Front Street Wealth Management

Fee Only, Proactive Wealth Managment

Inherited IRAs and In-Kind Donations

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Q: I recently inherited a regular IRA and a Roth IRA from my mother. I’ve heard something about a 10-year rule for my future distributions. But, I’m confused about how it all works from a tax standpoint for these two inherited accounts. Can you explain it?

A: The fact that your mom had already started taking her RMDs makes the rules a bit more complex. But, overall, it’s not too bad.

For your Inherited IRA, you will have to take annual distributions based on your age, not your mom’s age. In addition, you also have to fully distribute the entire account by the end of the 10th year, starting with the year following your mom’s passing. And, remember, your Inherited IRA distribution will be taxable income.

Things are treated a little differently with your Inherited Roth IRA. First, there’s no requirement to do annual distributions. But, the 10-year rule still exists. You just have to empty out your Inherited Roth by the end of that 10th year. Finally, assuming your mom’s Roth IRA was started at least five years ago, your Inherited Roth distributions will be tax-free.

The difference in tax treatment between these two inherited accounts is important to understand. Your Inherited IRA distributions will increase your taxable income. Your Inherited Roth IRA distributions won’t.

Depending on the size of your inheritance, you might want to spread out your Inherited IRA distributions to manage your tax picture. Of course, for your Inherited Roth IRA, you should let that account grow tax-free for the full 10 years.

Q: I’ve always made cash donations, but a friend of mine recently told me I could donate some of my appreciated stocks instead. Why is that a better way?

A: Donating appreciated securities, like individual stocks or even mutual fund shares, has a couple of advantages over just donating cash.

To start, when you donate appreciated shares, you still get to deduct the current value of those gifted shares. If you donate $10,000 worth of stock, you can deduct that $10,000, just like you do with your cash gifts (assuming you itemize your deductions, that is.)

But, here’s the added tax benefit. When you give away appreciated shares, you get to avoid paying tax on any of those built-up capital gains. Let’s say you originally paid $3,000 for a stock that’s now worth $10,000. If you sold that stock and donated cash, you’d owe tax on that realized gain of $7,000. Donating those shares “in-kind” directly to the charity and letting them sell it as a non-profit results in no tax at all. It’s a win-win.

Before moving forward, be sure to call the charity to make sure they are able to accept donated shares. Most can. It’s a pretty easy process.

A Series of Unfortunate Events

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If you’ve worked up the guts to glance at your portfolio lately, you might be pleasantly surprised. It might even look like very little has happened this year. Of course, it has felt like a malfunctioning roller-coaster ride. In fact, 2025 resembles Lemony Snicket’s “A Series of Unfortunate Events.” It’s been one thing after another.

It all started when the new administration took office. The onslaught of executive orders, slash-and-burn DOGE tactics and abrupt policy reversals immediately shook investors and retirees, alike. To be honest, I’ve lost count of how many people have expressed worry over the future of Social Security. That part is particularly unfortunate.

Then came the tariffs. As we all know by now, in early April President Trump unveiled a tariff policy that was seemingly devised by a procrastinating, high-school student relying on ChatGPT. To put it nicely, it made no sense. In response, the stock market plunged nearly 15% in a matter of days. Succumbing to Wall Street’s pressure, President Trump tweeted out a 90-day “pause.” The market then spiked 10% in the span of just an hour.

Since cooler heads appear to have prevailed, the stock market has clawed its way to within spitting distance of its all-time high set in mid-February. But, we aren’t out of the woods. The new tariffs and their inflationary and economic pressure remain a focus. The Fed’s path is very murky, to put it mildly. In classic economist-speak, on one hand the economy is slowing. But, on the other hand, tariffs are inflationary. I’m pretty sure derogatory jabs by President Trump are not making things any easier for the Fed.

The promised avalanche of big trade deals to come has yet to materialize. The fact that the April tariffs might soon be ruled as illegal could explain the slow progress. Why negotiate with a policy that might vanish on its own? Instead, we’ve only seen a few vague announcements of “frameworks.” Nevertheless, the markets seem to believe level-headed adults have taken things over. It’s not hard to imagine this as wishful thinking.

Adding to the mix of uncertainty, extending the 2018 tax cuts is now in jeopardy. If the massive tax and spending bill fails under its own weight, taxes could rise for almost every household. Some insist on sweeping spending cuts. Others refuse to budge on more tax breaks. It’s a game of legislative whack-a-mole. We shall see.

If you’ve found yourself mirroring the wild market moves with similar emotional swings, this recent recovery might offer a rare shot at a review and reset of your portfolio’s risk. This might mean raising some cash and trimming your stock market exposure. 

This is not a prediction of doom-and-gloom ahead. As I’ve learned over the years, everything should be done with a deep sense of humility. After all, nobody can predict markets with much consistency. All things in moderation is a sound guiding principle, especially in an environment seemingly devoid of it.

Roth Taxes and Estate Messes

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Q: I’m considering doing my first Roth conversion. I’ve read some mixed advice about how to pay the taxes I’ll owe. Should I use after-tax money to cover the tax, or can I just withhold taxes from the converted amount itself?

A: Ideally, I’d want you to use after-tax dollars to pay the tax bill. If you do, the full amount you’ve converted will land in your Roth IRA to grow tax-free. Using after-tax money is the optimal approach. While there is some fancy math behind this answer, it’s not necessary to go there.

Let’s be honest, though, not everyone has liquid cash on hand to cover the tax bill. If that’s the case, it’s fine to have the taxes withheld from the converted amount. Yes, it means less money will end up in your Roth IRA. But, if a conversion makes sense, don’t let the tax payment question stop you.

The key question in your Roth conversion analysis should be this: Is your current tax bracket expected to be lower than your future tax bracket? If so, a Roth conversion is wise to consider. The mechanics of the tax bill is kind of an after-thought.

Q: My husband really doesn’t want to figure out our estate planning. But I’ve seen how messy things can get from my friends who have recently had to settle their parents’ estates. It looks stressful and totally avoidable. How do I convince him to finally get our stuff in order?

A: If pure logic isn’t working, maybe painting a picture of what your kids might face will do the trick. 

Let’s imagine that you die first and your husband – who never got around to doing any estate planning – ends up holding everything.

First, all your family’s assets are now in his name alone; your investment accounts, your real estate, your bank accounts and all of his personal belongings. Naturally, your kids are left piecing together a puzzle after he dies.

They’ll now need to go to probate court to get things settled. If they are smart, they’ll hire an attorney just to get started. They’ll start searching through drawers and files looking for account statements and insurance policies. And, that’s if he kept organized and updated paper files! More likely, he will have opted to get paperless statements. So, now random email notifications become the new breadcrumbs to follow and finding his login credentials becomes an issue.

Even more frustrating, if your husband didn’t think to add one of the kids to his bank account, they won’t even be able to access basic funds to pay routine bills until the probate process plays out.

Obviously, most of this is totally avoidable. Now, if helping him imagine the burden he’s leaving behind isn’t convincing, it looks like you’ll just have to do it all yourself and just ask him to sign the papers!

Social Security Taxes and Gift Limits

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Q: My wife and I are both retired and we recently heard that Congress might eliminate taxes on Social Security, just like Trump promised during his campaign. We currently receive about $50,000 a year in Social Security and have another $65,000 in income. Could this new bill really mean we won’t have to pay taxes on our Social Security anymore?

A: The short answer is no and it’s not even close. To start, under today’s rules, a person can only get taxed on up to 85% of their Social Security benefit. With your $50,000 in Social Security and $65,000 in other income, your benefits are going to get taxed up to the maximum amount allowed. In dollar terms, this means about $43,000 of your benefits count as taxable income.

The proposed House bill won’t help you much. Under their chosen legislative process, they weren’t allowed to just declare Social Security benefits tax-free. Given the need for tax revenue, I doubt they really wanted to do that anyway. Instead, they are proposing a special added deduction for those 65 and older to the tune of $4,000 per person, or $8,000 for couples. That will only reduce the taxable portion of your Social Security by about 20%. In other words, that $8,000 added deduction only offsets your $43,000 of taxable Social Security. Granted, for some lower income retirees, the added deduction would offset a larger proportion. But, remember, currently about half of all Social Security recipients get tax-free benefits already.

Interestingly, this proposed change won’t make the tax treatment of your Social Security benefit look that different on your tax return. The same 85% of your Social Security will still be shown front-and-center as taxable income. 

Q: I want to give my niece’s daughter $25,000 to help her buy her first home. I’ve never given away such a large amount before. Will either of us have to pay any taxes on this gift? I really don’t want this to be too complicated for either of us.

A: Don’t worry, it’s simple enough. This year, you are allowed to give up to $19,000 to any person without any tax implications. However, since you want to give her $25,000, it does exceed the annual exclusion by $6,000. But, honestly, it’s really no big deal.

Exceeding the annual limit means you’ll just need to file IRS Form 709 to report this extra $6,000 gift amount on your tax return. Amazingly, you have a whopping lifetime allowance of $14 million in gifts before you’ll ever need to worry about owing any gift taxes! So, you’ve still got a lot of room for more generosity before Uncle Sam gets his slice.

For your niece’s daughter, this gift is very easy. She won’t owe any taxes on it and she won’t need to report your gift on her tax return.

Second Chance, Same Old Chaos

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Markets may feel a bit steadier, but don’t mistake this moment for stability. After the recent chaos, investors are breathing a little easier. But, I wouldn’t say we’re out of the woods. More likely, we’re experiencing a temporary reprieve.

President Trump’s recent 90-day pause of his so-called “reciprocal tariff” plan was his first sign of retreat. Stories are now floating around that he might just lower tariffs on China – from ridiculous levels to merely too high. And, he has also signaled a willingness to talk to Chinese President Xi, but only if he calls him first. Adding to the sense of calm, Trump has also suddenly decided to tone down his antagonism toward Federal Reserve head, Jerome Powell. This was just days after calling him a “major loser” on social media.

Of course, none of these reversals were rolled out as a formal shift in policy. Instead, they’ve come in the form of hints, rumors, offhand remarks and social media posts – leaving everyone to decipher the White House’s true intentions in real time. These childish guessing games have tangible, economic consequences.

The markets’ sense of relief started when Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick reportedly found a way to literally sneak into the Oval Office. Their goal was to get President Trump to at least pause his new tariff “policy.” The sneaking around was apparently necessary to get Trump’s influential trade adviser, Peter Navarro, out of earshot. Their clandestine effort smacks as a desperate maneuver. Moments later, Bessent and Lutnick waited in the room while President Trump walked back his tariff plan via a social media post. The mere image of this intervention is unsettling.

The policy in question – vaguely defined “reciprocal” tariffs – was never truly about reciprocity. Instead, it relied on a crude formula that no serious economist could defend. This entire episode highlights a governance style that appears impulsive, unthoughtful and reactive. Business leaders are left to guess what policy will look like a week from now. It has layered on a level of uncertainty that risks a recession.

Markets can handle policy changes. They can even handle reasonable unpredictability. But, when rules shift with little notice and policies lurch between extremes, the trust that underpins our markets erodes. The notion that Bessent and Lutnick are holding back the erosion of terrible decision making is concerning, to say the least.

While the “adults in the room” appear to have taken charge – for now – it’s unclear how long it will last. For this reason, now might be a good time to review your portfolio. If the past month has prompted feelings of regret for not paying closer attention to your investments, this period of calm might be a second chance. Because, in this environment – and with the current occupant of the Oval Office – it’s rarely about if the tone will change, but when.