMDs.From that point,Elisewillbegin to pay $100,000 from her IRA to charity withQCDs,emptyingherIRAintwoyears.

During those six years, the Browns no longer willwritechecks tocharity,as theirphilanthropic intentionswillbe fulfilledbyQCDs. Instead, themoneynormallygiftedtocharitywillgointotheirinvestmentaccounts.

Onceboth IRAshavebeen zeroedout, theBrownscan tap their investment accounts for theircharitablecontributions. If thereare losses,investmentscanbe sold to realizevaluablecapital losses, and the cash proceeds fromthesalecangotocharity.

On the other hand, if there have beengains in their investment accounts, theBrowns can give the appreciated securitiesto theirchurchandothercharities.As longastheappreciatedsecuritieshavebeenheldlongerthan12months,theBrownswillpay

notaxonthecapitalgainsandwillgettotakeanitemizeddeduction for the full, fairmarket valueof the donatedassets,uptotax-codelimits.

Qualified charities can receive the donations ofappreciatedsecuritiesandsellthoseassetswithoutowingincometax.Donorsgetataxdeduction,thecharitygetsanuntaxedcontribution,nooneeverpaystaxontheassetappreciation,andtheonlyloseristheIRS.

Even without current donations,

the Johnsons still can make the charitable contributions they’d

like, using grants from their donor

advised fund.

Joe Clark has been in the financial services industry for more than 25 years. He is the Managing Partner and Lead Advisor of The Financial Enhancement Group, LLC, an asset management and financial planning firm with four locations in Indiana that manages over $250 million. Joe is also a former Adjunct Assistant Professor at Purdue University, having taught the Capstone course for the Financial Counseling and Planning program for 7 years. He is a Charter Member of Ed Slott's Master Elite IRA Advisor Groupsm and has appeared on various national and local media outlets. Joe writes a weekly column for The Herald Bulletin and is the host of a weekly radio show "Consider This" that airs on multiple stations throughout Central Indiana.

Joe Clark can be reached at (800) 928-4001 or bigjoe@yourlifeafterwork.com. You may also visit his website, www.yourlifeafterwork.com.

8 ED SLOTT’S IRA ADVISOR • FEbRuARy 2017 To Order Call: (800) 663-1340

ED SLOTT’SIRA Advisor

Editor - in - ChiefEdSlott,CPA

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Ed Slott’s IRA Advisor has beencarefullyresearchedtoprovideaccurateand current data to financial advisors,taxpayers, and others who seek anduse the information contained in thisnewsletter. Readers are cautioned,however, that this newsletter isnot intended to provide tax, legal,accounting, financial, or professionaladvice. If such services are required,then readers are advised to seek theaidofcompetentprofessionaladvisors.This newsletter contains timelyinformation about complicated taxtopicsthatmayeventuallybechanged,outdated,orrenderedincorrectbynewlegislationorofficialrulings.Theeditor,authors, and publisher shall not haveliabilityorresponsibilitytoanypersonor entity with respect to any loss ordamagecausedorallegedtobecaused,directlyorindirectly,bytheinformationcontainedinthisnewsletter.

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Advisor Action Plan

• Determine which clients have substantial philanthropic intentions now andhopetomakelargecharitabledonationsduringretirement.

• Encouragetheseclientstomakesizabledonationswhentheyareinhightaxbrackets.Thebesttimemaybewhenclientsarenearretirement,withreducedfamilyobligationsandampleearnedincome.

•Suggestthatcharitablecontributionsbemadetoadonoradvisedfundbeforeage70½.Clientsmaygetacurrenttaxdeductionyetdefertheactualgiftstocharity.Thisplanallowsdonationstocontinueafterretirement,tooneormorechosenrecipients,evenifincomehasfallen.

• Urge clientswho reach age70½ to switchdonations to qualified charitabledistributions (QCDs) fromIRAs,up to$100,000perdonorperyear.QCDssatisfyrequiredminimumdistributions,andtheadvantagesofholdingdownadjustedgrossincomewilloffsetthelossofcharitabletaxdeductions,inmanycases.

• IfclientswanttotakeQCDsyetdefertheactualgiftstocharities,theywon’tbeabletousedonoradvisedfunds.AdvisesuchclientsthatQCDsinsteadmaybemadetorestrictedfunds,alongwithascheduleforfuturedonationstospecifiedcharities.

• IfIRAsarezeroedout,clientscancontinuetheirtax-efficientcharitablegivingbydonatingappreciatedstock.