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Many of our clients value giving. Whether tithing to their church or donating to local non-profits; giving is in our hearts. This is why Philanthropy is one of our 10 Elements of Wealth Management.
Spending time in this element with clients lets us focus on how we can use tools and strategies to make giving more effective. Most people simply write checks or give cash to non-profits, but cash is often the least effective way to give. Like the saying goes, “cash is king”, and it serves as a good reminder why we should consider the many other ways we can give without using cash. Let’s consider a few strategies:
First is Qualified Charitable Donation, or QCD. This little-known technique allows you to potentially donate the Required Minimum Distribution (RMD), or more, from an IRA or 401(k). Remember, the federal government forces you to take money out of your IRA or old 401(k) starting at age 73 (if you were born after 1960, your RMD age is 75). If you fail to take the RMD the penalty is 25% and the tax you would have paid on the withdrawal. This means that the penalty plus taxes could be over 50%!
It’s not unusual to find someone with sizable RMDs, yet they don’t necessarily need the distribution. Unfortunately, whether you need it or not, you will be forced to take it and pay the tax. This is where a Qualified Charitable Donation can be a great fit. Even better, our team will coordinate with the charity for a custodian-to-custodian transfer, a requirement for the distribution to never hit your tax return.
Think about it this way; If you are planning to give $50,000 to your favorite charity and you have a $50,000 required distribution, we can give the RMD and take the $50,000 you were planning to give and put it into a non-qualified account.
The reason this is so powerful is that non-qualified accounts receive preferred capital gain treatment and distributions do not add to ordinary income. This is especially important during retirement when income determines Medicare premiums and taxation of Social Security benefits.
This simple, yet effective strategy is one of many found in our Philanthropy Element of Wealth Management. We will continue sharing more tax saving ideas that satisfy your desire to give in the coming months. If you have questions about your tax strategy, don’t hesitate to contact us today.
