The Market feels a bit… “Toppy.”

5 03 2012

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily – calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

  • According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
  • The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
  • Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
  • Our National Debt is a significant problem – and only getting worse.
  • We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
  • The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
  • And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks – and to expect the market will go up are: 

  • Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
  • We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
  • We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
  • Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
  • Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.   

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. 


Our Expectations for 2012

19 01 2012

Jonathan N. Castle, CFP, ChFC

2011 has come and gone and we are rapidly working our way through 2012.  It seems that so far, a general sense of cautious optimism has taken over where only a few months ago, all we heard was gloom and doom.  We applaud what appears to be slightly more balanced reporting on the economic front.  While not all of the news is good, neither is it all bad as it seemed to be several months ago.  A sense of doom and gloom serves no good purpose for our economy, and we are pleased the mood appears to be lifting somewhat.

After reviewing a great deal of economic analysis and often conflicting opinions from our research providers, we have come to some general conclusions about what to expect for performance in the financial markets in 2012.  We have stated over the last several months that we are “cautiously optimistic,” or “moderately bullish.”  There is no substantive data that suggests we should change this outlook (details at the end of the article) – but that does not mean that we believe the road ahead to be easy, particularly for investors.  Nor does it mean that we are wearing rose-colored glasses, or our cups are always “half full.”  It simply means that we believe we will continue to improve – with occasional interruptions – from where we currently are NOW.  We also believe that it will take years for the economy to fully recover – but recover it will.

Our Major Concerns at this time are:

European Debt Crisis and Likely European Recession – Some experts believe that the European recession has already begun. Recent data points indicate that Germany’s economy contracted slightly last quarter, and it is likely that other economies will soon follow.  As we enjoy a globally integrated economy, European recession likely means slowing economic growth in the US and difficulty in achieving meaningful returns in international markets.

Rising Dollar – As the Euro weakens, other currencies, (including ours) strengthen against it.  A strengthening dollar makes it more difficult for US companies to export goods and may make it more attractive for US companies to outsource jobs overseas.  However, a strong dollar does have the benefit of making US debt more attractive to foreign investors looking for security.

Political Stagnation – The past 2 years have been a display of an embarrassingly dysfunctional government. Unfortunately, with 2012 being an election year, we believe it unlikely that any real policy change will occur until 2013 or beyond.

Overwhelming US Debt – this may be the most dangerous long-term economic issue we have to face. At some point, we must face the inevitable belt-tightening that will be necessary to keep the US afloat.  Either government spending must decrease, or taxes must increase – or both.  Neither option is good for the economy or financial markets.

The Fed is Out of Bullets – The Fed has reduced interest rates to the lowest that we have ever seen, and pumped trillions of dollars into our economy trying to stimulate economic growth.  However, the damage done to the economy during the Great Recession was so severe that most of the Fed’s actions served only to limit damage – not to create the opportunity for recovery that we were hoping for.  At this time, it appears that the Fed is nearly out of ammo and has few options left.  Fortunately, inflation has not been severe; if it were, the Fed would be forced to raise interest rates again, which would slow economic growth even more and investors holding bonds would see the market values of their bonds decrease.

US Consumer Belt-Tightening – A large part of our economy is based upon the American consumer.  While it is a bit embarrassing to say that our economy runs on us buying things we don’t really need – it is partly true.  As more Americans learn that they can, in fact, live without many of these luxuries, these dollars no longer stimulate the economy.  On a personal level, a reversion to thrift is positive and one that we wholeheartedly support.  On an economic level, however – especially as a service based economy, consumer thrift forebodes even slower growth than previously hoped for.

Rays of Hope and Sunshine

Receding Unemployment – ever so slowly, and certainly not in a straight line, unemployment figures are receding. This is a fact; there are jobs out there to be had.  Many are in small businesses where people are hired one at a time.  Some disbelievers say that unemployment is dropping “only because discouraged workers have given up looking for jobs.”  This argument is hogwash – new workers enter the job market on a daily basis, which offsets discouraged workers leaving or retiring early.  While the jobs may not be the premium top paying jobs that were available before – they ARE indicators of economic expansion from where we were two years ago.

Increased Home Sales – According to the most recent National Association of Realtors (NAR), housing sales appear to have stabilized.  Total housing inventory fell from an 11 month supply to a 7 month supply during 2011. Housing starts and permits are increasing, albeit slowly.  As the housing sector directly impacts over 17% of the entire US economy, this news – however tepid – is hopeful.

US Corporate Profits – US corporate profits are at a high not seen since before the tech-bubble crash.  While much of the profit results from cost-cutting, it is still meaningful. Increasing profits mean that most of the major US firms are on a solid fiscal footing, and are in a much better position to pay attractive dividends to shareholders and fund future expansions.  From a yield perspective – high quality stocks are now more attractive than bonds at current levels.

Improving Manufacturing Data – The December Manufacturing Institute for Supply Management (ISM) Report topped expectations with the factory sector barometer (known as the PMI) increasing to the best level in six months. The raw data of the PMI also indicates that the manufacturing sector has grown for 29 consecutive months, which is generally a good indicator of the future direction of the economy. ALL 3 major US automakers reported profits for 2011.

What to do?

“Buy Low, Sell High.”  We all know this.  Yet, many people are only comfortable investing when the economy is humming along smoothly and all the news is positive.  Unfortunately for these emotionally driven investors, periods of economic boom are often the most dangerous times to invest, because by then, markets are usually overvalued. (Buy High, Sell Low).  Remember – when everyone is already invested, there are no new investors to bid prices up further.  Being invested in portfolios designed to your personal risk tolerance – especially when markets are undervalued – has been proven to be a key to long term investor success.

Typical Bear Market Behavior

For the last 100 years, based upon a study done by Morgan Stanley in 2009 called “The Aftermath of Secular Bear Markets,” major bear markets typically behave as follows.  (Dates for our current bear market in parentheses).

  • Market Crash/Bear Market: -56% for 29 Months, on average (Oct 2007 – Mar 2009)
  • Rebound Rally: +70% for 17 Months, on average (Mar 2009 – Apr 2010)
  • Mid Cycle Correction: -25% for 13 Months on average (Apr 2010 – Aug 2011)
  • Trading Range: Sideways (but slightly UP) with 15-20% whipsaw behavior for 5.6 years, on average (Aug 2011 – ?)

Our current bear market appears to be slightly shortening the cycles, but, in light of current political dysfunction and the European Debt Crisis, we believe the “trading range” portion of the market cycle will likely last several years at a minimum.

For 2012, we believe the following:

  • Markets will continue to be choppy, sometimes uncomfortably so
  • We DO expect to see some growth out of stocks, but not particularly impressive growth
  • Larger, dividend paying stocks should play a large role in the equity portions of portfolios (as compared to mid- or small-cap stocks)
  • US markets will be less volatile, and return more, than developed international markets. Emerging Markets will suffer from the European recession.
  • Interest rates (and bond prices) will remain relatively stable
  • The US Dollar will strengthen compared to the Euro

Our suggestion is that investors focus on other issues over which they have control:

  • Maximize IRA, 401(k), Roth, and other retirement plan contributions.
  • Reduce debt wherever possible.
  • Cut back on unnecessary luxuries (cook at home more, examine utility bills, etc).
  • Examine opportunities for mortgage refinance or other strategies to lock in low interest rates.
  • Closely examine your tax strategies (Roth Conversions, capital gains realization, business sales, etc) to include the expectation that taxes will be higher in future years.

While this list is certainly not exhaustive, it is a good place to start.  If we can offer you assistance in making the decisions necessary to maximize your odds of success during these uncertain times, please don’t hesitate to give us a call.

This blog article is for informational purposes only and does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.  PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

Should I wait to retire for bigger Social Security benefits?

2 06 2011

by Michelle Ash, CFP®, CDFA™

Along the road of life there are many milestone ages – age 16 to drive, age 18 to vote, age 21 to drink, and so on.  When it comes to thinking about retirement specifically, there are a number of milestone ages there too – at age 50 you get your AARP card (usually without requesting it), at age 55 you can take penalty-free withdrawals from an employer plan like a 401(k) if you are retired or separated from service, and at age 59-1/2 you can take penalty-free withdrawals from an IRA.  The BIG milestone that causes many people to stop and think, though, is the age of 62.  What happens then?  Well, under current laws, age 62 is the first time in which a worker or spouse can draw social security retirement benefits.

However, age 62 is sort of like the minimum entry point to social security retirement benefits.  Think of it in the same way as if you were buying tickets to a sporting event or concert:  you’ve got the base tickets that cost the least and get you in the door but you might be in the nosebleed seating section; and then you’ve got better seats which cost more.  With social security, if you want a “better seat” – meaning a bigger social security check each month – then your additional “cost” is waiting until a later age to draw the benefits.

In fact, for individuals reaching the age of 62 today, their Full Retirement Age (FRA) is age 66.  As it’s name implies, that’s the age at which full benefits have been earned.  For individuals born in years 1955 or later, the FRA age is even higher than 66.  Under current law, the maximum FRA age is presently 67.

You’re not limited to the choices of age 62 or your Full Retirement Age as your only two options, however.  You can choose to draw benefits anytime in between those ages.  There is a sliding scale of reduced benefits that applies.  If you’re mathematically-minded and want to figure it out for yourself, you deduct 5/9th’s of one percent for every month you draw the benefits early.  I’ll give an example of how to calculate it in just a moment, however if you’re not inclined to do the math yourself, you may want to visit the Social Security Administration’s website at  There you will find charts based on your year of birth that give you the exact percentage of benefit you would draw based on your age when you retire.  They break it down by month, so the data is very precise and helpful.

Here’s an example of how to calculate your social security benefit between ages 62 and FRA:

Jane wants to retire now at the age of 63.  Her Full Retirement Age is 66.  Her social security statement tells her that her FRA benefit is $2,000 per month.  If Jane wants to retire now at 63, she will multiply 5/9th’s, or 0.5555, times the number of months she’s retiring early.  In her case, it’s an even 36 months she’s retiring early.  So, Jane multiplies 0.5555 x 36 months = 20% (by rounding).  Jane multiplies that 20% times her FRA benefit of $2,000 and gets a reduction of $400/month.  So, her age 63 benefit will be $1,600 per month.

Factors to Consider

The numbers can give us a very monetarily-based answer, but like many things in life, the decision is often not quite so simple.  Consequently, very frequently we hear the question:  “Should I wait to retire for those bigger social security benefits?”

If Jane in our example knows her exact monthly budget and how much money she needs for her expenses every month, it might be very simple for her to decide whether the $1,600 per month benefit will be enough and whether to go ahead and retire.  But Jane might also look at things and feel like $400 per month of additional dollars, which she could have just by waiting three more years to retire, is an awful lot to sacrifice.  However, she also has to weigh in the fact that, during the three years between age 63 and 66 that she’s not receiving social security, that’s $1,600 per month that she’s not getting.  The question this often leads to is – “What’s my breakeven?”

Your Social Security “Breakeven”

Your breakeven is essentially the age at which the cumulative amount of extra money you got by drawing the benefit at an earlier age is equal to the cumulative amount of money you would have by waiting and getting a bigger benefit.  Generally, the breakeven is between 12 and 14 years after you began drawing early benefits.  What this means is that, if you believe you will live longer than 12-14 years in retirement, then you’ll have received more social security money by waiting to draw your benefit.  If you do NOT believe you’ll live that long and are planning to retire and no longer work, then you are better off drawing the benefit before your Full Retirement Age.

Continuing our example from before, Jane’s breakeven is exactly fourteen years.  At her age of 77, if she draws social security at age 62 and receives $1,600 per month, she will have received a total of $288,000 in benefits.  By comparison, if she were to wait until age 66 to draw her FRA benefits at $2,000 per month, she will have also received a total of $288,000 in benefits.  The real question then becomes – does Jane believe she’ll live beyond age 77?  If so, and if she wants a bigger paycheck, then she may want to wait.  If not, it may make sense to go ahead and draw benefits.

The Crystal Ball of How Long You’ll Live

I always find it interesting to discuss longevity, or how long you’ll live, with people.  Actually, the first hurdle is sometimes discussing it at all, since some people don’t even want to think about it.  But in my world of financial planning, at least in terms of social security benefits, it often becomes the critical question.  If we all knew exactly how long we’d live, it would be very easy to then figure out when to draw benefits to get the most amount of money from the program.  Most of us, though, don’t really have that crystal ball, or at least not one that’s real accurate.  How can you estimate?  Here are the factors I’d suggest considering:

1. Family Longevity – how long do the people in your family tend to live?  Are their health and circumstances similar to yours?  If so, this might be a good indicator.  If circumstances are substantially different, however, they might not be a good comparison.

2. Statistics – what do the mortality tables say?  Statistically today, according to data from the US Census Bureau (1), a man who is age 60 today can expect to live to the age of 80.9, and a woman to the age of 83.9.  Sadly, younger individuals today actually have a LOWER life expectancy, likely due to childhood obesity and other problems facing our nation.  That’s a topic for a different blog, however.

3.  Personal Circumstances – how’s your own health?  Do you take care of yourself by being physically fit and eating healthfully?  Do you control your stress levels?  Do you have balance to your life?  “Yes” answers to these questions may tend to lead to a longer life.  “No” answers may, though not always, detract from it.

Factoring in Social Security Rule Changes

Everything discussed so far is predicated on the current rules of the social security program.  Whether those rules will remain the same, however, is anyone’s guess at this point.  Certainly we hear about the program needing to change because it’s going broke.  Will it change?  Your guess is as good as mine.  Without knowing the future of social security, all you can do is decide what YOU think will happen, and take action accordingly.

Do you believe benefits may no longer be offered between age 62 and your Full Retirement Age?

Do you think your Full Retirement Age might be raised?

Do you think benefit payouts will be reduced?

If you’ve answered “yes” to any of these questions, then you may want to give serious consideration to drawing early.  On the other hand, if you are not bothered by these possibilities, and prefer to make the decision on your own terms instead of succumbing to fears, then you may prefer to wait and draw social security when you otherwise would.

Two Important Social Security Rules to Be Aware Of Before You Decide

Another factor that is extremely important to consider if you are thinking about taking social security benefits prior to your FRA is this:  are you completely finished working, or are you just retiring from one career and may start working another?  The reason this is important is because, if you draw social security between age 62 and your FRA, then any wages you make over about $14,160 per year cause your social security earnings to have to be given back.  The general rule of thumb is that you lose $1 of benefit for every $2 you earn.  In general, if you earn more than $55,000 in annual wages, you’ll have given back your whole social security benefit.  Since by drawing it early  you’ve already locked in a lower benefit, it makes very little sense to draw it and then give it back.  Don’t think you can hide the information from the Social Security Administration (SSA) either, as they and the IRS do share data.  If the SSA finds out money is owed back to them, they will deduct it from your benefits – in a hurry.

There are caveats to these statements:  you can proactively suspend your social security benefits  if you see this issue coming.  You should also know that social security gives you credit on your earnings record for the continued wages you’re drawing so that it benefits your social security amount.  All of those items are beyond the scope of this particular article.  Generally, it’s easier to avoid the whole issue up front.  However, if you’re already in the middle of such a situation, it may be a good idea to either do some online research on, or make an appointment with the folks at the Social Security Administration for individual guidance.

Another important factor to be aware of is that the benefit you draw at your Full Retirement Age is NOT the maximum benefit possible.  Under present laws, if you were to defer your benefits until after your FRA, they could continue to increase until age 70.  Here’s the lucrative part:  the benefit increase is currently a guaranteed 8% per year.  If you’re going to retire late, don’t need the money right away, or think you’ll have really long life span, this may be a great way to grow your benefit with absolutely no market risk.  Age 70 is the maximum age, though.  Beyond age 70 the benefits do not increase by waiting, so it does not make sense to defer benefits beyond that age.

Other Considerations and Where To Go From Here

There are MANY other strategies that financial planners such as myself have discovered and can apply to individual situations.  If you are married, there are factors regarding the age and work status for both you and your spouse that may be important to factor into your situation.  Unfortunately, many of those get too complex to go into here.

What’s my best advice if you’re still uncertain about when to draw benefits after everything you’ve read here?  Seek the help of a qualified retirement specialist like a CERTIFIED FINANCIAL PLANNER™ professional to help you figure it out.  You can research professionals in your area by visiting the CFP Board’s website at

Footnote (1):  Table 103. Life Expectancy, by Sex, Age, and Race: 2007.  Source: U.S. National Center for Health Statistics, National Vital Statistics Reports (NVSR), Deaths: Final Data for 2007, Vol. 58, No. 19, May 2010. See also


Disclaimer:  This blog article is not personal financial advice.  Please consult your a financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.


Tax Breaks for IRA Distributions When Donating to Charity

21 04 2011

by Michelle Ash,

We’re all looking for legitimate ways we can save money on taxes, right?  Well, if you’re looking to have an extra bang-for-your-buck with a charitable donation, read on.

In a moment, I’ll talk about the specifics of a nice tax break that those over the age of 70.5 (who take Required Minimum Distributions from IRA’s) can use for making charitable donations.  But even if you’re  a) under the age of 70.5, or b) not looking to make a charitable contribution from your IRA, there might still be some helpful information in this article for you.

Charitable Donation Basics:

Anyone can give a charitable donation.  Without citing any particular statistic, I’ll just say that in these difficult economic times, I believe any charity would welcome a donation of any size.

For many Americans, though, a charitable donation can also mean a nice tax break.  Who gets the tax breaks?  The short answer is anyone who itemizes their deductions on Schedule A has the opportunity to take a charitable deduction.  Without getting too detailed, though, it’s important to know that deduction of charitable donations is limited to a maximum of 50% of your adjusted gross income (AGI).  That doesn’t mean you can’t give more away – it just means you don’t get a tax break for it.  Most Americans who give charitable donations don’t make them from their Individual Retirement Arrangements (IRA’s) – after all, those are for use in retirement, right?  Instead, most Americans just make a donation from cash flow, or maybe from an asset they want to give away, like an old car.  Age doesn’t matter with regards to making these types of donations.  The IRS will give you tax deductions for charitable contributions of this sort, regardless of your age.

The Qualified Charitable Distribution (QCD)

But for those who are age 70.5 and above, and who want to use those required IRA distributions for a charitable donation, there’s an extra tax break.  If the RMD is pulled out and sent directly to the charitable institution, amounts up to $100,000 may be excluded from the taxpayer’s gross income.  These distributions are  not subject to the normal 50% of gross income limitation, so potentially they could give higher than 50% of AGI in total and  still receive a tax break.  This provision exists for each taxpayer, so if a husband and wife each want to contribute, they can each do so up to $100,000 each from their own IRA’s – for a total of $200,000 combined.

Important details to follow to make sure the transaction is qualified:

  • Contributions must be from traditional or Roth IRAs.  QCDs cannot be made from employer-sponsored IRAs (Simplified Employee Pensions (SEP-IRAs) and Savings Incentive Match Plan for Employees (SIMPLE-IRAs), or from defined contribution retirement plans (for example, 401(k) plans or 403(b) plans).
  • Individuals must be older than 70.5 when the QCD is made.
  • Charities must be eligible to receive tax-deductible charitable contributions.
  • The distribution must be a trustee-to-trustee transfer; that is, a direct transfer from the IRA to the charity.
  • The distribution first comes from taxable funds, then from any nondeductible IRA contributions. Previously, distributions would have been allocated proportionately between deductible and nondeductible contributions.

How long are the QCD tax breaks available for?

Under current law, the deadline for using the Qualified Charitable Deduction rules for an IRA RMD  are until December 31, 2011.  Note, too, in the rules above that the RMD money must go directly to the charitable institution.  If you’ve already taken your RMD out of your IRA for the year, and wish you had done it this way,  it’s unfortunately too late, at least according to the current tax laws.  You cannot put the money back in your IRA and remove it again – such an attempt just won’t work.   You can still give that money away to charity, but it won’t be excluded from your gross income and it will be subject to maximum charitable gift deduction limitations.

Will this provision be extended into future years? 

At present I haven’t seen any information on that subject.  The current rules have been extended from previous years of law in 2007 and then 2009, so it seems likely that an extension might be under future consideration.  I would bet if the charities had things their way, they’d probably advocate for an extension, as it’s likely that only Americans who are required to make IRA withdrawals but don’t need the money are the ones using this rule.  Do charities have lobbyists who advocate for this kind of stuff?  I don’t know, but it sure would make sense to me!

Disclaimer:  This blog article is not personal tax advice.  Please consult your tax professional for personal, specific tax information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.