Unbelievable Strategies to Finish Your RMDs [Part 2]

Hey everybody, welcome to another edition of We're Talking Money. We're coming back with the second edition on required minimum distributions. A couple of weeks ago, Dustin, we covered the first three of six questions. We were talking about things such as: will you need the money to live now, will you reinvest the money, are you going to leave these dollars to your heirs? Today we're going to pick up on question four and finish up with six, and we got some really good stuff today.

Absolutely. There was a few of these that we just actually ran into earlier this week, and so these are very relevant ideas. We're excited to have you and looking forward to talking to you.

Absolutely. Stay tuned.

Wealth can be measured in many ways. As it grows, life can quickly become complex, creating the need for more focused planning. Welcome to We're Talking Money with OmniStar Financial Group. OmniStar's been helping clients achieve financial success for more than 20 years in a client-centric and stress-free environment, with a reputation built on a long track record of working with people who want to grow and protect their assets. OmniStar illuminates the blind spots, provides actionable strategies to help you achieve what's most important. This is where you can count on straightforward and unbiased advice from a team of professionals that are passionate about your success.

And the first part of our second part of the series of RMDs, one of the questions is: do you want to make charitable contributions? Now, this comes up a lot. If you're charitably inclined, a few opportunities exist in this space. First, a little known strategy involving a Roth IRA conversion and simultaneously making charitable contributions. This strategy provides multiple benefits and advantage: philanthropic goals are mets, RMDs are eliminated and tax consequences are satisfied. The strategy involves performing a Roth IRA conversion, then making a charitable contribution in the exact same amount as the conversion. In general, the goal is for your donation to help reduce your taxable income by the same amount of the conversion increasing it, leaving you with little or no tax impact.

You could also make the charitable contribution to a charity that has a donor advised fund program and recommend grants from other charities from your donor advice fund program over time.

Dustin, this Roth conversion thing's been talked about a lot lately. We hear it now more than probably we've ever heard it, but rightfully so. We're in a really interesting time this year with the CARES Act. A lot of benefits going on that can make a Roth conversion pretty attractive, maybe more now than ever. For example, say you plan to convert a traditional IRA to a Roth IRA, like Dustin was saying, and a hundred thousand dollars of the assets in the account, they would ordinarily be taxed. Making a hundred thousand dollar charitable deduction, on the other hand, simultaneously from a taxable account would generally offset the converted assets, leaving you with little or maybe no additional tax liability. So good to know. Great strategy.

You can eliminate these RMDs to some extent during your lifetime with this strategy, but where you really eliminate them is once you get converted to the Roth. Now you don't have RMDs during your lifetime. So talk about advancing your philanthropic objectives: converting from traditional IRAs to a Roth, simultaneously using charitable donations if you're so inclined, can make a huge, huge difference, particularly as we get down the road a bit. 5, 10, 20 years from now, the difference is really, really incredible.

Absolutely. Especially, not to mention, when the money passes there's no more tax for your beneficiaries if it isn't then that Roth vehicle. Haven't even talked about that. Very helpful.

That's sort of the down the road benefit. There's huge benefits now avoiding the RMD; that allows that money to keep growing. And then when your kids inherit without income tax, and today we don't have that luxury with a traditional because we've lost the stretch. And this really, really makes a powerful financial move. It can benefit for a long time to come.

Yep. Now, on the flip side, if you don't have a need for the conversion, you may be better not converting and just simply making a charitable donation. Similarly, individuals with traditional IRAs can take distributions in 2021 and offset their increased income by making the qualified contribution deduction with the cash proceeds. This planning opportunity may work well for philanthropically motivated individuals who intend to leave the bounce of their IRAs to public charities at death.

Yeah, for sure. Man, that philanthropic and philanthropy, those are big words. It's not easy getting through them. First time we were reading our notes and scripts on this thing, my tongue got tied three times. I'm trying to untie it. I hope it doesn't happen again, but those are tough words, man. And it just simply means let's just be good to the world. Most people think that philanthropy is all about money giving, but it's really just taking care to do the best you can for the world, if you will. And so the two get intertwined a bit with charitable planning, but a tongue twister. So hey, if we twist those things a little bit, don't worry about it. You know what we mean.

So our fifth question in this series of six questions: do you wish to include charities in your final wishes? Now, generally anyone who has a large charitable intention, so to speak, they may not want to convert to a Roth IRA, Dustin. And typically the most tax efficient account to leave to charity at death is a traditional IRA. So if they're philanthropically inclined, or if they want to leave to charity, just taking that traditional IRA, leaving it to charity might be a good thing, because the charity does not pay income tax and the charitable bequest is deductible against the investor's taxable estate.

And that's important. We're going to get into that in just a minute. It's important because we're talking about getting rid of income tax, but estate tax is not removed. You can get rid of that IRA through charitable planning, but the estate tax still uses the IRA as part of the calculation. But if it's left to a charity, there is an offset credit that can help reduce or eliminate that estate tax. So very important to know.

So when you name a charity as a beneficiary to receive your IRA, or other retirement assets for that matter, upon your debt, rather than donating the retirement assets during your lifetime, the benefits can multiply.

Absolutely. So one, neither you nor your heirs nor your estate will pay income taxes on the distribution of assets. Your estate will need to include the value of the assets as part of the gross estate, but just like Phil was mentioning right there, you will receive a tax deduction for the charitable contribution, which can be used to really offset those estate taxes. Because charities do not pay income tax, the full amount of your retirement account will directly benefit the charity of your choice. So that's powerful: no income tax, all the money goes right to the charity your choice. It's possible to divide your retirement assets between charities and heirs according to any percentages you choose. You also have the opportunity to support a cause you care about as part of your legacy.

Do you want to talk a little about the CRT? Everything that you've said, I'm just thinking about how powerful all of this is, and so many people, they don't know that these things exist. And these are a little bit more complex compared to the first set of questions that we did in the first show, but these are really powerful. And now we're going to launch one here, or talk about a charitable remainder trust, even more powerful. So what does that do? What does it mean?

Well, this irrevocable trust, Dustin, as you know, it generates potential income stream for the client, for the beneficiaries and for the charities. That's powerful stuff. And so who are good candidates for this? Well, if you've got a large IRA and you want to leave some dollars to your family members, maybe you want your kids to get income for 10 or 15 or 20 years. Powerful tool. You can leave that income to them and still have something in reserve for that charity. And so when you're gone, kids go through all of the income that you wanted for them. Now the money, the remainder, hence the term charitable remainder trust, everything now is left for the kids, or rather the charity.

The best part is you get the deduction now. You don't have to wait on that. So you get the charitable deduction now, you benefit from that huge tax incentives, kids get what you want them to have, charity benefits in a huge way. So when you talk about immediate charitable deductions, huge benefit. But also, if you have a need for income streams, the donor can take an income stream as well. And also it's a good option for clients who want to provide for their heirs, as I said, with the remainder. And that's the key here: you got to want to leave something to a charity. But the remainder, which can be substantial, is left to the charity. So there you go.

Absolutely. Powerful, getting that deduction today, but then knowing you're leaving the stream of income and then eventually it's going to go to the charity of your church. Huge.

It's here, so powerful. More people need to know about these things, particularly now with Uncle Sam wanting to extract sooner rather than later their so-called 30 or more in your IRAs. If you've got a qualified plan that's not a Roth, any other qualified plan, you might as well come to grips with the fact that Uncle Sam owns 25 to maybe as much as 40 percent of that money. So learning these strategies, working with advisors like OmniStar, getting acclimated to strategies that can help you make your money go further, that is a huge advantage. Naturally you want to save tax, but what you really want to do is make sure that you implement strategies that not only save tax but they deliver your hard-earned wealth where you wanted to go at the time you wanted to get there. Very important to know about these things.

Yep. And that brings us to our last smart strategy, number six: what about IRA qualified charitable distributions, or what we refer to as QCD? The CARES Act did not change the rules around the QCD, which allows individuals over 70 and a half years old to donate up to a hundred thousand dollars in IRA assets directly into a qualifying charity each year without the distribution showing as taxable income. However, the CARES Act is extended through 2021 so the 100 of AGI limit for qualified charitable contributions made my itemizers. This is a tremendous benefit in that it effectively affords individuals over 59 and a half the benefits similar to a QCD. They can take the cash distribution from their IRA, contribute the cash to charity, and may completely offset tax attributable to the distribution by taking a charitable deduction in the amount of up to 100 percent of their AGI for that tax year. So if you are planning on making a large donation in 2021, this may be a smart strategy, but just as long as you're between the ages of 59 and a half and 70 and a half and you're not dependent on the existing retirement funds.

You know what's really interesting is when they put these new rules in place, the required minimum distribution moved from 70 and a half years old to 72, but the QCD for some reason got missed, and it stayed seven and a half years old. Don't ask me why. All I can tell you is that's Washington at its best. But it got missed, and so you can do the QCD now, which creates great leverage if you wanted to, say, convert something to a Roth, for example. You can take as much as you want up to that hundred thousand and move it to a charity and offset an equal amount coming out of an IRA, moving it to a Roth, for example. Now that's a good benefit to know about, because at 70 and a half you can start utilizing the QCD. Had they moved it in lockstep with the RMD, which they should have, it should have been moved when that was moved, we would have lost that opportunity. So it's good to know. But hey, the bottom line is you've got to have a plan. Whatever you do, have a plan.

There it happens to be IRS limits to deductible charitable donations, but the CARES Act extended through 2021 the hundred percent, listen, this is important, 100 of the AGI limit for qualified charitable contributions made by itemizers. If you itemize, this is important. Absent this provision, these contributions were limited to sixty percent of your AGI. So in other words, if you gave a hundred thousand to a charity, you only had the luxury, if you will, of deducting sixty percent of that. So you didn't deduct the whole amount; you only deducted, say, sixty thousand if it was over that AGI amount of 60. So you lost a big part of what might have been 100 deduction.

Well, in 2021, we call this enhanced AGI limit, if you will. It requires little effort more than the stroke of a pen, and so all you have to do on your election, Form 1040, Schedule A, line 11, let them know that's what you want to do. If you're an itemized filer, you can give away as much as you want. 2021 happens to be one heck of a good planning year, Dustin, for charitable contributions, for Roth conversions. And hey, according to the 2020 Schedule A instructions, the individual indicates this election by entering qualified contributions on the dotted line next to the line 11 entry space. The instructions then tell you that the election can be made with respect to any contributions, which suggests to us that the election is on a gift-by-gift basis. In other words, the IRS is not going to penalize you because this thing goes

over 100 of your AGI. You can take this as far as you want, so this is a huge, huge opportunity. Don't miss it. We might not have it after 2021, who knows.

Yeah, absolutely. It's very important to know that if you are going to make some contributions to charity, now would be a good time. 2021 is a good time. They're talking about raising the taxes, and so doing it now is going to be really the way to go.

Well, with that AGI limit being removed, yeah, 2021's huge. And then you just said it, I know people don't want to hear this, but taxes have to go up with the way we're spending money right now. There's 4 trillion dollars being talked about. Taxes have to go up, we got to get the money from somewhere. So if we think taxes are going up in the not too distant future, these things are even more beneficial today. Things like converting to a Roth, using these charitable contributions, where they all of a sudden get magnified in terms of their value.

Absolutely. And you know that RMDs are likely to play an enhanced role in your retirement, just in your finances, and building a thoughtful retirement plan can be really, really the most effective way to help you reach whatever goals you may have. And so beyond the RMD planning, the ability to offset 100 of AGI with those qualified charitable deductions is extremely powerful. Knowing about the CRTs, that's extremely powerful. Being able to move things to your family the way that you want them to, really minimize as much tax as possible, and really try to give back and do whatever you wish to do with those hard-earned dollars.

And it all comes back to just having a plan, meeting with an advisor, knowing number one what your wishes are, identifying what those goals and objectives are, creating a plan, figuring out what the concerns are, and then having really rock solid recommendations from a professional. That's how you're going to achieve those goals.

Could have said it better, Dustin. Whichever scenario applies to our listeners, whether it is today or more of a planning strategy for you tomorrow, RMDs are likely going to play an important role in your finances during retirement. Building a thoughtful retirement plan and retirement income plan can help you use your RMDs the most effectively. It can help you reach important financial goals that you just talked about. If you don't have those goals, then maybe none of this is going to really matter.

Furthermore, and beyond RMD planning, this is important: the ability to offset, you just said it, 100 percent of AGI with qualified charitable contributions, that might be a once-in-a-lifetime opportunity, Dustin. For now we know it's available through this year, 2021. We don't know what's going to come in 2022. Maybe they extend it, but I don't know. With the possibility of increased tax rates, things are going to change. We will definitely see something take place in the not too distant future. We'll just see how it works out.

So absolutely.

But we just believe it's essential to consider these strategies as well: multi-year carryovers, fluctuations in overall tax rates, and tax law changes, for sure. At the very least, it's important to spend some time simply understanding RMDs. You might just avoid a costly mistake.

And for sure.

Hey, we appreciate you tuning in. That concludes our edition, second edition, for required minimum distribution, the six strategies that you need to know. We hope you liked it. Hope you got something valuable from the information that we shared on the first episode and today. Go back and watch them as many times as you need to, and if you have questions, call us. We're always happy to help. We're a resource and we're only a click or a phone call away. Don't forget to check us out on social media.