Annuities

Unintended Consequences and an Underutilized Solution


Annuities

Whenever there is a significant change in the tax code, there are always unintended consequences. The Tax Cut and Jobs Act (TCJA) is no exception. While many people thought the new tax law created simplification and reduced corporate taxes, it might also create a dramatic and negative affect on charities.

 

A few reasons why:

  • The TCJA increased the standard deduction to $12,000 for singles and $24,000 for couples
  • Tax brackets were lowered, making all deductions less valuable
  • The federal estate exemption was raised to $22 million for couples, making charitable bequests less urgent for wealthy households

 

The Tax Policy Center estimates that the share of middle-income households claiming the charitable deduction will fall by two-thirds, from 17 percent to just 5.5 percent. Even larger incomes will see a significant drop of nearly 25 percent.1

 

Obviously, those households that are charitably inclined will continue to support their favorite charities. However, many Americans are motivated to make donations based on financial advantages. I want to point out that there are great opportunities to continue making charitable contributions that can impact the tax control of a retiree’s income – one such technique is the use of Qualified Charitable Distributions (QCDs).

 

Help Clients Give

QCDs allow for required minimum distributions up to $100,000 to be directed to a charity directly from the plan participant’s IRA. The distribution does not count as income – that’s a really important distinction. A deduction, most likely, would be taken off adjusted gross income with some limits. A QCD simply does not count as income.

 

This strategy creates cascading benefits – some key ones include:

  • The client can make a charitable deduction even if their contribution is under the standard deduction
  • QCDs do not increase combined income for Social Security taxation calculations
  • QCDs do not increase the Modified Adjusted Income for Medicare premium thresholds
  • The lower income may allow a client to “bracket bump” and convert other qualified funds in a lower tax bracket

 

The use of QCDs hasn’t been popular recently, but I can’t pinpoint why. Many planners haven’t used this strategy because the client was able to take a deduction above and beyond the standard deduction. Now, tax laws have changed, making it more difficult to make a charitable contribution the “traditional” way.

 

Winning Strategy

The tax law change should make you think and act differently. Talk to clients who are taking RMDs about changing their contribution to Qualified Charitable Distributions.

Retirement Webinar

Craving More?

Professor Jamie Hopkins joins us to explain how the tax reform bill impacts retirement income tax planning, focusing on tax efficiency.

Catch the Replay Here

 

1Tax Policy Center, TaxVox, “21 Million Taxpayers Will Stop Taking the Charitable Deduction Under The TCJA,” January 2018: https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

 

About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. You can get his latest book, “Winning Strategies: The New Rules of Retirement Planning,” on Amazon.

Retirement Taxes Charitable Planning Qualified Charitable Distributions

How Guaranteed Income Drastically Changes Retirement Distribution


Annuities

As I’m writing this (January 2018), it’s hard to think about safety in a portfolio. The equity markets continue to rage with double-digit growth for the past several years. There seems to be a new stock market high just about every week, if not every day. 

 

But accumulation and income are two different animals. So they require two unique approaches to solve the client’s problem. 

 

Accumulation

Take a look at systematic contributions to a qualified plan like a 401(k) plan or a nonqualified systematic investment plan. As you’re making ongoing contributions, you buy more shares of the investment when the market (or, specifically, the investment) is down. As the value of the investment increases, you have purchased more shares and gain exponential value. The math phenomenon is called dollar cost averaging (DCA). By being disciplined and consistent, your average cost per share is less than the average paid per share, due to your ability to buy more when the investment is down.

 

Distribution

If you are relying on systematic withdrawals during retirement, the opposite math phenomenon works against you. As you withdraw funds for income, you are liquidating more shares when the market corrects. Therefore, you lose more shares for when the market recovers. It multiplies your losses in a way. After the correction and recovery, you will have less units or shares than you would have with a steady market. 

 

Guaranteed Income

Guaranteed income options provide stability in retirement income planning. Having a protected baseline of income reduces the pressure the portfolio might otherwise take on during the distribution phase. With guaranteed income, there is no need to reduce your unit holdings in order to generate the same level of income; thus, you have a better chance of protecting your assets for the long haul. The less you have to take out in a down market keeps more of the shares, or units, in assets under management for growth, inflation protection and capital gains treatment. There is nothing worse than paying tax on a liquidation that has corrected but still has embedded gains. 

 

Take a look at using a guaranteed income tool to provide a floor for distribution planning. You client benefits not only from the peace of mind, but also the ability to make their assets last longer during retirement. 

 

Winning Strategy

Give guaranteed income options a look. By shifting the downside distribution risk to a guaranteed stream of income, the client can likely maintain their asset base longer in retirement. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Accumulation Distribution Guaranteed Income Retirement Planning