An Open Letter to American Retirees Approaching Age 70 ½

Dear Post-Work Americans: Your retirement planning strategies may soon fall victim to Congress’s decision not to decide. Please don’t let them decide your fate.

We’re writing you today to suggest an action that can benefit you and all your peers, regardless of their retirement planning strategy. One that, in our opinion, would truly be a service to this country, and one your demographic group likely has the most sway with which to deliver change. This is the elimination of Congress’ ridiculous games with tax extenders, most specifically, the law allowing for donations of stock to be made directly from IRAs.

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Eight years ago, Congress passed the Pension Protection Act of 2006, a lengthy law that tweaked existing laws and regulations regarding various retirement account rules and provisions. Section 1201(a) was one such rule, establishing one of the most popular retirement-related rule changes in recent years. That section added a new rule to the IRS code involving required minimum distributions (RMD)—the amount the IRS requires you withdraw from traditional (i.e., not Roth) IRAs annually after attaining age 70 ½. Here is the text of the rule; then we’ll translate and explain why we’re writing you this letter. (If you don’t like legalese, you can feel free to skip the indented paragraph.)

Section 1201(a) of PPA ’06 adds § 408(d)(8) to the Code, which is applicable to distributions made in taxable years 2006 and 2007. Under § 408(d)(8), generally, if a distribution from an IRA owned by an individual after the individual has attained age 70½ is made directly by the trustee to certain organizations described in § 170(b)(1)(A), the distribution is excluded from gross income. The exclusion is only available to the extent that the distribution would otherwise have been includible in gross income, and § 408(d)(8)(D) provides a special rule for determining the amount that would otherwise be includible in gross income. In addition, the exclusion applies only if the contribution would otherwise qualify for a charitable contribution deduction under § 170 (without regard to the percentage limitations of § 170(b)). A distribution that is eligible for this exclusion is called a qualified charitable distribution.

The rule allows you to donate up to $100,000 annually directly to qualified charities and, generally, exclude it from your taxable income. Effectively, this means if you don’t need your RMD to meet expenses, you could donate it, avoid taxation, satisfy the RMD and feel good about giving back. (Or feel good about avoiding taxation, if you are so inclined.)

Now, as indicated in the indented paragraph from the legislation, when Congress enacted this provision, it was supposed to be temporary, for tax year 2007 alone. So, it should have gone away in 2008. But it didn’t. However, rather than making it permanent, or extending it early in the year, the government (and this is bipartisan!) has gotten into the practice of waiting until the very last minute, using it to extract concessions in negotiations, and passing it at the last minute.

The result of this political gamesmanship is every year, retirees who wish to take advantage of the rule—and the charities they donate to—are left on pins and needles. So it is again with 2015. There is talk right now in Congress of making this change permanent. Still others suggest allowing it to lapse. While we have found retirees greatly enjoy this provision, our major suggestion is Congress should grant retirees some clarity. Either make the rule permanent, pass extensions early in the year, or eliminate it. Period. No more games.

For us, as a financial firm well versed in retirement planning, we’re very practiced in helping retirees navigate the operational confusion and frustration Congress annually creates, and we monitor this closely. (Heck, we at Fisher Investments are probably the least impacted, considering that as a purely Registered Investment Adviser, we don’t custody our clients’ assets ourselves—we contract large, well-known brokerage firms nationwide to do that.)

Our point is simply that we hear from clients that this rule mumbo-jumbo is frustrating, and it is all unnecessary. Our humble thought is the more retirees express to their Congresspeople that watching political games daily during the holidays isn’t how they want to spend their golden years, the more likely Congress stops playing the annual tax extender game.

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