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Friday, 18 March 2016 15:54

Consider an IRA Charitable Rollover

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If you want a tax break and want to help a non-profit, this may be a good move.

Have you ever wanted to make a major charitable gift? Would you like a significant federal tax break in acknowledgment of that gift? If so, an IRA charitable rollover may be a good financial step to take.

If you are age 70½ or older and have one or more traditional IRAs, you may want to explore the potential of this tax provision, first introduced in 2006 and recently made permanent by Congress. In the language of federal tax law, it is called a Qualified Charitable Distribution (QCD) – a direct transfer of up to $100,000 from the IRA to a qualified charity.1,2

An IRA charitable rollover may help you lower your adjusted gross income. That may be a goal in your tax strategy, especially if your AGI is large enough to position you for increased Medicare premiums, greater taxation of your Social Security benefits, or exposure to the 3.8% investment income tax and the 0.9% Medicare surtax. If your AGI passes a certain threshold, you also lose the ability to itemize deductions.2

Up to $100,000 may be excluded from your gross income in the year in which you make the gift. The gifted amount also counts toward your Required Minimum Distribution (RMD).1,2

By the way, this $100,000 annual QCD limit is per individual. If you are married, you and your spouse may gift up to $200,000 in a year through IRA charitable rollovers. Imagine lowering your household’s AGI by as much as $200,000 in a tax year.2

A QCD will not afford you an opportunity for a charitable deduction. That would amount to a double benefit for the taxpayer making the gift, which is not something federal tax law allows.3

You need not be rich to do this. When many people first learn about the IRA charitable rollover, they think it is only for multi-millionaires. That is a misconception. Even if you do not think of yourself as wealthy, a QCD could prove a significant element in your tax strategy.

How does it work? Logistically speaking, an IRA charitable rollover is a trustee-to-trustee transfer: the IRA owner does not take possession of the money as the gift is arranged. Rather, the custodian or trustee overseeing the IRA writes a check for the amount of the gift payable to the charity. It is a direct transfer of funds, not a withdrawal.2

An IRA owner must be age 70½ or older to do this, and he or she must be the original owner of the IRA (an inherited IRA may not be used). The gifted assets must come from an IRA (or multiple IRAs) subject to RMD rules. SEPs and SIMPLE IRAs are ineligible if an employer contribution has been made for the particular year.4,5

Can you gift appreciated securities as well as cash? You can. Securities held within an IRA may be directly transferred from an IRA to a qualified charity in a QCD. You can claim an income tax deduction for the full fair market value of those securities.4,5

The charity or non-profit involved must pass muster with the IRS. It must be an entity that qualifies for a charitable income tax deduction of an individual taxpayer, and it cannot be a donor-advised fund, a private foundation that makes grants, or a supporting organization under Internal Revenue Code Section 509(a)(3). The charity must provide you with a letter of acknowledgement denoting that you received no goods, services, or benefits of any kind in exchange for your gift, and that you shall not receive any in the future as a consequence of your gift. If that letter is not quickly sent to you, be firm in requesting it.4,5

In case you are wondering, you can actually contribute more than your IRA RMD amount for a particular year through an IRA charitable rollover, as long as the gifted amount does not exceed $100,000. If you pledge a donation to a qualified charity or non-profit, an IRA charitable rollover can be used to satisfy your pledge.5

This tax break has been a boon to charities and IRA owners alike. Correctly performed, a charitable IRA rollover may help to lessen tax issues while benefiting qualified non-profit organizations.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - marketwatch.com/story/ira-charitable-rollover-provision-made-permanent-2015-12-25 [12/25/15]

2 - forbes.com/sites/jamiehopkins/2016/01/20/why-retirees-need-to-stop-writing-checks-to-charities/ [1/20/16]

3 - cof.org/content/analysis-ira-charitable-rollover-extension [12/22/15]

4 - wealthmanagement.com/retirement-planning/ira-qualified-charitable-contributions-reinstated-made-permanent [12/21/15]

5 - forbes.com/sites/berniekent/2015/12/20/should-you-make-a-charitable-contribution-from-your-ira/ [12/20/15]

Friday, 11 March 2016 15:01

Should We Break Up The Big Banks?

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One Federal Reserve official says we should rethink our financial system.

 

The newest Federal Reserve policymaker just put forth a radical proposal. Neel Kashkari thinks America’s big banks should be broken up, the sooner the better.

This opinion comes from the man who once directed TARP, the Troubled Asset Relief Program that bailed out giant banks in the Great Recession. Kashkari was assistant secretary of the Treasury at that time. This year, he became president of the Federal Reserve Bank of Minneapolis, two years after running for governor of California.1

On February 16, Kashkari spoke at the Brookings Institution and delivered, as one Bloomberg article put it, “a speech that [read] like a cover letter on a resume sent to the White House c/o Bernie Sanders.” Specifically, he called for “serious consideration” of three ideas.1

The first: “Breaking up large banks into smaller, less connected, less important entities.” The second: “Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).” The third: “Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.”1

While the Dodd-Frank Act of 2010 increased regulation of behemoth banks, Kashkari is hardly satisfied with it. As he told the Washington Post recently, “Policymakers have been telling Congress, or maybe Congress has been telling the American people, that Dodd-Frank has solved too big to fail. And I’m saying I don’t believe it.”2

The above reforms would require the approval of Congress. So Kashkari wants to deliver a proposal to Capitol Hill, with input from “leaders from policy and regulatory institutions [and] the financial industry.” All of these parties would convene to “offer their views and to test one another’s assumptions” pursuant to a bill.1

Is this kind of reform necessary? Many voices on Wall Street contend that Dodd-Frank was actually unnecessary, that the credit crisis of the late 2000s never would have occurred if markets, regulators, and Congress had simply abided by existing rules.1,2,3,4

Others have called for big bank downsizing before this, including some Fed officials. In 2012, the Dallas Fed put out an annual report entitled Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now. Its president, Richard Fisher, has talked of restructuring large banks into “multiple business entities.” St. Louis Fed president James Bullard once introduced the idea of limiting the size of individual U.S. banks to a percentage of annualized GDP.3,4

Of course, not too long ago the federal government helped make the biggest banks even bigger. As it decided certain financial institutions were “too big to fail” during the credit crisis, it also brokered some deals: Bank of America bought up Merrill Lynch and JPMorgan acquired Washington Mutual and Bear Stearns. JPMorgan and Bank of America both received significant help from TARP as a consequence. Taxpayers made a profit on TARP, and Kashkari says TARP was the right move at the right time. However, he prefers that history not repeat.1,5

The “too big to fail” idea contends that the nation’s largest banks need a federal backstop if threatened with collapse, because their failure would wreck the economy. Its adherents argue that a giant bank is a better bank, providing more services here and in emerging markets, benefiting from economies of scale that make their services cheaper than services of smaller banks. These banks, the thinking goes, deserve a safety net in a catastrophe.1,2,3,4

To other observers, the top U.S. banks have grown frighteningly large. An analysis conducted by SNL Financial last year found that just five banks held almost 45% of the U.S. banking industry’s total assets in 2014, about $7 trillion. To put this in perspective, World Bank data shows the entire 2014 U.S. GDP at $17.4 trillion.6,7

In time, market forces may actually accomplish what Kashkari would prefer to see. With TARP long gone, the largest banks have had to bolster their capital ratios, a potential disadvantage as they compete with smaller banks and online lenders. So new competitors (and new lending and financial services platforms) could soon emerge to take away some of their business.1

Kashkari does not want to wait. With the economy in comparatively good health, “the time has come to move past parochial interests and solve this problem,” Kashkari said in his February 16 speech. “The risks of not doing so are just too great.”5

      

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - bloomberg.com/gadfly/articles/2016-02-17/let-s-make-sure-neel-kashkari-s-right-before-splitting-up-banks [2/17/16]

2 - washingtonpost.com/news/wonk/wp/2016/02/17/neel-kashkari-oversaw-the-bailout-of-the-big-banks-now-he-wants-to-break-them-up/ [2/17/16]

3 - business.time.com/2012/03/22/break-up-the-banks-dallas-fed-president-calls-for-the-end-of-too-big-to-fail/ [3/22/12]

4 - bloomberg.com/news/articles/2016-02-16/fed-s-kashkari-floats-breaking-up-big-banks-to-avert-melt-down [2/16/16]

5 - money.cnn.com/2016/02/17/news/economy/neel-kashkari-breaking-up-too-big-to-fail-banks/ [2/17/16]

6 - cnbc.com/2015/04/15/5-biggest-banks-now-own-almost-half-the-industry.html [4/15/15]

7 - data.worldbank.org/indicator/NY.GDP.MKTP.CD [2/18/16]

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