Ep. 230 – QCDs and Donor Advised Funds in Retirement Planning

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss things to be aware of about qualified charitable distributions (QCDs) and donor-advised funds. The QCDs and donor-advised funds are great tax benefits strategies, but they make sense in your retirement planning journey in two different scenarios.

Listen in to learn about QCDs, the tax benefits you can take advantage of when donating to charity organizations, and the rules of the strategy. You will also learn more about the donor-advised fund, how to take advantage of itemizing tax returns, and the rules of the strategy.

In this episode, find out:

• Qualified Charitable Distributions – a tax savings contribution you can do out of your IRA.
• The QCDs tax benefits you can take advantage of when donating to charity organizations.
• The rules on when and how to take your QCDs, plus how QCDs can apply to your RMD when done properly.
• Donor Advised Funds – stacking your donations together to take advantage of itemizing tax returns.
• The rules of a donor-advised fund, how to fund this account, and why it’s flexible.
• Understanding where both QCDs and donor-advised funds make sense for you.

Tweetable Quotes:

• “The rule with the QCDs is that you’ve got to be seventy and a half in order to do it; with donor-advised funds, you can do it no matter what your age is.”– Radon Stancil   
• “Once you make a contribution into a donor-advised fund, it’s irrevocable.”– Murs Tariq 

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	What do you need to know about QCDs or qualified charitable distributions and donor advise funds when it comes to your tax plan as you’re preparing for and living through to retirement? In this episode, we’re going to answer all the questions.
Murs Tariq:	To learn more about how to secure your retirement and all the different elements you need to know, please subscribe to our channel and hit the bell so you’ll be notified when we release episodes every Monday. We have helped hundreds of our clients gain clarity and get on the path to a great retirement. Now it’s your turn. Let’s dive in.
Radon Stancil:	Welcome to Secure Your Retirement, a podcast really designed to try to help you think through and get ready for and live throughout retirement. And there’s lots of things that come up today. We’re not going to have a really long-drawn-out podcast, but this is one that’s really important this time of year because it’s helping us plan for taxes and the two things that we want to talk about to make sure that it is top of mind because we can make mistakes with them, or if we do it too late, it won’t work and it’s what we call QCDs, qualified charitable distributions or donor advised funds.
	And so we’re going to talk about those individually and kind of the things that you’ve got to be aware of. And don’t forget that we have a blog written on this as well, so you don’t have to worry about trying to make a lot of notes right now. So let’s just handle the first one, Murs. QCDs, qualified charitable distributions. Can you just explain what it is? We’ve done it, I think podcasts on this in the past, but what is a QCD? And let’s talk a little bit about the mistakes that could occur.
Murs Tariq:	Yeah, and it’s very timely as we approach the end of the year. We’re having a lot of conversations with clients around taxes and things that they can be implementing into their end of year tax strategy, QCD, donor-advised funds, Roth conversions. These are all heavy conversations that we’re having. But a QCD is a qualified charitable distribution like Radon said, and it is if you are charitably inclined, the way that you donate money typically is going to be you have money sitting in the bank that you write a check for and you give it to the charity. And how it works on your tax return is, well, you either get no benefit from it because you’re taking the standard deduction or you get a small benefit from that donation if you do happen to itemize your taxes. And we don’t need to really get into the differences of what those two are, but if you compare that to what a qualified charitable distribution is, a couple things you got to understand about it.
	But it is a tremendous tax savings contribution that you can do. Where it comes from is out of an IRA, so not directly coming out of your bank account, you’re not writing a check. Your IRA is writing the check directly to the charity. And like Radon said, if we do this properly because we’ve seen it done not right, if you do it properly, you get a dollar for dollar bang for your buck on taxes. Well, what does that mean? If you do it properly and you send the money directly from your IRA to the charitable organization, that’s a 5013c and it’s done before the end of the year and cash before the end of the year, then you get that dollar for dollar. So if you give $1,000 to whatever charity that you’re inclined to give to, $1,000 is when it’s coming out the IRA, it is not taxable.
	In most cases, in pretty much all cases, all dollars coming out of an IRA as a withdrawal. A traditional IRA is a pre-tax distribution. So that means you haven’t paid any tax on any of those dollars yet, but if we do it properly as a QCD, $1,000 come out, you pay zero tax on it and it goes to the charity of your choosing. So the question I would pose to you is if we are going to be charitably inclined, then why not take advantage of some of these taxable rules like a qualified charitable distribution?
Radon Stancil:	I just wanted to speak on that because you said it real quick and I just want to make sure everybody really gets it down in their mind. So let’s go to this other side of what Murs said, and I want to repeat it and really think about it. So if you took money out of your IRA or even out of your bank account, it doesn’t matter, and you are going to donate to somebody, if you took it out of the IRA, by the way, it would show up as taxable income and then whenever you donate to the company or to the organization rather, you’re still not going to get any benefit because we don’t go outside of what was called our standard deduction, which today is around $28,000.
	So most people don’t itemize. So think about that. I paid tax on the distribution if I take it out of the IRA and then I go and donate, I get no benefit that way. I want you to understand the power of what Murs just said. Now, if I take it from the IRA to somebody I’m going to already donate to already, I now get that money out of the IRA and no tax is paid. That is a huge tax benefit that if you are able to do so, you want to take advantage of that. Now, Murs, what’s the rules on that as far as when you can start doing QCDs and what you can use for QCDs?
Murs Tariq:	Yeah, so the rule is you have to be at the age of 70 and a half or above. It’s a very specific age, and that is the time that you can qualify for a qualified charitable distribution. 70 and a half used to be the original required minimum distribution age. The age at which the IRS says, “Hey, you got to start drawing on your IRA or your pre-tax type of accounts.” They since then have moved that to 72 and then now 73 and for some of you, age 75, but they left the QCD age at 70 and a half. So once you reach age 70 and a half, I would take inventory of who you are donating to if you’re donating money and consider, start taking it from the IRA as a qualified charitable distribution again, because you’re not going to get the dollar for dollar tax benefit if you’re taking it out of your bank account and relying on the standard deduction or trying to itemize.
	So 70 and a half is that rule, the age. Now, I said you got to do it properly, right? So you can’t take it out of the IRA, put it into your bank account and then write the check off of that. It has to go out of the IRA directly to the charity. So it’s got to be made out to them. It can’t be made out to you. If you do that, then you’re going to get taxed on it. If you make it out to the charity, then you’ll get that tax exemption. Also, what’s even more important or even more of an advantage is that I mentioned RMDs, required minimum distributions. Let’s just say yours are going to start at age 73. And let’s say you’ve got a million dollar IRA and your RMD, your required distribution this year is going to be roughly somewhere around $36,000 to $40,000.
	Let’s call it $40,000 is what the IRS says you have to take out as a required minimum distribution. But let’s say that you also happen to be pretty charitably inclined. The QCD can apply to your RMD amount. So for example, your RMD is 40,000, you give 20,000 a year just on average in the way that you donate money. Well, you can take the 20,000 from your RMD, so that’s taking $20,000 off of your tax bill because IRS is forcing you to take out 40. But they’re saying, “Well, if you give it away, then we’re not going to tax you on what you’re giving away if you do it properly.” So that’s a huge powerful tool that a lot of our clients are using right now to reduce that RMD tax bill because a lot of us with proper saving and the power of just cumulative growth over time, RMDs can become pretty sizable.
	And a lot of our clients, they don’t need it. With RMDs, I think you get the money, you pay the tax, and then you spend it, you take the money out, you pay the tax and you let it sit in the bank in cash or you get the money, you pay the tax, you reinvest it. And now this fourth category is well, you get the money, you don’t pay the tax on some of it because you give it away and then you do whatever you want with the rest that you have to pay tax on. So I think it’s a nice little addition that a QCD can bring to the table if you do it properly.
Radon Stancil:	All right, let’s transition now and talk about what are called donor advised funds. Now, the power here, we’re going to go back and we’re going to talk a little bit about this itemizing or not, is let’s just go outside of the IRA conversation that we just had and let’s just say that I donate. So this can happen, you can do this. Now, the rule that we were just talking about with the QCD is I’ve got to be 70 and a half in order to do it. With this I can do this no matter what my age is. So let’s just say that I do give to a charity each year and it’s kind of common for me to give a certain amount. So we’re going to use a little bit of math here and then we’ll go back to Murs on the application of how we set this up.
	But let’s say that you on say, every year I give away 10,000 to 15,000. To make our math year work, we’re going to use 15,000. So again, when I look at all of my deductions, many times when I add all that up, I’m not going to be above the $28,000 that we talked about for the itemization. So now I don’t itemize, I just give them the money, I get no tax benefit. Now, I want to give to the organization regardless of the tax benefit, so I still give it to them, but if there’s a way that I can get tax benefit, I’d want to take advantage of it. And so what the strategy here is that I can do what is called stacking my donations. And what does that mean? Well, I can set up a donor advise fund and I could say, “I know I’m going to give $15,000 a year to charities.
	It doesn’t have to be one charity. It could be multiple charities, but I’m going to give $15,000 a year away and I’m going to stack three of those together.” So 15,000 per year times three gets me to 45,000. Well, now my numbers are big enough, it’s going to force me or I’m going to take advantage of itemizing on my tax return. Because I did that I get to count my donations, which now is going to save me, in this case, a few thousand dollars. So we stack those donations and we’re not committing to one organization, we just say we’re going to give away $15,000 a year.
	I can later from my donor advised fund write checks to whoever I want. So even if the organization that I originally thought I wanted to give to is not there, I don’t have to worry about it. What if I don’t decide to give away all that money in the next three years? That’s okay. I can spread it even longer than that. What I did though is I stacked that money there so that I could get a itemization on my tax return for this year. So Murs, can you just walk us through the logistics of how you would set this up and what it would look like?
Murs Tariq:	Yeah, so the accounts are pretty simple to set up. Schwab has a great donor-advised fund that we utilize, but a lot of custodians have them as well. And they’re pretty straightforward. They’re also fairly flexible like Radon was saying. The one thing you have to understand is that once you make this contribution into a donor-advised fund, it is irrevocable. And just think about it for a second. The IRS says the IRS just gave you the ability to use and Radon’s example of $45,000 contribution into this fund and we’re earmarking it for charitable causes. So we got that deduction, we got that deduction on our taxes, it put us into a position to be able to itemize versus taking the standard deduction. So the IRS is saying, “Hey, you got the tax benefit so you can’t get this money back out for yourself. That would be double dipping.”
	So once it’s in there, it’s in there and it has to be used for charitable causes, but it’s very flexible. So I believe the smallest amount that you can donate is $25 out of a distribution out of a donor-advised fund. So you could cherry-pick however you want to use the dollars that are in there and that makes it really nice. It’s kind of like operating a bill pay on your bank account. I want to send X amount of dollars to this charity, I’m going to use X amount of dollars to this charity. And it just makes it so that we don’t have to have every little thing planned out for us. Now, another question or strategy as well, how do I fund a type of account like this? Do I just use cash in the bank? Do I use an investment account? Really one of the more powerful strategies that we’re using with a few of our clients is you used highly appreciated stock.
	So let me give you an example. You have a lot of Apple stock, you have a lot of Microsoft stock or IBM, whatever it is that you’ve been holding onto for a very long time. One could be that you inherited it, the other could be you bought it at the right time and it is appreciated so significantly that while you want to start lowering how much you have in that stock, you just don’t want to deal with the taxes. We hear that all the time. Well, you can gift stock directly into this fund. And what’s nice about that is you gift, let’s say you go with the $45,000 example, I’m going to give $45,000 of Microsoft stock into my donor-advised fund and once it’s in the fund, I can now sell that stock and I can put in cash. So that dollar amount is there, I can reinvest it or diversify it out.
	And I’m not worried one bit about how the tax complications come with long-term capital gains and things like that and that type of account. So just another strategy there on how we can fund a donor-advised fund, but also very powerful too when it comes to charitable giving. So when it comes to QCDs and donor-advised funds, QCDs obviously make plenty of sense at the age of 70 and a half and above. But if you’re younger than that and you are looking for ways to get yourself into a better taxable scenario and you are charitable giving, I would look into a donor advised fund and understand the ins and outs of that.
Radon Stancil:	All right, well, we hope this has been helpful. Please don’t forget, you can go to the website, go to pomwealth.net, there’s a blog article there on that, and you’ll be able to read about all the things we just discussed. And as always, if you have anything you’d like to ask us, always please feel free to write in. You can go to the website, top right-hand corner, click on schedule call. We’re glad to hop on a call and discuss any of these strategies that we ever talk about on the podcast. Well, we’ll talk to you again next week.
	We hope this video has given you some confidence and clarity as you plan for a worry-free life in retirement. But what else do you need? We have created a complimentary video course called Three Keys to Secure Your Retirement. This video walks you through step-by-step, what you need to do to get ready for retirement. You can also check out our podcast called Secure Your Retirement. You can subscribe below.
Murs Tariq:	For more retirement tips, check out these videos. Also, if you find them valuable, please subscribe to our YouTube channel and give us a like.