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Our mission is to guide motivated people to become financially successful. Welcome back to The Financial Call. Zacc and I are here today talking about Qualified charitable distribution. So this is episode three of season seven. We're talking all about charitable giving. Last time we talked about timing your donations, which is big and applies to just about everybody.

This episode is dedicated to those who are a little bit on the elderly side. More wise side, I guess we could say, I always joke with clients that this is something to look forward to as you get older, it's one of the best charitable benefits that you have out there, [00:01:00] and it kind of a no brainer for most charitable givers when they reach this older age.

So this age is 70 and a half. You have to be 70 and a half to be able to do this, but it's an awesome benefit. So we're going to talk about how it works, if you can do it, what are the benefits of doing it, basically talk about how awesome it is. They don't really give us age demographics in the listener stats.

I would love to know how many, cause we do have quite a few clients that are above that age and we do have quite a few clients that listen to the podcast. But 70 and a half is when this opportunity kicks in. And for most people that I work with. Then, at that moment, all the other charitable strategies that we use, whether it be bunching and doubling up like we talked about last time, or donating appreciated stocks, I mean, pretty much all of those charities get set aside.

This is it. This is the way you'll give to charities for the rest of your life if you have IRA assets to do it with. Yes, so what is it? So basically you could donate money from a pre tax account like an IRA [00:02:00] and Donate it directly to a charity and it does not show up on your taxable income meaning you don't have to pay any taxes on Money going directly to that charity now.

Keep in mind. I did mention it's from an IRA not a 401k So you can't do qualified charitable distributions from a 401k You would need to first roll those funds into an IRA and then you can donate them to a charity Why does this matter? Well, normally in retirement, when you draw from a pre tax account like an IRA, all of that is showing up as taxable income for you.

And then most people will turn around and donate from their bank account with after tax dollars, and they're getting really no benefit for it. But if you donate directly from the IRA to the charity, you skip that step. And you save all the taxes on those dollars given to the charity. We talked about itemized and standard deductions last time.

And we talked about how if any of your charitable giving falls within the standard deduction, you're losing some benefit. And [00:03:00] that happens a lot, a lot more than you'd realize. I mean, most of the time that's happening. So what this does is it reduces the income. out of the gate and then it's like doubling up the benefit here.

You get to take the standard deduction and before that even, before you even get to the part of the tax form where it has you look at itemized versus standard deductions, it just reduces what's called your adjusted gross income. This is super important because there's a difference between adjusted gross income And taxable income.

Last time we talked about how your taxable income gets thrown into these buckets and tax the 10 percent and then what spills over tax at 12, what spills over tax to 22, and then it keeps going. The difference with Adjusted Gross Income is that's before, your Adjusted Gross Income is before you get to reduce it for an itemized or standard deduction.

Some things in retirement, like your Medicare premiums, your Social Security benefits, [00:04:00] And a few other things are, and like health care subsidies, they are impacted by your adjusted gross income, not your taxable income, and technically, if anybody's listening and they're really into this, it's modified adjusted gross income that affects those, and there's like six different modified adjusted gross income numbers based on what they include and what they don't.

Yeah, that's how the IRS likes it. Just know that that modifier is they're throwing stuff back in on top of AGI. So basically AGI is pretty much most of your income, modified, adjusted gross income is adding a few things in. And so what I'm saying here is If you can do a QCD or Qualified Charitable Distribution and reduce that top line numbers, they call it top line, if you can reduce that top line number, it may actually make it so you save on taxes on your social security, or it may reduce your Medicare premium.

I have one, one client in particular where every single year. We are super careful [00:05:00] not to take the IRA out as a normal distribution to his bank account and then have him give to charities because if we do that, he's just so close to the Medicare premium line that it'll push him over the line. But if we send it from the IRA directly to the charity, never shows up and he stays behind the Medicare line.

So it saves him thousands of dollars between him and his spouse each year in Medicare premiums by doing it the right way here. Again, donating the same way, I mean donating the same amount, just a different way. In the right way. That's what, so last episode, if you didn't listen to last episode, Laura made that point, that if you can do it right, if you can give smarter, if you can time your deductions, or in this case, if you can use a qualified charitable distribution, there are sometimes ways to use the same amount of charitable giving and save you more tax dollars.

So that's super important. For people that don't know, those Medicare lines that we're talking about, that's for your Part B premiums. [00:06:00] It's a set amount, and then if your AGI is high enough, they start to increase those premium amounts. And so we watch those lines really carefully, and any dollar that goes over that line, You're now paying more on those Medicare premiums.

So if you can keep your AGI lower, we can help avoid that line like Zacc talked about. Whereas the previous episode, we talked about maybe maximizing your itemized deductions. Even if you max out your itemized deductions, it doesn't affect your AGI. So you're still going to cross over that Medicare limit.

That's right, because AGI on the tax form happens before they subtract out your deduction, standard or itemized. So it's a really good point, Laura. We're not even talking about deductions yet when you're talking about your AGI. This is one of the few things, there are very few things out there that can reduce your adjusted gross income, other than you just not making as much money.

That's the other option, is somehow find a way to not make money, which is not what people want. Usually it's better to have more money and pay a portion in [00:07:00] taxes. But anyway, this is one of the few areas where you can still have the same amount of money and actually reduce your adjusted gross income.

Now, another thing, we'll get into the logistics of how this works, but a common mistake I hear is somebody who is, let's say they are 69 years old, they take 20, 000 normally out of their IRAs, Of that, they're giving to charities later, you know, because they can't do a qualified charitable distribution yet.

That's one of the rules. You must be 70 and a half. Okay, so they can't do it yet. They finally turn 70 and a half, and they're like, Great, okay, let's keep the 20, 000 of IRA withdrawals coming to me, and let's do another 10, 000 over to the charity. That doesn't help your tax situation at all. I mean, it's great, and you're doing a good job giving to charities, but now you're taking 30, 000 out.

You still have to show that 20 on your tax return. The benefit comes when you do a little bit of musical chairs and swap it around where you say, okay, I was taking [00:08:00] 20. I was paying 10 to the charity because the IRA is going to pay the 10 directly to the charity. I don't need to take the 10, you know, half of that 20 back to me.

Their cashflow is still the same and sometimes a little bit better because they're not paying as much tax on money that they're taking out. So just recognize in order to truly benefit from the strategy, you may need to do a little bit of redirection of withdrawals rather than increasing your withdrawals, like doing extra.

If you give a hundred thousand dollars, which by the way is the maximum per person $200,000, I do have some people that I know that give with really big IRAs that give a hundred thousand dollars every single year to charities, and they would give more if the limit was higher. It does happen. It's not common, but it does happen.

It's interesting to me to think about incentives that way. Like, hey IRS, do you know that this would happen? And maybe, maybe that's, they do know and maybe they don't want them to be able to give more because they want the tax benefit on the minimum distribution that this person has to take out. Just on that same line, you [00:09:00] know, if you're not drawing from your IRA, you don't need the income, your fixed income is good enough, you're not drawing anyways, might not make sense to take the money out just to donate it to the charity and save on the tax because if you weren't taking out money anyways, you weren't paying taxes on those dollars.

So that's something else to think about. Maybe you're not at the age where you have to take money out, you're doing well on fixed income, maybe you just keep paying your tithing regularly. Well, I was going to say, if you're a charitable giver like that, like a regular charitable giver of some type, these QCDs are pretty fantastic.

I'll give you an example. Let's say that I was giving 10, 000 to charities every year. Okay, I'm 71 years old. Lara's like way ahead of me here, but I can only talk so fast. So, 71 years old, I'm giving 10, 000 to charities, and I'm not taking any money from my IRAs. Well, I will be forced to before too long, which is a minimum distribution.

We'll talk a little bit about that too. But let's say that I can do a qualified charitable distribution, but I have other cash flow. I even [00:10:00] think it's worth doing the QCD 10, 000 to the charity. If that truly frees up 10, 000 of cash, put that into a brokerage account and let it grow. The point is, like, there's an opportunity there somewhere if you are a charitable giver and you're over 70 and a half and you have an IRA.

Those are the three criteria, don't you think? Yes. If you are going to put those dollars somewhere else where they can continue to earn, fantastic. Do it. Take advantage of the opportunity. Other people might just spend the money and, you know, you're missing out on the money that could have grown had you left it there.

Did you sense Lara's frugality there? By the way, Lara is notorious for being super frugal. Cheap. Cheap. And so she's like, if you're just going to spend it, don't. Don't take it out. And I'm over here like, wait a second, they should be spending it. They're going to die before. That's true. It's a great point.

If you have money and I do encourage people to spend their money if they're in that spot where they're going to have extra. No, I could take a joke. So moving on to a couple of things. So should we talk about what [00:11:00] is a minimum distribution? Have we covered that? I don't think so. Required minimum distribution.

So, basically, you've been deferring money as you're working into a 401k and IRA. You've been deferring the tax on it and storing it up in these accounts. Well, the government says, okay, we've waited long enough to get our piece of the pie. You need to go ahead and take some money out, pay us the tax on it.

They call it the required minimum distribution. And they just changed it. So we're recording this episode in 2023. They just changed that required minimum distribution age to age 73. So in the year that you turn 73, you have to start taking out a portion of your IRAs or 401ks and paying the tax on it. If you are born 1960 or later, your RMD age is 75.

If you don't take this money out, there's a 25 percent penalty, which is pretty steep. You do want to make sure you're getting that taken care of. It used to be 50%. Are they changing that for the people [00:12:00] that will be in 2023 at 75? I mean, I'm asking a kind of very technical question here, but that's something for us to look into because it's been 50 percent up until like very, very recently when they made the change.

to make it so that people who will turn 75 in 2033 have to do distributions, then it's 25%. But anyway, we need to look into that. But the bottom line is it's a steep penalty. It's either 25 percent or 50 percent for those people today. I think it's for everybody. So since 2023, if you don't take out that RMD, you're subject to that 25 percent penalty either way, 25%, 50 percent still, those are steep penalties.

You want to make sure it's taken care of. Most people have a lower tax rate than that. Definitely lower than 50, but most people have a lower tax rate than 25%. So if you don't take it out, because you're really trying to avoid taxes, you're going to end up paying more than the actual tax rate on it. Okay, so the government is forcing you to take minimum distributions out, and that happens at [00:13:00] 73.

By the way, it used to be 70 and a half, and QCDs and RMDs, these acronyms, Qualified Charitable Distribution, and Required Minimum Distribution. So the required amount you had to take out, and the eligibility to give it straight to charities, We're linked before it was both 70 and a half and I actually am pretty happy and pleased that they did us a solid there Yeah, no kidding and they bumped the minimum distribution age up But they held steady with the qualified charitable distribution eligibility age at 70 and a half Which is great.

That means there's this window. Now, I'm just going to say if you are contributing to an IRA after 70 and a half, I mean, in order to do that, you'd have to still be employed. So you still have to have earned income to contribute. It can mess with, we're not going to go into the technicalities of it, but it can mess with a QCD, like make it ineligible or less favorable for you if you're trying to do QCDs and contribute to the IRA from your earned income.

A [00:14:00] rollover contribution doesn't count. I'm just talking about like earned income, regular contributions. So, um, talk to us about that if you have questions on how that works. So we talked about RMDs, they're coming. If you have a really big IRA right at

70 and a half to help minimize those minimum distributions in the future. Because even if you're not drawing from the account, you could also look for Roth conversion opportunities if we're taking some money out. Just some things to think about. But yes, if you have a big IRA or 401k, start thinking about this right at 70 and a half.

How to start taking money out tax free. Because at the RMD age, you're going to have to take out a certain amount, and you might not be able to take very much out tax free. It might push you into a higher tax bracket, so you just want to plan ahead. So, like, let's just throw this all together and say, like, okay, let's say somebody had regular investments, non retirement accounts, and they are between 60 and 70 and a half.

Laura brought it up, but there's [00:15:00] a lot of tax strategy here. We could take that person and bunch up their charitable giving through giving away appreciated stocks. I'm bringing like three or four episodes together here that we just recorded. So giving away some of those stocks that have gone up in value, avoiding the capital gains on those.

Getting a higher itemized deduction, front loading several years worth of giving, and in the same year doing some Roth conversions, which reduced the minimum distribution, knowing that at 70 and a half, they're going to be doing qualified charitable distributions anyway. So that is the decade and a half of planning that we think a 60 to 75 year old needs, and I think a lot of 60 to 75 year olds are just not getting that information very clearly for them.

But that's the strategy. That's the way you manage it. And then you watch those marginal tax brackets and you say, Hey, I have 30, 000 of a headroom in the 12 percent tax bracket. We should be taking advantage of that. Or I can create another 20, 000 of a headroom in the [00:16:00] 12 percent tax bracket by bunching up my charitable and then I could re take advantage of it by converting over to a Roth.

And really there's so much opportunity there, but that's, this is where we specialize is usually helping people in this range from mid late 50s through early 70s to really set themselves up so that 70 and beyond can feel a lot more steady. There's less pulling of levers once you get to about 75. Things are a little more baked, but hopefully if we've done the work right for the previous decade and a half, you are happy with what you've baked.

Because you're now sitting in a pretty solid tax situation, and I do find that most people, unless they have a lot of money, they don't like taxes, but they finally recognize at that point, like, I'm actually paying a pretty decent rate. Yeah, you can plan around it. And some people ask if you have to take an RMD from Roth accounts.

No, those are not applicable to those Roth [00:17:00] IRAs. The government already got their tax on those dollars, so they don't care. So if you do those Roth conversions, it doesn't apply to the Roth accounts. So this is the cool part. I think we've alluded to it, but I don't think we've explicitly told you if you're doing a QCD, that also satisfies your RMD.

So let's say your required minimum distribution for one year is 25, 000. You do a QCD for 15, 000. You now only have to take out 10, 000. I think I said 25 or 15, 000 QCD. Then you just have to take out the remaining. 10, 000. If your QCD is more than your RMD, great. You've just satisfied it. You don't need to take more out.

Just go through a couple key things. I feel like we've talked about the benefits of a QCD, but there are a few things that you need to know before you go acting on that to make sure that it works for you and to make sure you don't try to do something that you can't do. Okay? So to make sure it works for you, you cannot take that money and put it in your bank account in any way.

The check or [00:18:00] distribution needs to be directed and written directly to the charity. So that's important, and usually, wherever your IRA is sitting, they'll have a one time IRA withdrawal form of some type, and there'll be a spot to list out a check to a third party. So you'll need the charity's, usually the charity's name, address, and how to make the check payable.

You fill out that form, we usually do that for our clients, help them with a dollar amount. You're not going to do any tax withholding because that makes zero sense because there's no tax to be paid. So you're not going to do any tax withholding, you'll fill out that form, you'll sign it, send it to the company that holds your IRA, they call those custodians or carriers if it's an insurance product of some type, then that gets sent, that check will then get processed and sent directly to the charity.

Sometimes the check will come to you. That's okay, as long as it's made out directly to the charity. You can still give that to the charity and you're fine there. So don't panic if the check is mailed to you. That's normal. It just needs to be made [00:19:00] out. You can tell you've had a few questions come your way.

Oh, yeah, we have some concerned clients. Something else to be aware of is that custodian or the carrier, they'll send you a tax form at the end of the year at 1099 saying, hey, you took a taxable distribution of 10, 000. That might have been your QCD amount. Don't panic. That's just the company covering themselves.

They're not looking into where you're Giving that money. They're not checking to make sure it's a qualified charity. So they're saying yeah, they took this money out It's taxable It's from an IRA as long as you have the receipt for the charity and then make sure you're filing your taxes either yourself Or your CPA knows.

Yes, this was a qualified charitable distribution That will not be taxable to you, but don't panic when you get that tax form at the end of the year That's normal. You just have to file it correctly The way that we see that usually filed is, and we don't file tax returns, but we look at a lot of tax returns.

So the way we see that usually filed is there are two boxes on the IRA and retirement account distribution lines. It's, it's somewhere within the first five lines of the [00:20:00] 1040. On the first one, it shows the total distributions. And then on the next box to the right of that on the same line, it shows the taxable amount.

And then usually the accountants will write in the acronym QCD. And so then if the IRS sees, okay, they took out 40, but only 10 was taxable. And then the difference is a QCD, the 30, 000 is the QCD. So that's how we see it. And, but that is such a good point, Laura, because when you get that 10 99 R, which is the form that your brokerage firm or other firms sends you, and you're thinking I did a QCD.

And they're showing me 40, 000 of distributions that are taxable. And that's an uncomfortable feeling, but it's normal because the brokerage firm is not going to do due diligence on every withdrawal to ensure that it's an eligible charity to be able to do that. Speaking of eligible charities, donor advised funds, which we will cover next.

are not an eligible charity for qualified charitable distributions. This is where my [00:21:00] heart gets sad because I love donor advised funds. I think that they create more good in the world. I think they encourage people to give more and I think they help you control your giving and organize it better, but for whatever reason so far.

The folks that run donor advised funds haven't maybe lobbied enough. I don't know. I know they're trying, but the IRS is not allowing qualified charitable distributions to go to a donor advised fund. We're going to talk about DAFs next episode. So tune in for that one. And you'll understand what we're talking about better, but you cannot do a qualified charitable distribution to a DAF.

It has to go to an end charity. Specifically, they've disqualified DAFs for that. So if you are 70 and a half or know somebody who is 70 and a half, this might be your parent or grandparent and they have an IRA, tell them to listen to this episode or call us. You can probably, and they're donating, you know, they're charitable givers.

This is something that you need to be aware of. Yep, those are the three criteria. Age, 70 and a half or older, have an IRA, give to [00:22:00] charities. If you check those three boxes, your charitable giving is probably QCDs for the rest of your life. And if you, if you're not doing it, you got to start looking into it for sure.

Okay, one other thing that I'll just mention about qualified charitable distributions. You can do a one time qualified charitable distribution of 50, 000 to Gift annuity, a charitable gift annuity. This is a legal structure that allows you to create an ongoing payment that you can receive and have benefits also go to the charity.

It's something that we're not going to go into today because there's actually a lot of different ways to structure things like this, like charitable remainder trusts, charitable lead trusts. Those you can't do a QCD to those, but you can do a QCD. to a charitable gift annuity. Mostly just want to mention that so you know that that's out there.

And if you want to learn more about that, we're not going to do a whole episode on that because it doesn't apply to very many people. It's just people who really are [00:23:00] trying to give away a lot of money and figure out how to get a little bit of income in the process and have specific goals, but we can help you with that.

So summary, qualified charitable distributions are a really strong tool for minimizing taxes after 70 and a half for someone who has an IRA. And gifts to charities. That's it. Awesome. Thanks for joining. Thanks. This podcast is intended for informational purpose only, and is not a substitute for personal advice from Capita.

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