How to Make a Tax-Free Donation From an IRA

Investors who have reached age 70½ can make charitable donations directly from their traditional individual retirement accounts (IRAs), saving taxes in the process.

But you need to act quickly, because this opportunity will expire at the end of 2011 unless Congress acts.

This donation option is called a qualified charitable distribution (QCD). Unlike most IRA distributions, which are taxable, the QCD is not.

However, a QCD must meet several tax-law requirements.

You must be 70½ and your IRA trustee must make QCDs directly to an eligible IRS-approved charity.

The QCD must meet normal tax-law requirements for a charitable donation that is 100% deductible, meaning if you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules, you can make a QCD.

The QCD must be otherwise taxable, meaning a Roth IRA distribution generally does not meet this requirement.

Additionally, there’s a $100,000 limit on total QCDs per year.

However, if both you and your spouse have IRAs, you are entitled to $100,000 each, for a combined total of $200,000 – and that’s the case even if you file jointly.

Finally, note that you can’t claim itemized deductions for QCDs as you would for traditional donations to charities.

That’s because QCDs are already tax-free.

But there are a number of ways you save taxes using QCDs.

First, QCDs are not included in your adjusted gross income.

Second, QCDs fulfill required minimum distribution (RMD) rules – so you can take an RMD without paying taxes on it.

Third, QCDs reduce your taxable estate.

How Retirement Plan Fees Will Soon Become Clearer

What you don’t know can be costly – which is why you should be familiar with the ins and outs of your retirement savings plan.

Such plans include individual retirement accounts, 401(k) plans and other retirement savings vehicles.

You probably know such vehicles have some fees – but do you know what those fees are and how much they are?

Many American investors are unaware of the fees they pay their retirement plan providers.

In fact, a recent study by the AARP found that 71% of 401(k) plan participants think they don’t pay any fees, and 6% don’t know.

That’s a total of 77% of American investors who are misguided.

Annual maintenance and account termination, or account transfer fees, are perhaps the most common retirement plan fees.

Depending on what share class of mutual funds you own in your account, you may also be assessed a fee called a contingent-deferred charge as well.

That’s not to say all retirement plan fees are bad. Your plan provider has to be compensated somehow. But the question is, are the fees too much?

The good news is that starting Jan. 1, 2012, retirement plan providers will have to disclose the fees participants pay for their 401(k) plans.

Meanwhile, there are also many calculators that can help you determine what you’re paying in retirement plan fees.

REITs May Still Be a Good Investment Option

Real estate investment trusts (REITs) may present a compelling investment option in today’s economic and market environment.

Despite the dismal state of the U.S. real estate market, many REITs have performed well recently.

Housing prices were down again in the first quarter of 2011, according to the S&P/Case-Shiller national home price index. The index shows that housing prices decreased 5.1% in the first three months of 2011, compared to the same period in 2010. Prices were also down 32.7% from their peak set five years ago.

However, as of May 31, U.S. REITs were up 14.09%, according to the MSCI U.S. REIT Index.

Investors purchased nearly $22 billion in new REIT shares in the first five months of 2011, almost triple the amount they purchased during the same period the year before, according to The Wall Street Journal.

A REIT is a company that owns and, in most cases, operates income-producing real estate.

The shares of REITs are traded on major stock exchanges.

Each year, REITS distribute at least 90% of their taxable income to shareholders in the form of dividends.

Of course, REITs aren’t for everyone. There are special risks associated with investments in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions.

However, investors may be able to mitigate these risks by seeking REITs in certain categories, such as the health care sector, which may benefit from growing demand as baby boomers age and the population enjoys a longer life span. Your financial advisor can help you determine if REITs are appropriate for you, given your individual financial circumstances and goals.

Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index.

How You Could Get a Tax Break on Continuing Care

A little-known tax break could help offset the cost for people considering a continuing-care retirement community (CCRC). With CCRCs, you pay a one time entry fee and ongoing monthly charges. In exchange, the CCRC provides housing and a range of accommodation, medical and other services. The level of services can be increased as your needs require. With traditional retirement homes, you pay a monthly fee.

The good news with a CCRC is that you don’t have to move as your needs change. The bad news is that the entry fee can be high, exceeding the upper six figures in locations where real estate is expensive. Monthly fees can also be expensive.

That said, a tax break can offset part of the entry fee and monthly fees. That’s because a percentage of CCRC costs can be considered medical expenses for tax purposes, even if the resident requires no medical care. How? Because the amount of CCRC fees considered medical expenses does not depend on the level of medical services you actually receive from the CCRC. It depends on the CCRC’s aggregate medical expenditures in relation to its overall expenditures. And you can write off those medical expenses to the extent they exceed 7.5% of your adjusted gross income.

A CCRC should be able to give you estimates of those percentages, but you may have to ask for them. Your financial advisor can provide you with guidance.

The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their circumstances.