Deduct Future Charitable Contributions Now...

 

Are you sitting on large capital gains from assets you purchased years ago?  Do you normally support charities?  Would you like to reduce your taxes now?  A Donor Advised Fund (DAF), may allow you to solve your capital gains problem, contribute to charity and take charitable deductions while your income is high.  So...what am I talking about?

• You have a position in a mutual fund that you've held for more than a year.
• You don't want to pay taxes on the large capital gains that you've accumulated
• You routinely give to charity and you plan on doing it for the rest of your life or at least for the "long-term"
• You are in your high-earning years and you're in the 28% or higher tax bracket and you expect in retirement your tax rate will be lower and you might not even itemize.

Here is what you do:

• You donate the mutual fund to a DAF taking a large deduction (Fair Market Value of the mutual fund) in the year of donation
• Once the mutual fund is inside the DAF you can re-allocate the assets with no tax ramifications
• You take your large tax refund (due to the big charitable deduction) and invest it
• Each year you contribute a portion of your DAF to a charity of your choice (within limits)
• You take the money you would have given to charity and invest it.

Now, like anything associated with the Tax Code there are exceptions and limitations and the devil is in the detail.  But, I think this is a great way to do some good and do well too.

Rising Longevity and Your Retirement

 

New research conducted by the Society of Actuaries (SOA), a leading membership-based organization for actuaries in the United States and Canada, revealed that older Americans are living longer than previously estimated. Specifically, SOA's data showed that since its last report published in 2000 the life expectancy of men age 65 has risen two years from age 84.6 to age 86.6 in 2014. Similarly, among 65-year-old women, longevity rose 2.4 years, from age 86.4 in 2000 to age 88.8 in 2014.1

 

Commenting on the findings, Dale Hall, managing director of research for the SOA stated, "The purpose of the new reports is to provide reliable data that actuaries can use to assist plan sponsors and policy makers in assessing the financial implications of longer lives." (1)

 

What about individuals? How might this news affect the financial lives of retirees and/or the retirement planning strategies of those nearing retirement age? Those additional two years could mean that the time the typical person might expect to spend in retirement could increase by 10% or more than he or she originally anticipated. As a result, the values associated with a retirement accumulation and/or distribution plan may need to be adjusted accordingly.

 

For example, individuals still accumulating retirement assets who had previously determined they needed a $1 million nest egg, would now need $1.1 million to finance those two added years. For someone who is in mid-stream on a retirement savings plan, increased longevity could mean boosting contributions by 20% or more to catch up. Similarly, individuals who are already retired might need to scale back their annual withdrawal amounts in order to create reserves for those extra two years.

 

Because of increased longevity, managing cash flow in retirement is more critical than ever. As a starting point you will need to clarify your current financial situation, as well as any significant changes you expect. Two sources will provide this information:

• A net-worth statement, which provides a snapshot of your assets, debt, and cash reserves.

• Your monthly or annual budget, with itemized breakdowns of your income and expenses. If you haven't retired yet, it's a good idea to prepare a projected budget of your retirement income and expenses.

Even with reasonable assumptions about investment returns, inflation, and retirement living costs, it is likely you will encounter numerous changes to your cash flow over time. Experts often recommend a monthly review of your budget, as well as a comprehensive annual review of your financial situation and goals.

As you monitor your finances keep the following factors in mind, as any one of them could affect your cash flow and necessitate adjustments to your plan.

• Interest rate trends and market moves may result in an increase or decrease in income from your savings and investments.

• Changes in federal, state, and local tax rates and regulations.

• Changes in Social Security or Medicare benefits or eligibility, as well as new rules affecting employer-sponsored retirement benefits and private insurance coverage.

• Inflation and health care costs.

• Life events such as marriage, the death of a spouse, or the addition or loss of a dependent may also affect your cash flow.

It is worth paying close attention to cash flow, making sure you budget carefully, monitor income and expenses frequently, and take action whenever you believe that significant changes may be necessary.

Source/Disclaimer:

1Society of Actuaries, press release, "Society of Actuaries Releases New Mortality Tables and an Updated Mortality Improvement Scale to Improve Accuracy of Private Pension Plan Estimates," October 27, 2014. The calculations presented are based on public mortality tables, which were developed with certain populations in mind, and reflect probabilities based on averages in large populations.    

 
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