Monthly Archives: October 2016

Rules You Need to Know to do an IRA Qualified Charitable Distribution

How to Avoid Mistakes that Cannot be Undone When Making Qualified Charitable Distributions from an IRA

Are you meeting all of the specific requirements to reap all the benefits when making a Qualified Charitable Distribution? Make sure you are not leaving money on the table.


Did you know that if you are over the age of 70 ½ and charitably inclined, you can send a portion of your IRA’s Required Minimum Distribution directly to a charity and thereby lower your adjusted gross income and potentially decrease phaseouts and Medicare premiums?


The IRS recently passed the PATH Act of 2015 to permanently allow qualified charitable distributions (QCDs) every year.  Previously, Qualified Charitable Distributions had been reinstated annually for the preceding year, which made the use of QCDs for tax planning a little more difficult.  The QCD allows an individual who has reached the age of  70 ½ to send a portion of their RMD from an IRA directly to charity.  The limit on the amount that one can send to charity is $100,000 and the distribution must be made from an IRA, not a 401(k).  The $100,000 limit is per an individual, so a married couple may each send up to $100,000 from their respective IRA’s RMDs to a charity.     


There are several reasons why it may be important for an individual or married couple, who is already charitably inclined, to send their RMD directly to charity.  First, it decreases your Adjusted Gross Income (AGI).  Instead of including your entire RMD in your AGI and then making a donation to charity for a deduction, you can send the amount you would have donated directly to a charity and it will not be included in your AGI.  You still end up giving the same amount to charity while decreasing your AGI. 


Second, as your AGI increases, you begin to have an increase of phaseouts on deductions and exemptions as well as an increase in Medicare premiums, which then increases your taxable income.  By sending a portion of your RMD directly to a charity, you can attempt to avoid some of the phaseouts that occur at a higher AGI.  Consider the following hypotheticals:


A married couple in their late 70’s wishes to make a large donation to their favorite charity.  Their current AGI, including their RMDs of $160,000, is $327,000.  They make a donation of $100,000 and deduct the amount on Schedule A of their tax return.  Their total estimated Federal Income tax payment is $47,660.  Since their AGI is over the threshold for phaseouts, they will lose part of their deductions and their exemptions.  They will also have higher monthly Medicare premiums and will be required to pay the Net Investment Income Tax.    


If the same couple sends $100,000 of their RMDs directly to charity, their current AGI will decrease to $227,000.  They will not list a charitable deduction on their Schedule A.  Their total estimated Federal Income tax payment will be $42,581.  Not only are they paying less in Federal Income taxes and Net Investment Income tax, but they will be paying less in Medicare premiums as well.


See comparison below:

October 2016 FF Image- May 2018 Update

If you do decide to make a QCD, it is key to remember to have your IRA’s custodian make the check payable to the charity and not to you as the owner.  If the check is made out to you, there is no way to correct this mistake and the money will be deemed as part of your adjusted gross income.  Additionally, the charity must be a public charity, not a private foundation nor a donor-advised fund. It is also important to note that a QCD can only by made from a Traditional IRA or an Inherited IRA where a beneficiary is over 70 1/2 years-of-age. You cannot make a QCD from a SiMPLE IRA, SEP IRA or 401(k), as these are considered employer-sponsored plans and are excluded from the rule.  

Taking advantage of the newly permanent QCD law is a tax-efficient way to keep your income lower and pay fewer taxes while still being able to give to the charity of your choice. 


img_7Alexis Long, MBA, CFP®

Alexis Long is an wealth manager at Willis Johnson & Associates. For Alexis, financial planning combines an interest in producing detail-oriented financial plans with a desire to help people obtain their goals, ranging from retiring early, paying for their grandchildren’s educations, buying a second home or leaving a legacy for their children. Understanding what is truly important to a client is key to good financial planning, along with providing solid technical advice.

Alexis earned her undergraduate degree in International Business from Texas Tech University and her Finance M.B.A. from the University of St. Thomas.


Why IRS Announcement 2014-32 is Causing Tax Problems for Retirees

October 12, 2016

What You Need to Know About the 60-Day Rollover Rule: IRA Rollover Mistakes You Should Avoid

Indirect Rollover, IRA Loans, and Tax Penalties


Just the other day, I sat down with two of my clients and I walked them through their retirement consolidation, investments, and cash flow plan. These two clients were a couple. For the purpose of this article, let’s call them Mr. and Mrs. Jack and Jane Smith.


We completed an intensive investigative process, which helped me learn a lot about their financial situation when we first sat down. I proposed a plan to help Jack and Jane understand their benefits and accomplish their financial goals. 


Eventually, the conversation began heading towards the logistics of how to fill out the paperwork to do an IRA Rollover from Jack’s 401(k).  Jack and Jane wanted to make sure that the money they selected to invest towards the new strategy would be deposited directly into their Rollover IRA, which was recently set up. Then, Jack asked me the following question:


Jack: “Why can’t I just have the check made out directly to myself?”

Nick: “Well, Jack, that is called an Indirect Transfer and it can potentially cause some tax penalties. We believe that the best practice is to always do trustee-to-trustee transfers.”

Jack: “What does that mean? And frankly, I’m not too sure I feel comfortable having this much money payable to Fidelity, even if it does include the words, ‘for the benefit of Jack Smith’.”


Straightaway, this led us into an in-depth conversation about IRS Announcement 2014-32.


As many people may know, the IRS allows a financial transaction called a 60-day rollover. This is where an individual may take a withdrawal from one qualified retirement account and roll the proceeds into another qualified retirement account within 60 days without any penalties.


Before, the rule used to allow an unlimited amount of IRA rollovers as long as the withdrawal and deposit were both made into the next IRA within a 60-day period. Unfortunately, most people are not familiar with the new announcement from the IRS. Today, only one 60-day rollover is allowed within a 365-day period. Only One. If an additional rollover occurs within a 365-day period then the distribution will be taxable and possibly subject to penalties.


Previously, advisors encouraged the prolific use of the 60-day rollover rule so much so that special strategies were developed to take advantage of it. One of the more well-known strategies is the IRA loan. In this strategy, an individual, like Jack, might have a short-term need for money.


For example, let’s say that Jack and Jane are purchasing a new house and selling their current home. The problem is that their new house purchase is closing before the current house sell. They need the 20% for the down payment. Jack may decide to take the money out of his IRA and use it for the deposit. When their home sells, he can put the money back into his IRA within 60 days without any taxes or penalties. The problem is that if Jack either already made a 60-day rollover in the last 364 days or chooses to make an additional 60-day rollover in the next 364 days, then it will void the IRA loan. The second transfer can potentially cause taxes and early withdrawal penalties; this can easily happen in situations as follows:


1) Jack decides to consolidate IRAs.

2) Jack may have an IRA CD at a bank that automatically renews and rolls over to a new IRA.

3) Jack cashes out an IRA annuity and the annuity company makes the check payable directly to him.

4) Jack’s advisor does not advise him differently during the proposed consolidation plan.



Given these points, retirees, such as Jack and Jane Smith, are not the only ones unaware of the new rule change, but some financial professionals may not provide the correct advice to their clients. In light of the new rule change, Ed Slott, a CPA and advisor in Rockville Center, recently wrote an article on Slott illustrates how advisors, bank tellers, and many others are giving out dangerously incorrect instructions. It is so easy to slip up and incur penalties which is why Slott recommends to, “Never, ever, take in new client IRA or Roth IRA money as a 60-day rollover. Only use direct transfers. Advisers don’t know the history of the clients’ other IRA rollover transactions in all their other IRAs and Roth IRAs for the last 12 months. If another 60-day rollover was done, the new client IRA rollover cannot be done and the funds must be distributed and subject to taxation.”


It’s great advice for advisors and clients. If you are ever moving money between IRAs and/or other qualified accounts, we recommend to always do trustee-to-trustee transfers. In the case of a slip up on your part, or anyone else’s, then you are less likely to find yourself in hot water in regards to the 60-day rollover rule.   



Willis Johnson & Associates is a registered investment advisor. If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted Traditional IRA contributions, and on all earnings. A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor.
This material is intended for informational purposes only and should not be construed or acted upon as individualized investment advice. Federal tax laws are complex and subject to change. Neither Willis Johnson & Associates, nor its investment advisor representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.



Nick Johnson, CFA®, CFP®



Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.


As Vice President and a Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.




The Markets (as of market close September 30, 2016)

October 6, 2016


The second quarter provided a bumpy ride for investors. Following the upheaval caused by the Brexit vote in June, July kicked off the third quarter by ending the month in favorable fashion, as each of the indexes listed here posted month-to-month gains, led by the Russell 2000 (5.90%) and the Nasdaq (6.60%). Stocks held their own for July, despite falling energy shares, as crude oil prices (WTI) sank from around $49 per barrel to under $42 by the close of July. As money moved into equities, bond yields remained on the low side as the yield on 10-year Treasuries remained below 1.60%, closing July at just about where it started at 1.45%.


The dog days of summer saw light trading in August, but that didn’t stop the markets from moving sharply. By the middle of the month, the Dow, S&P 500, and Nasdaq had surged to all-time highs – the first time since 1999 that all three indexes reached a new high at the same time. Yet by the end of August, each of the indexes listed here saw their values fall back to about where they were at the beginning of the month. The large-cap Dow and S&P 500 fell ever so slightly from July’s closing values, while the Russell 2000 and Global Dow posted modest gains for the month. Crude oil fell below $40 per barrel during the month, but rebounded to close the month at about $45 per barrel. Bond prices fell as the yield on 10-year Treasuries reached 1.60%.

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