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Tax Strategies for Retired People

Custodial Accounts for Minors

Since minors generally lack the ability to manage property, custodial accounts are set up for them. Custodial accounts are set up in a bank, mutual fund, or brokerage firm and can achieve income splitting.

Rules governing custodial accounts vary according to state. So, check with your local state to find out the requirements you need to follow. The differences between state laws, however, do not affect federal tax consequences regarding custodial accounts - in general. Purchase of securities through custodial accounts provides a practical method for making gifts of securities to a minor child, eliminating the need for a trust. The custodian may be a parent, child’s guardian, grandparent, brother, sister, uncle, or aunt. In some states, the custodian may be any adult, bank, or trust company.

The custodian has the right to sell securities in the account and collect sales proceeds plus investment income. The custodian can use the proceeds and investment income for the child’s benefit or reinvestment.

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Donated Assets

A great tax planning vehicle to be used by anyone is through charitable donations, which decreases your taxable income. Be sure to obtain a receipt stating the market value of the goods received. This will be needed for verification documentation. Below are some common ways to donate your assets:

Charitable contributions. Donate retirement assets to charity. They do not qualify for basis step-up either currently or after repeal of estate tax. Many times they do not qualify for a capital gain tax rate. By donating assets to a charity (charitable giving), income tax consequences will be minimized.

Vehicles. Many nonprofits seek automobiles, or other forms of vehicles, to help them deliver goods and services to the needy.

Frequent flier miles, plane tickets. Another asset to consider donating to a charity are your frequent flier miles, or plane tickets. Many nonprofit organizations are in need of these items and will put them to good use. Make A Wish Foundation, for one, is always in need of plane tickets to help fulfill children’s travel wishes.

Cell phones. Many nonprofits need cell phones to give either to their administrative staff or to their needy members. For instance, shelters for battered women are always looking for cell phone donations. Cell phones are given to their residents as a measure of safety for when they leave the shelter facilities.

Books. Give your books to libraries, or programs promoting literacy. Check with your local Chamber of Commerce. Or, look in your phone book for local contacts. There also are children’s nonprofit teaching programs available that would welcome books.

Cash. Nonprofits are always in need of cash to fulfill their mission statement. Tax consequences of giving cash are varied and complex. They will not be discussed here. Check with your financial or tax advisor.

Computers. This is another asset you can give to a nonprofit organization that gives tremendous benefits. Senior centers, kids learning centers, nonprofit service organizations, and others are always in need of computers. Administrative offices of many nonprofits usually cannot afford them, but could use the efficiency and organization that they provide. Entire set-ups (printers, monitors, mouse, keyboard, hard drive) are needed.

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Gift Planning

Gift planning can be an important part of estate planning. Start thinking about property transfers that may reduce or avoid estate taxes. Relatively small gifts can completely avoid gift tax because of the annual gift tax exclusion. Gifts to a spouse and certain gifts to pay educational or medical expenses are also not subject to the gift tax.

Gift tax generally does not have to be paid even on very substantial taxable gifts because the gift tax is offset by a tax credit that effectively exempts up to $5 million of lifetime taxable gifts from the tax. Gift tax is reported on Form 709. In 2013, the lifetime gift tax exemption is scheduled to decrease back down to $1 million.

There is an unlimited gift tax exclusion for payments of another person’s tuition or medical expenses. These exclusions apply only if you make the payment directly to the educational organization or care provider. The relationship between you and your donee does not matter as far as the medical and educational exclusions are concerned. The exclusion for directly paid educational expenses applies only to tuition. It does not apply to room and board, books, or supplies.

Contributions to a qualified tuition program (QTP) on behalf of a designated beneficiary do not qualify for the educational exclusion.

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Retirement Planning Tips

Consider the following tips to help you take responsibility for your retirement.

  1. Set a Goal - "I think I can save $25 a paycheck." It's easy to procrastinate so set up a "painless" payroll deduction for saving. It doesn't matter if the money goes into a 401(k) plan, an IRA or into a plain, old-fashioned savings account, just start saving. Pay yourself now, you'll thank yourself later.
  2. Open an IRA - IRAs are easy to get, easy to contribute to and easy to save with. Most Americans can set up an IRA - whether it's a traditional IRA or a Roth IRA - and save on taxes.
  3. Learn About Your Retirement Plan - If you are covered under your employer's retirement plan, your former employer is required to give you a plain language explanation of the plan called a "summary plan description." It describes your rights under the retirement plan.
  4. Review Your Individual Benefit Statement - Your individual benefit statement shows your total plan benefits and the amount that is vested, or fully owned by you.
  5. Sign Up for 401(k) Contributions - If you are covered under a 401(k) plan, you may have to designate the amount of money you want contributed to your 401(k) account.
  6. Take Your Required Minimum Distributions - If you are 70-1/2, you are generally required to receive a required minimum amount from your qualified retirement plan or IRA by year-end. This is required since you will be penalized otherwise.
  7. Review Your Social Security Statement - The Social Security Administration likely sends you a Social Security Statement each year about three months before your birthday. This statement is your personal record of earnings on which you have paid Social Security taxes and a summary of estimated benefits you and your family may receive as result of those earnings.
  8. Learn About Your Spouse's Retirement Plan - Many retirement plans provide benefits for spouses. For example, your spouse's plan may provide that you will receive an annuity unless you consent to distribution in another form. Before signing, read and understand any waiver or consent forms for your spouse's retirement plan.

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Self-directed Retirement Plan

Take control of your retirement account investments by converting your IRA-based retirement plan into a self-directed retirement plan.

If you wish to take a more active role in managing your retirement account investments, you may set up a self-directed retirement plan. If your retirement account is self-directed, you are allowed to decide, within the current IRS guidelines, when, how, and where your retirement monies will be invested. By having a self-directed retirement plan you decide what you want to do with your money. This allows you, for example, to invest your retirement monies in real estate investment.

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Tax-Free Rollover

Use a trustee-to-trustee transfer to move retirement account funds from one retirement account to another.

When you transfer account funds from one retirement account to another, you must be careful how you move these funds. The best way to move funds is to initiate a direct transfer, called a trustee-to-trustee transfer. Using a direct transfer, you instruct the trustee of your new retirement account to contact the trustee of your old retirement account.

A tax-free rollover may occur only once in a one-year period. This starts on the date you receive the first distribution. And, this rule applies separately to each of your retirement accounts. Trustee-to-trustee transfers are not taxable events, because you do not receive the funds. The law does not require a waiting period between transfers. Rollovers are subject to a once-a-year limitation.

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