GroundSkill
Advise on retirement funding, income-expense timing, and capital-versus-ordinary character
Retirement planning depends on timing in two ways: which vehicle holds the savings, and which year bears the tax. This lesson compares annuities, IRAs, and employer plans; sets income in the right year under constructive receipt; and assigns each receipt its character — capital or ordinary — before any rate is applied.
Retirement vehicles differ in when the tax is imposed. A qualified employee plan — the employer's pension, profit-sharing, or stock-bonus plan meeting Code requirements — earns deferral: employer contributions and growth wait until distribution. An annuity is a contract paying a series of payments at regular intervals over more than one full year, fixed or variable; a commercial variable annuity follows the same timing, with earnings untaxed until a withdrawal or annuity payment, and the taxable part then treated as ordinary income.
| Vehicle | Tax while saving | Tax at payout |
|---|---|---|
| Qualified employer plan | Deferral on contributions and growth | Taxable distributions; RMDs from age 73 |
| Traditional IRA | Deductible contributions when eligible | RMD by December 31 each year after age 73 |
| Commercial (nonqualified) annuity | Earnings untaxed until distributed | Taxable part is ordinary income |
| QCD to charity (traditional IRA only: age 70½+, direct trustee to eligible org) | Direct trustee transfer from the IRA | Excluded up to $108,000 per spouse; counts toward the RMD |
The table's last row is the charity option for a retiree who must take an RMD but needs neither the cash nor the income: directing it to charity satisfies the December-31 deadline while excluding the amount. As "Leaving the Plan" taught, a QCD moves directly from the IRA trustee to the charity for an owner age 70½ or older, excluded up to $108,000 per spouse and counted toward the RMD. That charity option is IRA-only: a QCD is generally a nontaxable distribution made directly by the trustee of the IRA (other than an ongoing SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions, and the owner must be at least age 70½ when it is made — so a 401(k) distribution paid straight to a charity is not a QCD, and an RMD that must come out cannot be rolled over into continued deferral. Starting payouts early never cancels the RMD duty — calculation by the required beginning date remains mandatory. On funding choice, the comparison cuts the other way for Roth accounts: a traditional IRA forces RMDs starting with age 73, while the original owner of a Roth IRA takes no lifetime distributions regardless of age.
Iris, 74, holds a $400,000 traditional IRA, needs $20,000 of cash, and gives $15,000 a year to her church. Her 2025 RMD is $25,000 due by December 31, 2025. Directing $15,000 straight from the IRA trustee to the church as a qualified charitable distribution excludes that portion (inside the $108,000 cap) and credits it toward the $25,000 RMD, leaving $10,000 to withdraw for her cash need. Had she taken the full $25,000 personally and then written a personal check, the distribution would be fully taxable first, with only a possible itemized deduction afterward.
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Annuity. An annuity is a series of payments under a contract made at regular intervals over a period of more than 1 full year. They can be either fixed (under which you receive a definite amount) or variable (not fixed).View on the source
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It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify).View on the source
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The earnings aren’t taxed until distributed either in a withdrawal or in annuity payments. The taxable part of a distribution is treated as ordinary income.View on the source
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The required minimum distribution for any year after the year you reach age 73 must be made by December 31 of that later year.View on the source
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Even if you begin receiving distributions before you reach age 73, you must begin calculating and receiving RMDs by your required beginning date.View on the source
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A QCD will count towards your required minimum distribution, discussed earlier.View on the source
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Qualified charitable distributions (QCDs). A QCD is generally a nontaxable distribution made directly by the trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 701/2 when the distribution is made.View on the source
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The maximum annual exclusion for QCDs is $108,000. Any QCD in excess of the $108,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $108,000.View on the source
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Distributions not eligible for rollover. Amounts that must be distributed (required minimum distributions) during a particular year aren't eligible for rollover treatment.View on the source
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After the starting year for periodic distributions, you must receive at least the RMD for each year by December 31 of that year. (The starting year is the year in which you reach age 73 or retire, whichever applies in determining your required beginning date.)View on the source
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Yes. You must begin receiving required minimum distributions by April 1 of the year following the year you reach age 73. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. No. If you are the original owner of a Roth IRA, you don't have to take distributions regardless of your age.View on the source
Which of the following is correct regarding traditional IRAs, Roth IRAs, and qualified charitable distributions (QCDs)?
Most individuals are cash-method taxpayers and report income when actually or constructively received: available without substantial restriction. Physical possession is never the test. Interest credited and withdrawable on December 31 is current-year income though the records update in January; garnished wages count for the year they would have arrived; money reaching the taxpayer's agent counts when the agent gets it.
The planning consequence: actually deferring income changes the year, while merely holding a check does not. Genuinely deferring a discretionary bonus to January moves it to the next year, because nothing was available in December. Asking a client to hold a December check back moves nothing, because availability already fixed the year. The same logic governs deductions — a December payment for genuinely current outlays produces a December deduction — so advisers bunch current spending such as office supplies and professional dues into the year whose rate is higher.
Consultant Theo expects a 32% marginal year in 2025 and 22% in 2026. Two moves are on the table: billing a $9,000 December job so the client pays January 10, and paying $4,000 of professional dues December 28. The January receipt is 2026 income — the client owed nothing available in December — while the December 28 dues payment is a 2025 outlay. Had the client instead mailed a check dated December 29 that Theo asked to be held until January, the $9,000 would stay 2025 income: made available is received, held at the payee's request or not.
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it available to you. You don’t need to have physical possession of it. For example, interest credited to your bank account on December 31, 2025, is taxable income to you in 2025 if you could have withdrawn it in 2025 (even if the amount isn’t entered in your records or withdrawn until 2026).View on the source
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Garnished wages. If your employer uses your wages to pay your debts, or if your wages are attached or garnished, the full amount is constructively received by you. You must include these wages in income for the year you would have received them.View on the source
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Payment to an agent. Income an agent receives for you is income you constructively received in the year the agent receives it.View on the source
Lena's employer offers her a $4,000 discretionary bonus in December 2025. Lena can take it in December or have it paid January 12, 2026. She asks for January payment, and no amount is available to her in December. In which year is the bonus taxable to her?
Character comes before rate: the return first sorts each receipt into capital or ordinary, and only capital gain reaches the lower maximum capital gain rates. Net capital gain is the year's net long-term capital gain minus net short-term capital loss, taxed for 2025 at 0%, 15%, 20%, 25%, or 28% depending on the gain's source and the taxpayer's bracket. Ordinary income — wages, business profits, interest, nonqualified annuity earnings, short-term gains — never enters that pile.
As "Gains, Losses, and Netting" taught, a collectibles gain held more than one year faces a maximum 28% rate. The character map, building on the property module's holding-period and netting rules:
| Receipt | Character | Why |
|---|---|---|
| Stock held 14 months, sold at gain | Long-term capital | Capital asset held more than one year |
| Collectibles gain | Capital at the 28% rate | Source-based rate within capital treatment |
| Business inventory sold | Ordinary | Stock in trade with ordinary treatment |
| Nonqualified annuity earnings | Ordinary | Distribution timing without capital conversion |
Recommending a sale therefore means checking two questions in order: does the asset qualify for capital treatment at all, and which capital rate applies to its source.
Client Ana holds shares bought 14 months ago ($8,000 gain), a gold coin bought 3 years ago ($5,000 gain), and business supplies she resells ($2,000 gain). The shares feed net capital gain at the 0%/15%/20% rates by bracket; the coin feeds the same computation but at the 28% collectibles rate; the supplies are ordinary business income outside the computation entirely. Telling Ana that everything long-held shares one rate would overpromise on the coin and misclassify the supplies.
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The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.View on the source
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The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.View on the source
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For 2025, the maximum capital gain rates are 0%, 15%, 20%, 25%, and 28%. See Table 4-View on the source
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Long-term or Short-term. If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.View on the source
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Noncapital Assets A noncapital asset is property that is not a capital asset. The following kinds of property are not capital assets. 1. Stock in trade, inventory, and other property you hold mainly for sale to customers in your trade or business.View on the source
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Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year.View on the source
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Table 4-4. What Is Your Maximum Capital Gain Rate? IF your net capital gain is from... AND... THEN your maximum capital gain rate is... collectibles gain 28%View on the source
Carl sells two business assets: canned goods from his grocery inventory and shares of stock he held for investment. How is each gain characterized?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.