Smart giving using retirement assets


The potential for higher tax rates, coupled with markets close to or at record highs, is keeping investors and their advisers on the alert. As investors save to cover future expenses, their advisers help assess opportunities for wealth transfer. A tailored strategy can incorporate gifts to individuals and charities as part of a lifetime or legacy plan.

Even those who are saving for retirement can benefit from lower tax rates and guard against potential tax changes on the horizon.

There is no shortage of charitable solutions available, evaluating a plan for assets intended for spending as well as charity is beneficial. Identifying suitable alternatives to achieve both goals while managing taxes can be difficult. An effective strategy will take into account the tax characteristics of currently taxable and tax-deferred accounts and combine solutions to provide potential tax savings and other benefits.

Planning of taxable assets

Long-term investors in today’s markets may find themselves holding securities that have appreciated significantly. Effective management of the tax consequences of these assets requires an understanding of the potential taxes on capital gains when selling or transferring valued assets. If you have transferred highly valued shares to a loved one during your lifetime, the beneficiary could generally defer the cost base of the valued securities and only recognize the gain when the securities are sold. If the beneficiary is an adult child or another person in a low tax bracket, a donation of valued securities that you have held for more than one year from the date of purchase may allow the beneficiary to be taxed at a lower rate of capital gains.

For example, if an investor who would be taxed at a capital gains rate of 20% transfers the valued asset to a child in a tax bracket where his or her capital gains are taxed at a rate of 0% or 15% , the family can benefit from lower taxes. . Beneficiaries in states with lower or no state capital gains rates (such as Florida or Texas) may also end up paying less tax.

Passing on valued assets after death can provide even better tax savings for your family. Those who do not make lifetime transfers to individuals, or who have no reason to sell valued assets for diversification purposes or to adjust their asset allocation – provided they are willing to accept investment risk – may consider owning these valued securities. On death, the assets allow the beneficiaries to receive an increase in costs. The mark-up allows the beneficiary to reset the cost base of an asset valued to the fair market value established on the death of the account holder.

Conversely, any asset held at a loss is preferable if it is sold during the lifetime of the account holder, as it can be used to offset the gains of any valued asset also sold during the lifetime of an account holder. (and his spouse if held as a joint account). If held until death, assets held at a loss could lead to a reduction in base, meaning the new owner would take the asset with a new lower base – which is undesirable when trying limit the tax on capital gains.

Another way to limit capital gains tax is to consider a charitable donation. If valued securities are donated to a charity, they can then be sold by the charity without the donor having to pay capital gains tax. Make a charitable donation of securities at low cost, or when the cost is difficult to assess (such as shares acquired under a dividend reinvestment program in shares), or when a cost basis is not available, can save time, cost and tax. The beneficiary can be an operating charity, a donor advised fund, or a private foundation.

Planning of tax-deferred assets

Unlike portfolios of taxable assets, retirement assets, such as traditional IRAs, 401 (k), and other qualified retirement plan assets, are generally subject to ordinary income tax when distributed ( with the exception of after-tax contributions). Unlike assets held in taxable accounts, lifetime transfers to individuals in lower tax brackets are not possible, and pension assets will not receive a premium on death. There are a few ways to get around or delay taxes.

Normally, IRAs cannot be transferred without tax liability when transferred to a charity during the lifetime. However, a Qualified Charitable Distribution (QCD) allows tax-free transfers of IRA assets to a public charity during the account holder’s lifetime. When planning distributions over their years of life, those who are 70 and a half or older and also want to make charitable donations can use a traditional IRA to take advantage of the QCD (also known as the IRA rollover of charity) to donate IRA funds to charities and, if applicable, also meet their required minimum annual distributions.

QCDs are direct payments to public charities that allow owners of traditional IRA accounts (and owners of legacy IRA accounts and some SEP and SIMPLE plans – but not other owners of retirement plan accounts) to ” Make a direct transfer to a public charity without having to be taxed on distributions of up to $ 100,000 per year. The amount distributed to charity is also eligible for the required annual minimum distribution now in effect at age 72 (as provided for in the SECURE Act). Note, QCDs are always available to taxpayers from the age of 70 and a half, regardless of the start date of the RMD, but the tax benefits of a QCD are limited if a taxpayer makes contributions to their IRA.

Finally, for those whose charitable giving plans include funds advised by donors and charitable foundations, there are a few things to keep in mind. While some tax-deferred assets, such as IRAs and other pension plan assets, may not be donated to a donor advised fund or tax-exempt private foundations for life, these entities may be referred to as as beneficiaries of a retirement plan upon death. In fact, using non-Roth retirement funds as a source of charitable bequests is a tax-efficient estate planning strategy.


When investors examine both the use of taxable assets and pension plans to achieve their goals, they can begin to identify favorable solutions for managing their taxes. The importance of knowing how to position individual assets today and in the future will enable them to make better decisions for taxable and tax-deferred assets to improve results.

The views expressed in this article are those of the author alone and not those of BNY Mellon or any of its subsidiaries or affiliates. The information presented in this document may not be applicable or appropriate to each investor and should only be used after consultation with professionals who have considered your specific situation.

This material is provided for illustrative / educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Every effort has been made to ensure that the material presented here is accurate at the time of publication. However, this document is not intended to be a full and exhaustive explanation of the law in any area or of all available tax, investment or financial options. The information presented in this document may not be applicable or appropriate to each investor and should only be used after consultation with professionals who have considered your specific situation.

Senior Wealth Management Strategist, BNY Mellon Wealth Management

As a Senior Wealth Management Strategist at BNY Mellon Wealth Management, Kathleen Stewart works closely with high net worth families and their advisors to provide comprehensive wealth planning services. Kathleen focuses on the complex financial and estate planning issues impacting wealthy families, key business leaders and business owners.


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