The ABCs of QCDs With David Hogan

You can get biblical financial wisdom delivered to your inbox each week absolutely free. Articles, videos, podcasts, and special offers on biblical resources. Over 60,000 people receive our free weekly wisdom email, and you can too. Create your free FaithFi account by going to faithfi.com and click Sign Up to begin receiving weekly wisdom in your inbox. The qualified charitable distribution is one of the most underutilized tax benefits, yet almost 25 million Americans are eligible to take it.

Hi, I'm Rob West. There are many requirements for taking a qualified charitable distribution or QCD. You must be 70 and a half and have an IRA. More folks might take QCDs if they understood them better. David Hogan joins us today with the ABCs of QCDs. And then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is Faith and Finance, biblical wisdom for your financial decisions. Well, it's my pleasure to have my friend David Hogan on the program today. David is a CPA and principal with Clifton Larson Allen CPAs in Atlanta. David, great to have you back with us. Thanks for having me, Rob. It's always fun to be able to help people be strategic in their giving.

Well, I love that idea as well. And we're saying that a lot of folks who might benefit by taking a qualified charitable distribution aren't doing it. So why don't you help them understand what a QCD is? So in simplest terms, a qualified distribution to charity is a direct transfer from your individual retirement account to a qualified charity. You don't get a deduction for that, but you also don't have to report the income. So it creates a great benefit for people that qualify.

Yeah, it really does. So how exactly do you take a QCD? Do you have to do it over the internet? Can you do it over the phone?

What are the mechanics? So it depends on who you have your funds with. But the easiest way, if your IRA has checks, is to write a check to your favorite charity. So a lot of IRAs allow that and maybe they allow it and people don't have a checkbook. So it might be a good idea to request one. But if you don't have a check, you can probably do it a direct transfer directly on the internet or call your advisor. If you can't figure out how to do it, if you call your favorite charity, they probably can help you do it. Excellent. And you mentioned that there are tax advantages.

Let's go back over that. What exactly are the tax advantages of a qualified charitable distribution? Well, for people that are over 70 and a half that may not have mortgage interest, so they may not be itemizing, so that when they do their charitable contributions, they really aren't getting any tax benefit. By doing it from your IRA, you don't get the deduction, but you don't have to report that income. So you essentially are getting to deduct it by not reporting that income from your IRA distribution. Yeah, so the money is coming out of the IRA, you're not recognizing it as income. And that really is, David, if I'm correct, the only way to get money out of an IRA without paying tax on it, right?

That is correct. And it has to go directly to the charity. You can't take it out and then write a check to the charity.

It has to go directly to the charity. Yeah, that makes sense. And that leads us to the next piece, and that is a required minimum distribution.

So how do these relate? So they moved the retired distribution to 73, so you don't have to do it at 70 and a half, but you still can benefit. But this distribution to your charity does satisfy your requirement on distribution. So particularly if you've got a large IRA, bigger than you need, you can direct it to a charity and not pay tax on it. Yeah.

So essentially, someone who is taking the required minimum because the IRS says they have to, but they don't need the money, their bills are covered from other income sources, this is a way to get this money out without paying tax on it and satisfy the required minimum. Exactly. Yeah. Now, for folks who want to give the same amount they were going to give, I guess one strategy is they could replace the giving they were going to do with after tax dollars from checking or savings with the same amount coming out of their IRA. Exactly. If you've got funds outside that you've been giving for, now you can use those for other uses and not live on your IRA distribution, but live on your other assets.

Excellent. Now, we've said you have to be 70 and a half and have an IRA, but David, is this just for very wealthy people? Can people with any income take advantage of a QCD? Well, it certainly is beneficial to the wealthy who have really large IRAs and can do this technique, but it's also really beneficial to people that don't have large IRAs, but they want to be giving charitably and they can do this and get a tax benefit, or they wouldn't because they're probably not itemizing. So it's really helpful for anybody that is charitably inclined and has an IRA. And go over that just for a second when you say they're not itemizing. So most people take the standard deduction, but this is a way to benefit them despite that because they're not recognizing this as income, which has no effect on that, right? That's exactly right.

Yeah, very good. All right, David. Well, we've covered a lot of ground in a short period of time, but let me just underscore this idea, folks. This is perhaps the best giving opportunity that you're not taking advantage of if you have an IRA and you're over 70 and a half.

So consider a qualified charitable distribution. David, thanks for stopping by. Thanks so much, Rob.

That was David Hogan. David is principal with Clifton Larson Allen CPAs in Atlanta. All right. Your calls are next. The number 800-525-7000. That's 800-525-7000. And if you prefer not to call, keep in mind, you can always send us an email at askrob at faithfi.com.

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More information is available at oneascent.com and by clicking Analyze My Investments. Hey, great to have you with us today on faith and finance. I've got one line open. I'm ready to dive into your questions today. 800-525-7000 is the number to call. If you have a question in your financial life today, give us a call. Let's begin today in Tennessee. Melanie, you'll be our first caller.

Go right ahead. I will be retiring, Lord willing, March 31st of 2025 and at that time I'll be 63 years old. My husband is self-employed.

He's 61 now. He'll continue to work a little along and I am not planning on tapping into my Social Security unless you say I may as well do that. We will be at that time probably free of any payments or debt except for a 2019 Yukon and it'll be right at $20,000.

We'll still owe on that. I am probably over-insured in every area of the world, but that's okay. We use Samaritan Ministries for his health insurance and I will convert to that once I retire for my full-time job. I'm a nurse so I'll be doing something. There's something that I can do and I've been away from hands-on care. So I'll be getting back into some frontline hands-on care is what I want to do. Nice.

And that'll be on a very part-time, you know, a couple days a week is what I'm thinking. Yeah. So my 401k will have around $200,000 give or take $10,000 at that time depending on, I guess, if it crashes or whatever. Sure. So what would you advise as far as my 401k?

We do have an emergency fund and we have three rental properties. Excellent. I love it. Well, that's a great overview, Melanie. And first of all, congratulations.

You guys have put yourself in a really strong position. You're debt-free except for that car. I love the fact that you've got a plan as you head into retirement thinking about what it looks like to start to slow down, but you have the ability to continue to do things that you're passionate about that align with your gifts and talents and God's call in your life. It allows you to continue to have some sources of income even though maybe you're pivoting towards some things that allow for a little bit more seasonal rest and enjoyment of just all the things you have in your life. I love the fact that you've got good diversification not only in stocks and bonds through that 401k, but you've got an emergency fund and then you've got some property as well, three rental properties that as long as you're willing to continue to serve as a landlord should throw off some nice income and continue to appreciate.

So that's great. Have you run your budget, Melanie, for what that will look like as you transition into retirement here in a couple of years? Just to look at, okay, what changes might we have?

Maybe you don't need as many work clothes and maybe you're not eating out for lunch as much. Just looking at what that budget might look like for that season and with your expected step down in income for both you and your husband, would you be able to cover your bills with the income you have from your part-time work and your rental properties without taking Social Security or drawing from the 401k or will you need to supplement it? We should be able to do without tapping into that. The big thing, the question I had about the Social Security and not taking advantage of it early is the threat of it not being there, you know, several years away. So that was my only thing about the Social Security.

Yeah. No, I think it does make sense for you to wait. You're going to get certainly waiting until full retirement age, which is probably 66 and a half for you or closer to 67. But I'd even consider waiting all the way till age 70 just because you don't need the money and you'll grow that check by 8 percent a year. You are in a situation where you're close enough to retirement where, you know, you're probably not even going to see any changes in your benefits. I mean, what we're looking toward is 2035 when the headlines telling us that the Social Security trust fund will run out.

And that's true. We're on track for that to happen, even if that were to happen. And I don't think it will.

And I'll tell you why. But even if it were to happen, they'd still be able to pay 70 percent of retirement benefits, even with that trust fund at zero, just through ongoing revenues coming in through FICA taxes. But it's too much of a political hot potato. It's not something that they will be able to allow to even drop to 70 percent. They'll shore it up either, in my opinion, through higher FICA taxes or continuing to push out the full retirement age as a means to restore it. You know, there's just too many voters in that category for anyone on their watch to allow Social Security to be insolvent. So I wouldn't worry about that. And I like the guaranteed increase of that 8 percent a year, because as long as you have you're in good health, you know, as long as you live past 82, you'll have that check probably about 25 to 28 percent higher for the rest of your life, which could come in really handy down the road if you need long term care.

And it's, you know, increasingly the inflation on that is pretty high. So I like that option because you all can cover your bills. You've done a great job preparing and you don't need the money. I'd probably look to roll that 401k to an advisor who can manage that. Once you retire, get out from under the 401k, open up your investment universe, give your advisor a little bit more control over the investments that are selected and the fees.

And if you don't have an advisor, you could go to our website at faithfi.com and interview two or three certified kingdom advisors when you click find a professional and find the one that's the best fit. You said you're overinsured. Have you taken on any long term care insurance along the way? I don't have long term care insurance. We have three daughters.

And being a nurse, I'm very resistant to medicine and medical care. My daughter has always said, you know, we've got this basement, I'm going to convert it to a nursing facility and we'll put my in-laws here and y'all here and we're gonna take care of y'all. Don't worry about it. I love that.

What a blessing that is. All right. Well, listen, I think you're doing great here, Melanie. I love the plan. I would delay Social Security. You pray about it and decide what you want to do, but that would be my recommendation. And then I'd look to get an advisor for the 401k when the time comes. Stay on the line. I want to send you a book on an uncommon guide to retirement that will give you a biblical world view of how to think about this next season. But I love your plan.

Just keep at it. Let's go to Chicago. Hi, Sally. Go right ahead. Hi. Thank you for your ministry and your wisdom.

I really appreciate it. I have a question regarding real estate property. I own a building and I live in it. I have a couple of tenants that live in there as well. And the building is about 100 years old.

Very well built up, but still a lot of problems. And I am able to do a lot of stuff myself. I come from a working family.

My dad was electrician and most of my family was involved in real estate. But the problem becomes that I'm never able to deduct any of this stuff on my taxes. And I still spend a lot of my time or time on my family or friends that I know. And in return, I do things for them that they're not able to do. So we kind of barter. Is there a way for me to charge for my time or some of the time that is donated for these projects and still stay within the lines of law?

Yeah. Unfortunately, there's really not a great option. I mean, I would always check with your CPA to make sure you're not missing anything because I'm not a CPA.

But the answer, unfortunately, is no. As a landlord, you can't deduct the value of your own labor on a rental property, even if you act as the property manager or perform maintenance or repairs yourself. This applies whether you're full time or part time as a real estate investor. Now, there are still plenty of things you can deduct. Mortgage insurance, property taxes, insurance, repairs and maintenance not done by you.

Utilities, depreciation, legal fees, advertising, supplies. Just not the work you do yourself, unfortunately. But get that CPA to look over what you're doing and see if you're missing anything. We're going to take a quick break.

Back with much more right after this. Stick around. What's most important to you when it comes to choosing your financial advisor, someone who's aligned with your biblical values? How about someone who will take the time to explain your options? Certified Kingdom advisors are professionals who meet high standards and competence and integrity and have been trained to offer biblical financial advice.

To find a certified kingdom advisor in your area, visit faithfi.com and click Find a CKA. Nineteen. That's how many pairs of shoes the average American has in their closet.

One. That's how many pairs of shoes it takes to share health, education, opportunity and the love of Christ to a child in need in the world. You can play a part in changing the life of a child today through Buckner Shoes for Orphan Souls.

Visit GiveShoesToday.org and find out how you can provide shoes for a child in need. That's GiveShoesToday.org. We're glad to have you with us today on Faith and Finance. We're taking your calls and questions today.

800-525-7000. Before we head back to the phones, just to let you know, Faithfi 4.0 is out. Now, you might say, I didn't know there was a Faithfi 1.0. Well, Faithfi is our app. You'll find it in your app store when you search for Faithfi at Google Play or Apple. And what you will find is a community of stewards really on this journey to be found faithful together. You'll find our Faithfi community where you can post a question, get an answer. You can find all of our content and broadcast archives. There's no charge for it. It will encourage you in your journey.

You can even dig into topics that interest you, but all from a biblical perspective. You will also see our money management tool. The late Larry Burkett really popularized this idea of managing money using the envelope system. Now, back in Larry's day, there was a physical envelope that you would use and you'd cash your paycheck and stuff those envelopes.

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Just search for Faithfy. All right, let's head back to the phones. We're going to head to Chicago next. George, you'll be our next caller. Go ahead, sir. Thank you for taking my call, Mr. West. Real quick, I have a mortgage of $181,000.

Wondering if it would be a smart idea to take out a HELOC on the mortgage, use the HELOC to pay daily expenses, and then throw my paycheck towards the mortgage completely, anywhere from, let's say, $4,000 a month, and try and pay that mortgage off in about four years, and then obviously pay the HELOC back. Just wondering what your thought would be. Yeah, it's a good question. Is somebody proposing that you buy a software package to do this, or is this something you were wanting to do on your own? On my own. Okay.

All right. Normally, when I hear this kind of idea of infinite banking, it involves a pretty complex and expensive software package. Where this comes down is in how the interest is calculated. With most mortgages, interest is calculated monthly.

With a HELOC, it's often calculated daily. A lot of it comes down to whether the interest rate is higher or lower on one or the other. It typically involves somewhat of a complicated process where you're having to manage your cash flow and watch it very carefully.

I'm not a big fan of this strategy. Mathematically, it can work, but I just find that the complexity of it and an absolute commitment to the process, especially if you had a disruption in income or a job loss unexpectedly, could create some real problems. Where you have to have a lot of excess cash flow, and you're kind of flowing everything through this HELOC with the idea that you would reduce that principal balance for as many days as you can, and then you'd have to borrow it back, especially with these higher interest rates right now. I would rather you go more of a plain vanilla approach, George, which is just simply let's dial in our spending as much as we can, let's free up as much margin, and then if you have the ability to send maybe a consistent extra payment beyond your scheduled monthly mortgage payment directly to principal and it's applied immediately, I just find that's a lot less complicated and it has a much quicker off-ramp if something goes awry than something as complex as this. Not to mention the fact that if you don't already have this home equity line of credit, there's expenses just to originate that new loan. So I think for me, even though, again, I understand that it can make some sense on paper and in your spreadsheet, my preference would be that you not take this approach because of the complexity and because of the things that can go wrong more so than the things that can go right.

That's just my take on it. I hope that's helpful to you. Thanks for calling. Let's stay in Chicago and talk to Marlene.

Go right ahead. Hi, Rob. Thank you for taking my call.

I love your show. I'm 54 turning 55 next year and able to pull out my annuity of $215,000. And I'm a teacher, so I'll be retiring in about five years, so I will be pulling about $85,000 to $90,000 a year for a pension.

So I have a mortgage right now of $140,000 and I'm wondering, is it smart to use, I'd like to use my annuity to pay off the mortgage as soon as possible. Okay. So let me just make sure I understood what you said here. How far are you from retirement? Five years. Okay.

And are you not able to collect Social Security because of your job as a teacher? No, I'm not. Yes. Okay. Right. No.

And so you've got this annuity and you're telling me that the cash value of that annuity is at $215,000? Yes. Okay. And I also have a Roth. Okay. And how much is in there?

Right now, $40,000. Okay. And you said you owe $140,000 on the mortgage, correct? Yes. Okay.

You were talking about $85,000 or $90,000. What was that with regard to the... That's going to be my yearly pension from the union, CTU. Okay. So you're going to get $85,000 to $90,000 in the form of a pension and then this annuity is on top of that, the $215,000? Yes.

Okay. And would the pension be enough to cover your bills every month? Yes, for sure. Especially since I would pay off my mortgage.

Yeah. I guess the only thing I don't like about that is that you're going to create a pretty big tax bill. So I would rather you... Certainly, I want you to wait until you're 59 and a half because I don't want you to pay the early withdrawal penalty of 10%. So I think at this point, at least between now and age 60, you're going to want to just try to prioritize paying down that mortgage out of current cash flow as best you can. And then once you get to retirement, you're beyond 59 and a half, then all of a sudden we've got some options. You're going to have some surplus every month because you don't need the $85,000 to $90,000 coming from your pension. And so maybe it's a combination of whatever's left at that point because remember for the next five years, we're trying to accelerate the pay down. Whatever's left, maybe you divide it some between withdrawals from the annuity and some just out of that excess cash flow.

But that's five years down the road. I wouldn't do anything today if that makes sense. Awesome. Thank you so much. I appreciate it.

You're welcome, Marlene. Thanks for your call today. Let me say thanks to my team today.

I certainly couldn't do this without them. I'm incredibly grateful for my good friend Jim Henry's providing research today. Devin Patrick, our producer and handling all of our call screening today.

Dr. Robert Youngblood. Thanks for being a part of the broadcast today. May the Lord bless you and we'll see you next time. Bye bye. Faith and Finance is provided by Faith Buy and listeners like you.