dsmWealth: November 2, 2023

BY STEVE DINNEN

Required minimum distributions — RMDs — from your retirement savings account are a fact of life. Once they kick in, you can’t avoid them. But you can certainly use them to your advantage to help minimize your taxes.

Kevin Wingert, founder of American Retirement Systems in Urbandale, has counseled many people about using RMD money once it lands in their lap. One of his favorite strategies is putting the money in a Roth IRA. “I’m a big fan of Roths,” he said. “You can use it to build tax-free wealth.”

For instance, you can take traditional IRA funds and convert them to a Roth account. Roth earnings are tax-free. (You do have to pay taxes at the time of the conversion, but future growth in the Roth IRA is tax-free). This strategy usually works best after retirement, when your income may be lower than when you were working, but before you reach RMD age. Since both RMDs and Roth conversions create ordinary income, you’ll want to manage your income so you don’t climb into a higher tax bracket. For federal taxes, the sweet spot in most cases is in the 24% bracket or lower tax brackets for couples.

In one situation, Wingert worked with a woman who wanted long-term care insurance. They used an RMD to buy an insurance policy that had a component of long-term care insurance. So if she ends up needing it, the insurance policy would provide around $40,000 yearly to help pay for long-term care — basically, an advance on her death benefit, Wingert said. And if she doesn’t use the long-term care insurance, her children will get the proceeds of the insurance policy, tax free.

Another insurance idea: Wingert worked with one client who had a taxable IRA valued at $2.4 million. When the man dies, his children will inherit that IRA, along with a tax bill of roughly $800,000. But he can buy a life insurance policy with RMD dollars that will pay out a big enough benefit to handle that tax bill.

And of course, you can always give money away to lessen your RMD. You can donate up to $100,000 to qualifying charities and have it lower your RMD base for future years. You must be at least 70 and a half years old to do a qualified charitable distribution, and the funds must go directly from your IRA custodian to the charity.

As always, make sure to consult your tax professional for details.

IRS bumps up caps for retirement savings contributions
BY STEVE DINNEN

Hot off the press: The IRS on Wednesday raised the amount that Americans can set aside for retirement in their 401(k) and other tax-deferred plans next year.

Beginning in 2024, workers will be able to contribute up to $23,000 to their 401(k) accounts. That’s an increase of $500 from this year. The increase applies to other retirement savings accounts, as well, including 403(b) plans, most 457 plans and the federal government's Thrift Savings Plan.

Catch-up contributions for savers age 50 and older remain unchanged at $7,500.

The IRS also lifted the contribution maximums for IRAs, bumping the limit to $7,000 for 2024, up from $6,500 in 2022. The catch-up contribution amount for IRAs stays at $1,000.

Now, to Roth accounts: The newest income phase-out from the IRS will rise to $161,000 for individuals and heads of households, up from $153,000 in 2023. The phase-out will climb to $240,000 for married couples who file jointly, up from the previous cap of $228,000.

According to a 2022 Vanguard report, average balances for retirement were $141,542. So if you can kick in that catch-up amount, go for it. One in four Americans has no retirement savings at all, so if you can start to save, do so. And start today.

Inflation-proof your retirement savings now
BY LAURA SAUNDERS FOR THE WALL STREET JOURNAL

It’s hard to find a more confusing “safe” investment than the government bonds called TIPS — Treasury inflation-protected securities — and that includes the taxes on them. But people who avoid them now could be making a mistake, especially if they’re facing retirement.

No wonder investors are bewildered. TIPS say they offer inflation protection, but last year, when inflation soared, many holders of funds with longer-term TIPS had steep negative returns. That’s because TIPS, like other bonds, suffer when interest rates rise.

Many investors fled, pulling about $42 billion out of TIPS funds between April 2022 and Sept. 30 of this year, according to Morningstar Direct.

Yet now that inflation has cooled, TIPS yields are shining. What’s known as the real yield on 10-year TIPS was recently about 2.5%, the highest in years. If investors hold to maturity, they’re guaranteed that annualized return, because the principal of the bond is adjusted for inflation.

Including the inflation adjustment, the total yield on 10-year TIPS was recently about 4.9%, while the yield on the traditional 10-year Treasury note was flirting with 5% — but it’s not adjusted for inflation. So TIPS will do better than traditional Treasurys if inflation averages more than about 2.4% over the decade.

TIPS taxes are also confusing. Because these bonds throw off phantom income, they often generate annual tax bills without cash payouts to cover them. This makes some investors shun them.

If you’re one of the shunners, think again. Right now, say some advisers, individual TIPS offer remarkable opportunities to investors who want inflation-proof chunks of cash with increases in spending power, such as for retirement.

One of these advisers is Allan Roth, a CPA and the founder of Wealth Logic, an advisory firm. Putting his money where his mouth is, he recently built a $1 million, 30-year ladder of individual TIPS for his own family. As each slice matures, the principal and income will provide inflation-adjusted cash equal to about $45,000 a year in today’s dollars, he says.

Roth knows he’s giving up the potential for more capital appreciation from investments like stocks. But he wants to lock in future spending power on these assets. For growth, he’ll look to a separate slug of stock-index funds.

“It’s scary to spend down a portfolio, especially in a down market, but the ladder gives me a license to spend,” he says. “It’s the only investment strategy I’ve found that makes economic sense and also feels great.”

Roth adds that given current TIPS yields, his ladder is enabling a withdrawal rate of 4.5% pretax for 30 years when held to maturity. This is more than the 4% retirement withdrawal benchmark. The fees are also minimal, and he says the tax on phantom income is “an annoyance, not a deal breaker.”

That said, TIPS are complicated. Read more about them right here.

Charitable donations: what to know about scams and taxes
BY KATELYN WASHINGTON FOR KIPLINGER

With the rising number of natural and other disasters occurring around the world, you, like many others, may feel the need to donate. But do your research because not all organizations claiming to be charities are legitimate. Fake charities can appear real and be set up by scammers to steal your money. But that’s not all scammers may be after.

According to the IRS, scammers might also request personal information, which puts you at risk for identity theft. While the presence of these scams shouldn’t deter you from giving, it’s important to verify charitable organizations before you make a donation, especially in times of crisis.

"Knowing we're trying to aid those who are suffering, criminals crawl out of the woodwork to prey on those most vulnerable — people who simply want to help, " IRS Commissioner Danny Werfel said in a release about charity scams. Werfel added it's important to check out a charity first to confirm it's authentic. As he put it, don't "feel pressured to immediately give to a charity you've never heard of."

Fake charities: Spotting tax donation scams

It’s not always easy to spot fake charity scams. After all, scammers might “spoof” your caller ID to make it look like they represent a legitimate organization. Or they might set up fake websites that look authentic. But knowing what to look for can help protect you and your money.

For example, legitimate charities won’t ask you to provide gift card numbers or to wire your donation. Here are a few other things the IRS says can indicate a scam:

Requests for more information than required (for example, personal information such as your Social Security number)
Pressure to donate money immediately
You're unable to verify the charity’s name, address and website based on your own research (more on that below.)

How to tell if a charity is legitimate

Using the IRS Tax-Exempt Organization Search (TEOS) tool allows you to research legitimate charities. You can find information about a charity’s tax-exempt status and filings and check to see if the charity is eligible for tax-deductible donations.

Since not all charitable contributions are eligible for a tax deduction, using the TEOS can be beneficial if you plan to itemize deductions, even when you trust the organization. However, it is important to note that just because a charity doesn’t qualify for tax-deductible contributions doesn’t mean it isn’t legitimate.

How to claim a charitable donation tax deduction

If you itemize deductions, you can claim qualified charitable contributions as a tax deduction on Schedule A of your federal Form 1040. However, as stated, not all charities are eligible for tax-deductible donations.

For example, donating money to an individual is not tax-deductible, even if the donation goes to a good cause, such as medical treatment or housing assistance. And even when the charity is eligible for tax-deductible contributions, there are special rules you must follow.

If you benefit from the donation (for example, if you receive a meal), you can deduct the difference between your donation and the fair market value (FMV) of what you receive. For example, if you donate $50, and the FMV of your meal is $25, you would only be eligible to claim a $25 deduction.
For non-cash donations (such as art), you must deduct the FMV of the donation at the time you make the contribution.
You cannot claim a deduction for volunteering your time or services. However, you can deduct costs related to volunteering (for example, transportation expenses).

Other limitations may apply to claiming tax deductions for charitable contributions. Because not everyone’s tax situation is the same, it’s wise to consult a tax professional when itemizing deductions.

Other common IRS scams to watch out for

Setting up fake charities isn’t the only way scammers try to trick taxpayers. For example, Kiplinger has reported on numerous tax scams this year, including art donation tax scams and IRS refund mail scams. Regardless of the type of scam, there are some common warning signs to watch out for. Here are a few:

Any email, text message, or social media message claiming to be from the IRS is a scam.
Scammers often use awkward wording, improper spelling, or poor grammar in texts and emails.
If an offer seems too good to be true, it probably is.

How to report a scam: The IRS urges anyone who receives correspondence from a fake charity (or one they suspect is fake) to visit the FBI’s Charity and Disaster Fraud webpage. If a taxpayer receives a suspicious tax-related email, they should forward the email to phishing@irs.gov.