Recently, I wrote an article about the Required Minimum Distribution (RMD) on your retirement accounts. There are several ways to satisfy this requirement, and one of those ways is through a Qualified Charitable Distribution (QCD).
A QCD is a way to give funds to your church or other charity directly from your traditional IRA. It is a very tax efficient way to give, and relatively easy to set up: talk with your custodian, your broker, or your advisor and say, “I want to give $500 (or $10,000—however much you want to give) to my church every year.” They can set it up on a quarterly or annual basis as an automatic withdrawal. The funds will then go directly to the church or charity you indicate so it doesn’t show up as taxable income to you, and it satisfies or helps satisfy your required minimum distribution. You can begin to make Qualified Charitable Distributions the day (not the year) you turn 70.5, even though the RMD doesn’t begin until you are 72.
Because the standard deduction is so much higher now, many people are not able to earn a tax deduction for their giving because they don’t itemize anymore. Sending the money directly from the IRA to your church or charity provides a way to essentially get a tax deduction since it’s not reported as taxable income. Plus, the entity will be able to use it just like they do any other donation.
You want to be sure you have a conversation with your church treasurer about your giving plans. It makes a lot of treasurers, especially in small churches, very concerned if they don’t receive the funds they had expected. If you say, “I’m not going to make any contributions to the church until November 1 because that’s when I turn 70 ½ and can utilize my QCD,” this conversation will help them plan the budget accordingly and alleviate those concerns.
If you have another retirement account that is subject to the RMD, but is not eligible for the QCD, another effective way to offset the taxes from that RMD is to utilize a Donor Advised Fund (DAF). This is a helpful tool, especially if you have any investments that have increased in value and have unrealized capital gains. For example, when the asset is at a good price, you take an in-kind distribution (transfer the shares directly) from your brokerage account that holds these mutual funds or stocks and transfer them to your donor advised fund. Any tax deduction you are eligible for is based on the price of the asset at the time of transfer and you avoid long-term capital gain taxes since you didn’t sell first.
For example, let’s say you’re going to give $30,000 away in one year. Go ahead and take $30,000 worth of funds or stocks that have unrealized capital gains, find the ones that have the lowest cost basis, and transfer that to your donor advised fund. You can then gift the money at whatever amount and frequency you had planned. So instead of giving, let’s say, all $30,000 to your church all at once, you give to several different ministries or charities you would like to support over several months or the whole year or even multiple years.
You can also take the cash that you would have given to charity and put that back in your brokerage account to rebuy the same investments that you just gave away. If you really like that particular investment, and you think it has a lot of future growth potential, this is a great option to consider. Perhaps you have an investment that you paid $10 a share for and now it’s worth $20. You give away the gains at the $20 a share price, but then you buy back the same investment for $20 a share. It helps you with future tax planning as well, because your basis in that same investment is now twice what it was before because you bought it at the current price instead of keeping it at the old, lower price.
You are limited, of course, on what percentage you can give this way. Beginning this year, you have limitations of giving 30% of your Adjusted Gross Income of long-term capital gain property.
You can set up a DAF with South Carolina Christian Foundation or the National Christian Foundation. You can also set one up through your brokerage account with your custodian (i.e., Fidelity or Schwab). I prefer using one of the foundations that has a Christian worldview like mine, but you can use any of those services to set up the account and transfer your funds.
Both the QCD and DAF are great ways to give to charity from your investment and retirement accounts. Each has its restrictions and limitations, so be sure to talk to your financial professional and tax preparer before implementing any of the strategies I have discussed.
If you have any questions about the qualified charitable distribution or donor advised fund, please don’t hesitate to contact me at mike@talkingmoneyradio.com or 1-800-588-7526.
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