Passing the half-century mark brings with it new tax and financial concerns. In particular, estate planning and planning for retirement take on more importance.
Below are six tax planning considerations of special interest to those over age 50. To effectively implement planning, it is helpful to have a coordinated team in place. An annual meeting with your financial adviser, CPA, and estate planning attorney is ideal. This allows the advisers to review income tax, estate planning and investment strategies and proceed with a comprehensive plan.
The tax planning considerations:
1. Continuing to Save for Retirement
In 2016, the maximum 401(k) contribution for someone 50 or older is $24,000 (the standard $18,000 maximum plus a $6,000 catch-up contribution). The maximum IRA contribution for 2016 (and for 2015) for people 50 or older is $6,500 (the standard $5,500 limit plus a $1,000 catch-up contribution). For IRAs, contributions for 2015 can be made up until April 18, 2016.
If you expect your income to decline, you might want to take advantage of your current ability to deduct charitable contributions with a donor advised fund.
2. Giving a Charity Up to $100,000 From Your IRA
Congress recently made permanent the ability for those over 70 ½ to make a tax-free “qualified charitable distribution” (in the form of a rollover) of up to $100,000 per year from an IRA to a qualified charity. As a result, an individual can avoid paying income tax on an otherwise taxable distribution from an IRA by instructing the IRA trustee to make the distribution directly to a qualified charity.
A charitable rollover is particularly beneficial for people over 70 ½ who don’t itemize or whose charitable contributions are limited due to their high income. For 2015, the total of your charitable contributions deduction (and certain other itemized deductions) may be limited if your adjusted gross income is more than $258,250 and you’re single or $309,900 if you’re married filing jointly.
3. Using Donor Advised Funds for Charitable Contributions
If you expect your income to decline in coming years, you might want to take advantage of your current ability to deduct charitable contributions by funding a donor advised fund (DAF) account.
DAFs are charities set up primarily by community foundations and financial institutions (Fidelity, Schwab and Vanguard run three of the largest donor advised funds). Your contribution is held in an account from which you can make charitable contributions by “advising” the fund of your wishes. You receive a charitable deduction on your income taxes when you contribute funds to your DAF account, but the money can be taken out of the account for charitable causes in a later year.
So, if you expect not to itemize deductions as you get older or expect your income to fall (lowering the amount of charitable contributions you can deduct), it might make sense to fund a DAF now while the contributions produce valuable income tax deductions for you.
4. Saving for a Child’s or Grandchild’s Education
If you can afford to help send your children or grandchildren to college, a 529 plan offers a tax-advantaged way of saving. Funds contributed to a 529 for the benefit of a child earn income and appreciate free of income tax. As long as the funds are used to pay college expenses when they are withdrawn, they are never subject to federal income taxes. However, penalties will apply if they are not used for educational purposes.
Every state has a state-sponsored 529 plan and many offer state income tax advantages to those who contribute.
5. Making Annual Gifts
The tax laws permit every person to give up to $14,000 per year to as many recipients as desired without imposition of any gift tax. For those who will eventually be subject to federal or state estate taxes, using this annual gift-tax exclusion can help reduce the amount of estate taxes that are ultimately due.
Annual-exclusion gifts can be used to fund 529 plans, uniform gift to minors act (UGMA) accounts or even to provide a young working family member with funds to make a Roth IRA contribution.
If you have a few children and grandchildren, it is easy to give away substantial amounts each year.
6. Downsizing Your Home
In many cases, homeowners can avoid owing capital gains taxes on the sale of their homes. If you have lived in your home for at least two of the five years prior to its sale, you can exclude from income taxes gains of up to $250,000 per individual (or $500,000 for a married couple).
Since you don’t have to reinvest the proceeds of sale in another home for this tax break, these rules make it easier for empty nesters to downsize without worrying about owing a lot of capital gains tax.