December 2016

More on Qualified Charitable Distributions
by James Terwilliger, CFP®

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). This legislation addressed many individual and business tax provisions which expired at the end of 2014.

One provision made “permanent” that benefits seniors is the so-called Qualified Charitable Distribution (QCD). We covered this change briefly in a past column. Let’s take a closer look to better understand and appreciate the value that this option offers to seniors.

Understand that IRAs are tax-efficient goldmines when it comes to charitable giving, both pre-and post-death. The use of QCDs from IRAs during one’s lifetime can provide some very attractive tax-reduction benefits.

Quite simply, the QCD provision allows a taxpayer age 70-1/2 and older to transfer up to $100K annually directly to one or more charities from his/her traditional pre-tax IRA and not have the distribution included in taxable income.

Perhaps the most-valuable feature is that required minimum distributions (RMDs) may be used to fund these transfers. This bestows the greatest benefit on folks who do not need their RMDs for household cash flow. In this case, such transfers allow both RMD obligations and charitable interests to be satisfied simultaneously.

The big advantage here is that such distributions are not included in Adjusted Gross Income (AGI). Why is this important?

Some additional benefits of QCDs are:

Other features and watch-outs include: 1) QCDs are not allowed for gifts to donor-advised funds; 2) QCDs are not allowed from employer retirement plans such as 401(k)s; 3) QCDs can only include distributions that otherwise would be 100% taxable; 4) QCDs can only include transfers that would otherwise be 100% tax-deductible; and 5) Roth IRAs are not suitable QCD sources.

Proper and beneficial use of QCDs requires knowledgeable planning. Be sure to consult with your financial planner to make the best use of this attractive charitable-giving option.

James Terwilliger, CFP®, is Senior Vice President, Financial Planning Officer, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at

September 2016

Diversifying your Nest Egg Account Types

by James Terwilliger, CFP®

In past columns, we have emphasized the importance of investment diversification.

Such diversification refers to your overall investment portfolio and is important at two levels:

Diversification does not mean having similar accounts spread out over multiple financial institutions. Doing so generally results in substantial duplication and normally does not achieve the desired allocation benefits.

Pre-tax accounts typically consist of 401(k)/403(b)/457 employer plans and various forms of IRAs. Contributions generally are tax-deductible, and earnings and growth are tax-deferred. Income taxes are paid when distributions are made.

After-tax accounts include savings and checking accounts, non-IRA CDs, and investment accounts. Here, income taxes have already been paid on the principal, but taxes are then paid annually on the interest and dividend earnings and on gains realized from sales of securities.

Finally, tax-free accounts are represented by one of the greatest gifts ever given to the American taxpayer by Congress – the Roth IRA and Roth 401(k). For assets held in such accounts, none of the generated income or capital gains on securities sales is taxable, as long as some simple timing and age rules are followed.

Note that I am ignoring, for the sake of keeping this discussion simple, deferred annuities and tax-free municipal bonds which are variations on this general theme.

Except in unusual circumstances, I typically encourage clients to approach retirement with a mix of all three types of accounts.

To appreciate the value in doing so, it is important to understand some of the pros and cons of each type.

Pre-Tax – Pros: immediate tax deduction for contributions; tax-deferred income and growth; easy, disciplined way to save for retirement; employers often offer match contributions for employer plans; first $20K/year of distributions not taxed in New York State; can be left to heirs.

Pre-Tax – Cons: distributions taxed at ordinary rates; required annual distributions starting at age 70-1/2; 10% penalty for distributions prior to age 59-1/2, with a few exceptions; required distributions can have negative income tax consequences – taxability of Social Security at lower income levels and phase-out of itemized deductions and personal exemptions at higher levels; can also trigger additional 3.8% Medicare tax at higher levels; annual contributions limited by ceiling dollar amount; no step-up in basis at death; non-spouse heirs required to take annual distributions.

After-Tax – Pros: always under the owner’s control; highly-flexible; favorable federal tax rates for long-term capital gains and qualified dividends; can be gifted to spouse, family, charity; no annual contribution ceiling; can be left to heirs; full step-up in basis at death.

After-Tax – Cons: contributions not tax-deductible; annual interest/dividend income taxable; income taxes also generated by regular account rebalancing and changes in the investments including securities sales;

Tax-Free – Pros: no income taxes ever, if simple rules are followed; reasonably-flexible; no required annual distributions; easy, disciplined way to save for retirement; no tax or penalty associated with removing principal, regardless of age or timeframe; can be left to heirs; heirs can continue accounts tax-free.

Tax-Free – Cons: contributions not tax-deductible; dollar ceiling on annual contributions; non-spouse heirs required to take annual distributions.

When a client is accumulating assets, I usually suggest the following order of priority in setting money aside for retirement:

What is an appropriate allocation for the third step? It depends on individual circumstances. There is no standard rule of thumb.

The idea is to have a reasonable mix to take advantage of the “pros” and not be disadvantaged by a preponderance of the “cons”. For example, it is not unusual to find a retiree with most of his/her assets in a pre-tax form – not a particularly good situation.

As we always advise, be sure to partner with a trusted financial planner to determine the account-type allocation strategy best for you.

James Terwilliger, CFP®, is Senior Vice President, Financial Planning Manager, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at

June 2016

Congress Closes Social Security “Loopholes”

Congress giveth and Congress taketh away!

Case in point: As part of the late-November federal budget deal, a compromise that literally came out of the blue was reached. The intent was to make a small dent in the cost of the Social Security program and to close off a couple of retirement benefit claiming strategies that presumably benefitted the rich.

Trouble is, the strategies were available to and used by folks across the entire economic spectrum. Many lost a significant degree of flexibility and potential benefit dollars regardless of economic circumstances.

We have written about the advantages of these so-called “loopholes” in past columns and are disappointed to see them go. Let’s look at the particulars.

File-and-Suspend. Legislation enacted in 2000 that allowed file-and-suspend was originally designed to encourage people to keep working or to return to work. It 1) changed the earnings test so that it stopped at full retirement age (currently age 66 for those born in 1943 through 1954) and 2) allowed folks at or over that age who previously had started to collect Social Security benefits (but now wished they had not) to suspend receiving benefits.

This enabled those who had adequate household cash flow to suspend Social Security benefits in order to build delayed credits. Then, at age 70, say, benefits could be restarted but at a rate up to 32% higher than full retirement age benefits.

Since then, people linked this option together with an entirely different option enacted in 1939 that allows for spouses with low or no earned benefits to receive spousal benefits based on their higher-earning spouse’s work record. With this option, spousal benefits can only be received if the higher-earning spouse had at least filed for benefits.

A spousal benefit is equal to ½ of the other spouse’s full retirement age (age 66) benefit but reduced if the spousal benefit is started prior to age 66.

The result of this combination has allowed the high-earner of a married couple, say, to file-and-suspend at age 66, delay taking retirement benefits all the way to age 70, then lift the suspension to start enhanced benefits. At the same time, the spouse with no or low earned benefits has been entitled to receive spousal benefits based on the higher-earner’s work record.

Restrict Application to Spousal Benefits Only. This option also relates back to the legislation establishing spousal benefits. It enables one to file for just spousal benefits at full retirement age or older while delaying earned benefits all the way to age 70, thereby enhancing the earned benefit. If one files prior to full retirement age, the benefit will be the greater of one’s own earned benefit or spousal benefit. There is no choice.

Combining the two options above has resulted in a “perfect storm” benefitting the married household. The combination enables both spouses, for example, to delay earned benefits all the way to age 70, thereby enhancing both benefits by 32% over full retirement age benefits as well as enabling one of the spouses to receive spousal benefits up to 4 years prior to reaching age 70.

The New Rules. Two things changed.

  1. The file-and-suspend option remains in place for the original purpose but can no longer be combined with spousal benefits. Spousal benefits can only be taken if the other spouse is actually collecting earned benefits.

  2. 2. It will no longer be an option to restrict one’s application to spousal benefits only. When filing any time prior to age 70, the benefit will be the greater of one’s own earned benefit or spousal benefit. Period.

Phase-In Timetable. Fortunately, anyone who is currently benefiting from the “old” rules is safe. All are grandfathered in. Otherwise,

  1. Combining file-and-suspend with spousal benefits will continue to be allowed for situations in which the suspension occurs by April 30, 2016. All bets are off for suspensions occurring after this date.

  2. 2. Restricting one’s application to just spousal after full retirement age will continue to be allowed for folks who are age 62 or older at the end of 2015. All bets are off for younger people.

Note that the file-and-suspend change does not affect spousal benefits for divorced individuals but the second change does indeed impact these folks.

There is a lot of misinformation in the media about these changes. Don’t rely on what you read in the paper, magazines, or on the internet. If these changes impact you, be sure to consult with a knowledgeable, trusted financial advisor in order to understand your options and take appropriate action within the deadlines.

James Terwilliger, CFP®, is Senior Vice President, Financial Planning Manager, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at

February 2016

Working Past Age 70

Age 65 tended to be the standard retirement age back a generation or more ago. That was when working for a single company for 40-plus years and receiving a guaranteed lifetime pension during retirement were the norm.

My, how things have changed.

For a while, early retirement was the rage. Today, we are seeing an evolving reversal. More and more folks, for a variety of reasons, may still retire early but then continue to work part-time or pursue a second career. …and sometimes a third career.

The emotional and health benefits from doing so are well-documented. The financial benefits from working longer are many. For example, by working longer, you can:

Once you reach the age 70 threshold, all the benefits above continue (with one exception) and some additional financial benefits to working longer begin to appear. The one exception is Social Security retirement benefits. The advantage of delaying the start of these benefits no longer continues beyond age 70. However, for folks receiving Social Security, even beyond 70, additional years of earned income can increase benefits beyond the annual COLA adjustment if the additional years replace earlier lower-earning years in the retirement benefit formula.

Perhaps the most significant additional financial benefit to working past age 70 has to do with Required Minimum Distributions (RMDs) from pre-tax retirement accounts. This is important to those who do not need some or all of these distributions to maintain a positive household cash flow. Let’s look at two categories of such pre-tax accounts:

Employer Retirement Plans – 401(k)s, 403(b)s, 457 Plans. If you are age 70 ½ or older and still working, you may be able to delay taking RMDs from the company plan. This is commonly known as the still-working exception. You can also continue to make contributions to the plan.

For this exception to apply you must: be considered employed throughout the entire year, own no more than 5% of the company, and participate in a plan that allows one to delay RMDs. Not all allow this option.

Your first RMD will be due for the year you ultimately retire or otherwise leave employment. You have the option to delay taking that first RMD up to April 1 of the following year. If you do, you’ll have to take two RMDs during that following year – one by April 1 and one by December 31. Then in subsequent years, you will get into the standard one RMD per year cycle. While you generally can leave your money in the plan after leaving employment, most folks choose to perform a direct rollover to a traditional IRA where you have a greater range of investment choices and distribution options.

Individual Retirement Plans – Traditional, SIMPLE, and SEP IRAs. If you are age 70 ½ or older and still working, you cannot delay taking RMDs from these plans. You must start. In addition, you no longer can make Traditional IRA contributions, but you can continue to contribute to your SIMPLE and SEP IRAs as long as you are receiving earned income.

A very attractive option to reduce or eliminate having to take RMDs from your Traditional and SEP IRAs is to roll over some or all of your IRAs to your employer retirement plan if you are still working. To make this work, your plan must allow this, which isn’t always the case. Also, if you’ve already reached the year in which you turn age 70 ½ or later, you must first take any IRA RMD before rolling the balance over to the plan.

Be sure to work with a trusted financial planner when considering how to leverage all the financial benefits available to you by continuing to work, particularly beyond age 70.

James Terwilliger, CFP®, is Senior Vice President, Financial Planning Manager, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670