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Retirees: Make the Most of Your Charitable Giving

Retirement expert Ed Slott offers tips for maximizing tax savings using qualified charitable distributions.

Christine Benz: Hi, I'm Christine Benz for Thanks to the new tax laws, doing a qualified charitable distribution is more advantageous than ever. Joining me to discuss the maneuver is Ed Slott. He is an IRA expert and he is also author of the newly revised Retirement Decisions Guide.

Ed, thank you so much for being here.

Ed Slott: Great to be back here at Morningstar in Chicago.

Benz: Right. It's great to have you here in the studio. I wanted to talk about qualified charitable distributions. Let's start by talking about what these are and who should consider them.

Slott: One of my favorite things in the tax code, QCDs. They come out sort of eased into the tax code, because if you remember, they came out, then they were appealed, then they were renewed, then they were appealed. Since 2015 they have been permanent. And what that is, it's called a qualified charitable distribution. Not everybody qualifies. That's the only negative thing about it; not everybody qualifies. You have to be an IRA owner or an IRA beneficiary who is 70.5-years-old or older. So, it doesn't qualify if you are in a 401(k) in a plan or if you are under 70.5. Now, if you do qualify, you are allowed to make charitable contributions right directly from your IRA. So, the funds go directly from your IRA to the charity and the big benefit is, you can exclude that money from income. Excluding something from income is the same thing as taking a deduction. And because IRA owners over 70.5 have required minimum distributions, the amount you take satisfies or counts toward your required minimum amount.

So, let's say you normally give $5,000 to charity. And just to make the example easy, let's say your required minimum distribution is also $5,000. If you give the same money, you would always give--and remember, I'm not talking about giving more to get a bigger deduction. I'm talking about giving the same you have been always giving but just do it this way and you will save on taxes. So instead of the old way--writing a check, giving it to the charity, and maybe getting a tax deduction--instead, instruct whoever your IRA custodian is (and that we'll talk about; there could be snag there) and say, make a direct transfer from my IRA directly to this charity. And what's going to happen it will satisfy, in the example I gave, the $5,000 RMD, and you don't have to include it in income. Now, you don't get a corresponding deduction because that would be double dipping, but you are reducing your income. That's a big deal. You will always save taxes that way.

Benz: OK. So, you are able to give up to $100,000 of your required minimum distribution in the form of a QCD to charity.

Slott: Per year.

Benz: Per year. So, say my RMD is lower than $100,000, say it's $11,000, but for some reason, I want to give more. I want to give $50,000 in a QCD. Can I do that?

Slott: Yes.

Benz: OK. So, you could be more generous than the RMD required.

Slott: Right. And again, that will be excluded. That will more than qualify--satisfy your required minimum distribution, but it would exclude all of that money from income.

Benz: OK. So, I want to talk about the new tax laws that came online for 2018. And let's talk about what in them makes the QCD particularly advantageous. The issue is that most people will not be itemizing their deductions anymore.

Slott: That's exactly it. In fact, QCDs are not even mentioned in the new tax law, but the new tax law makes this one of the most powerful tax saving provisions available to just about everybody, again who qualifies, IRA owners over 70.5. So, what happens is, as you said, more people due to the brackets and the taking away of deductions and so forth and mainly, because of the increased standard deductions for people, joint and single both, most people won't be itemizing this year, which means they won't be getting deductions for their charitable donations anyway. So, by doing it this way, in effect you are getting the higher standard deduction plus the amount you give to charity. Now, you don't get a deduction for the charity on top of the standard deduction. But in effect, you do by excluding it from income, it's the same thing as getting a tax deduction.

Benz: OK. So, let's discuss the logistics of this. When within a year should I do this QCD? Does it matter?

Slott: Yes, it actually does matter. The earlier, the better. Why? Because once you are an IRA owner and those are the only people who qualify, over 70.5, you have required minimum distributions. And the tax rules say, the first dollars out are deemed to satisfy your required amount. So, you want to use the qualified charitable distribution to satisfy the RMD. So, I would make the contributions, these QCDs, the first dollars out, because they will be deemed the RMD.

Benz: OK. And I also want to work with or have my charity work with my financial provider together. I don't want to take possession of a check in this?

Slott: Well, first of all, there's a disconnect there. The charities are missing the boat on this. I hope they all see this segment and realize how much money they could bring in if they just got the mechanism straight. It's just a matter of changing what is years and years, generations of collecting charitable donations, getting a check and people getting a deduction. So, you actually can do a check. I don't really recommend it. But some of the custodians now have something called IRA checkbooks. It's a check right out of your IRA. If you make that directly to the charity, that's fine. I suggest the direct method where it comes right out of the IRA to the charity and the charity has to be on board with that, maybe a good financial advisor could help you facilitate that. The problem with the checks are--I mean, that's fine. It's good for people who want to go to different charities. I have got a check there, a check there. But if you bring that IRA check to the supermarket, your groceries are going to be 30%, 40% more.

Benz: Right. So, you mentioned multiple charities. That's OK with this QCD. I don't have to just select one and lavish all of my RMD on that. I can pick and choose.

Slott: Right.

Benz: How about charity size? Does it matter?

Slott: No.

Benz: Or are there any--as long as it's a qualified charity?

Slott: Right. The only charities that don't qualify are charitable arrangements, I should say, that don't qualify are something called donor-advised funds, which a lot of people as a result of the new tax law are moving into, because it's a way to bunch deductions and get that itemized deduction. But it's still not as good as a QCD. Why? Because itemized deductions only reduce taxable income. QCDs reduce your adjusted gross income. That's a triggering point for many other tax benefits, credits, deductions, and that can reduce taxes in other ways. So, the QCD reduces AGI, something called adjusted gross income. The donor-advised funds are not eligible for QCDs and private foundations are not eligible. No supporting organizations. The way the law is set up, they wanted to go right from your IRA to the charity, not to a group that will one day give it to charities. And also, there's another rule a lot of people don't know this, a benefit back rule that could throw off the whole thing.

Benz: What does that mean?

Slott: You can't get anything back. Let's say, you went the limit. We just talked about you could do up to $100,000 a year and you have this charity and you have the money, let's say, and you are giving $100,000 a year, you have a real large IRA and you are giving it to the charity, the right way directly from the IRA to the charity. And the charity is so happy with you, they give you a $10 tote bag back. That nullifies the whole $100,000.

Benz: So, how do I avoid that stuff?

Slott: So, say, don't give me anything. I'm giving it to you. I want nothing back. I'm not allowed under the tax law to get it. Keep your tote bag. Keep your show tickets. Don't give me anything, because if it fails, then you are back to the old system where you have to take an itemized deduction.

Benz: OK, Ed. Such an important topic. Thank you so much for being here to discuss it with us.

Slott: Thanks.

Benz: Thanks for watching. I'm Christine Benz for