QCD = The Joy of Giving Tax Free

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This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well. Finishing Well, today's show, how exciting.

At this time of year, this season in December, our topic today is QCDs. Which are qualified charitable distributions. There you go. The joy of giving, tax-free. But we have, you know, that whole idea of the joy of giving, I've been just thinking about recently, that God, you know, so much in that verse in Genesis, the first thing he said about mankind is that we were made in His image. And so, in so many different ways, I've been thinking recently how we mirror God. And that you really, really love to do stuff, because guess what?

God really, really loves to do stuff. And if you think you like giving gifts, you know, guess who really, really, really does like giving gifts? And when you think about the gifts he's given us, obviously his son, and so many things that we think about at Thanksgiving, and we think about at Christmas. And so, as we see that clearly there's laws in this country that are going to make this beneficial to have the joy of giving, to even feel like it's even more joyful, because I'm not paying taxes on income that I had received. But based on our generosity, whether that's to our family through Thanksgiving, or I mean through gift-giving at Christmas, or through our church, or, you know, even say that Jesus' labor and love, or somebody that's taking care of widows and orphans, that kind of thing. When that happens and you have joy in that, like one of my favorite things to give to is the Christian prison alliance, right? Because these are people that bring Christian materials into these people that are incarcerated, and they're like, oh my goodness, like how cool is it that here are these people getting stuff? And so I get a lot of joy out of doing that, because I know that these people will be given life and life abundant even if they're in prison, and that will end up with God getting more thanks. And so it's kind of like, in real life, the gift that keeps on giving, because as those people get an abundant life, wherever it is that you invest in your own family, or if you invest wherever you go, as those people get the abundant life in Christ, then they too get to be truly generous with kingdom gold, right?

And it causes things to keep going, Hans, and so how fun, we get to talk about this today. Yeah, I mean this is, QCDs, I mean it warms my heart to meet clients, and I just had one the other day who, this gentleman is almost 90, and he's coming to a financial planner for the first time. But to some degree, he is a financial planner, because he worked at a bank, and you know, in a very high position, and priced bonds and things, and he retired like 30 years ago, okay? And he came to me for some specific financial planning as a result of listening to the show for several years, and he's already been doing QCDs, and he's been doing them because he learned about them on this show. And he even learned about some of the intricacies of them, and he was very thankful for that. Yeah, it's a beautiful thing, right?

When we get to see, you know, fruit from what you do, so. Well, and so we got all these acronyms we're throwing around, QCD, IRA, RMD, you know, and people, acronyms basically turn consumers off. I mean, it's just, so we'll try to limit that, and most people, IRA is a pretty acceptable term, and people know what that is, and you know, that's what we're talking about today, is we're talking about money that's inside an IRA. So not inside a 401k, not inside different other retirement plans or savings plans, we're talking about specifically money that you have in a traditional IRA, which covers a lot of people in this country and a lot of our listening audience. And what the government allows you to do with your IRA is they allow you to give directly to a charity, qualified charitable distributions, which would include the church, missions, any qualified charity. Any 501c3, I would imagine.

It is, and if you give the money directly from your IRA to the charity, it never shows up on your tax return. How does that grab you? It grabs me. I mean, I love the concept, but I happen to know that there's a few qualifications there. Well, there are. I mean, for starters, you need to be 70 and a half or older, okay? So that doesn't apply to me.

Well, it might apply to your parents. It might apply to a large group in your church of senior citizens, seniors, who most of whom are going to have some form of IRA money, which they need to live. A lot of them only take minimum distributions from their IRAs because they have to, and the law requires it, so there might be an opportunity in your church to spread the word about this to your pastor that we could sit down with a group of people in the church, or the pastor could, or you could, and just talk to them about this thing called QCD, or qualified charitable distribution.

They're over 70 and a half. You yourself are going to become 70 and a half or older at some point, and so when we do your financial planning, or you're doing it now, you can plan to do a good bit of your charitable giving in your later years through your IRA. I mean, there's all kinds of applications of this for all kinds of people. It could be for your parents or your grandparents if you're young and they're still living. So this is a wonderful program that we can transfer wealth or transfer money that you've never paid taxes on directly to the charity, or the church, or the mission, or whatever it is that you want to give to. We can even put your annual giving. You just give it all at once, and you do it right out of your IRA, and it doesn't create a tax deduction, but it also doesn't create taxable income.

It's like it never happened. So it's a pretty cool thing, and what we want to talk about today is some of the rules around this. I want to caution folks. I don't want people to run out and start doing this all by yourself unless you know the rules, and you're real comfortable that you know the rules. I'll state that anybody that wants help with this, if you're giving money to the church or some other charity that's important to you, I'll be glad to help you with this or help your financial advisor or anybody that is not as up on them as I am. I'll be glad to give you some guidance, make sure you don't violate any of those rules, or you could just call me up to do a financial plan or just specifically for that, and this is just part of what we do for every one of our clients.

It's over 70 and a half. Yeah, and the other thing you can always do is share that there's a podcast out there, right, that I heard this great thing on qualified charitable distributions. You can share it in your Sunday school class.

Listen to the Finishing Well podcast. It's pretty easy. Yeah, so once you reach now age 72, used to be 70 and a half, government doesn't make things easy, okay? I mean, they just don't.

It almost looks like they're intentionally making these hard, and that's not the fact. They get passed at different times, so required minimum distributions now start at age 72 or immediately thereafter, and so once you reach that age, if you have money in a traditional IRA, means you've never paid tax on the money yet, and you're required to take distributions each year of a minimum amount, required minimum distributions. We could do several shows on the rules and regulations for those, and we have, and we will, but just to understand, that's at the foundation of the QCD rule, is that because you're required to take money out of your IRA every year, why not give some of it or all of that required minimum distribution directly to the church if it saves you some taxes, and you truly don't need this to live, and you were planning on being charitable anyhow, this is a real tax-efficient way to do it. Yeah, my understanding is, and again, we'll get into the rules later, but if you're in a regular tax year, not like this year, but say next year, that you normally give 10% of your income, and say you make $100,000 in income a year, and you normally give 10% of that to the church, which is $10,000, that you could, at the beginning of the year, take that whole distribution of $10,000 out of your QCD, and go ahead and give it to church right now, and say here's my tithe for the year. Now obviously they benefit, and immediately probably need the money, right, the way things really are, but then in your case, you've given your tithe to the church, and hopefully that would allow for you to give more at whatever level you want to, but you've been able to do that, and then, since essentially you were making that tithe out of money that you've never paid tax on, and so you get more banking. Right, you get more bang for your buck, so to speak. In other words, rather than having to give the church $14,000 in order to cover the taxes and whatever, I don't know the math, you do much better with that, but it would require this much taxable income in order to give the net of $10,000.

You're essentially saving that, right, coming right out of the chute. Well, and it meets your RMD, so that's the other benefit from it, is that if you otherwise would have had to withdraw this money and then pay taxes on it, and you felt like you could give the whole amount of the money, you've just met your RMD for the year, so it's a beautiful thing, and you can give more than your RMD. So say in this example you just gave a person's required minimum distribution, or RMD was only $6,000, they can still give $10,000 out of the IRA.

You can give more than the minimum distribution, it's just stating that you've now met your minimum distribution for that year and not had to pay any tax. And it's a beautiful thing, but before you run off, like you said, and go give $10,000 to your church, you know, if this was all part of your strategy, you want to make sure you do it right. Yeah, I mean the second part of the show, we're going to talk about the rules around this, so that if you clearly understand these rules that I'm going to lay out for you, then you can go ahead and do this and probably do a little homework online, but I would caution with you, because you make a mistake, all this becomes taxable.

Right, so you can see that. Again, this is today's show, QCDs, The Joy of Tax-Free Giving, how we can be found in Hans' book, The Complete Cardinal Guide to Planning for and Living Retirement, which you can find at cardinalguide.com. And when we come back, right, we're going to be sharing some more along these lines.

Again, it may not apply directly to you, but to have some understanding of these things is really helpful, because you may have a friend that you know that's dealing with this or whatever your situation may be. So we'll be right back. Hans and I would love to take our show on the road to your church, Sunday School, Christian, or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans' aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday School, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. So welcome back to Finishing Well with certified financial planner, Hans Scheil. Today's show is QCD, which means qualified charitable distribution, The Joy of Tax-Free Giving. Okay, so just to cover what we went over on the first show, qualified charitable distribution, you can make a contribution to your church or other qualified charity directly from your IRA and avoid a tax impact on you on money you've never paid taxes on. Now it needs to be from an IRA. You can have several IRAs. Many people have two or three IRAs.

Money came from different places they worked or their own. And so you can have multiple IRAs and you can take the qualified charitable distribution just out of one of them. That's for starters. You can do your RMD, required minimum distribution, just out of one of them.

Really? Yeah, even though when you go to the bank and you ask them, all they're going to tell you about is your required minimum distribution out of this one account. But if you have three accounts all out of the same person, they're all traditional IRAs, you can do what's called aggregating. You can go through and you can decide which account you want to take your minimum distribution from. And that could be the one that has the most cash in it as opposed to securities. You maybe don't want to sell securities in one to do an RMD.

It could be the one with the most money. This makes things a little bit simpler. So that's the first point we want to get with required minimum distributions or RMDs. And then when we do them with a QCD, a qualified charitable distribution, we can again do that out of just one account. And it can be for the required minimum distribution or more than that. You can go all the way up to $100,000 per person per year so that people that have a large IRA or you're at a very advanced age and you see the wisdom in this and you want to pretty much give away your IRA to the church and then perhaps give your children or your heirs money that's already had tax paid on it, then you won't be handing over a tax debt to your kids. So somebody at the end of their life could give a large amount every year.

It can't be more than $100,000 per person. So that's one of the rules with it. You can't start this until you're age 70 and a half or older. And that's what the old rule was for required minimum distribution.

So they haven't changed that. So if you're not yet 70 and a half, then that doesn't apply to you this year or maybe next year or for a few years. You can still plan for a contribution at 70 and a half. So when we're doing financial planning, if a person has a desire to give a significant amount to their charity, we can plan to wait until 70 and a half and then give a sizable amount and put that into the financial planning. But then every year after 70 and a half, then you're able to do this every year and you're able to meet your required minimum distribution for that year from your IRA. So you could never pay tax on that money if you just give it away, give away the required minimum distribution.

Yeah. So as we talked earlier, people have done this in exchange for their tithing, okay? And, you know, in other words, if you give 10 percent to the church or whatever it is you do give to the church, we can calculate that on an annual basis and you can do that through your IRA and that's going to work out much better on your taxes. Now, what a lot of folks are not really aware of with their charitable giving is under the new tax law, the Tax Cut and Jobs Act of two or three years ago, you've got such a high standard deduction now where they just, instead of itemizing your deductions, you just take the standard deduction.

Many more people are doing that now. I mean, it's like $25,000, $26,000 for a married couple of just standard deductions that they're really not getting a tax benefit by their substantial giving. So this is an opportunity to shift their giving from their regular money and their income money and their savings over to their IRA and, you know, perhaps if you feel so inclined you could give more through this because you're getting a tax benefit from it.

So there's lots of strategies with this. But rule-wise, you know, normally, right, one of the things I understand about a QCD is it has to be your first, essentially, it has to be your first distribution of the year from an IRA. So this is a place that people mess up is they've already taken a distribution out of their IRA sometime earlier in the year.

They hear about QCDs from somebody like me or they read about it and they say, oh, that's nice, and they go to their financial person or they just do it online themselves and they give the contribution directly to the charity and then it's disallowed so they have to pay tax like it was distributed to them because it wasn't their first distribution of the year. Right, which makes the interesting timing of today's show is we're here in December. So obviously if you already took a distribution this year in 2020, you know, you can begin to go, oh, okay, in January would be a good time, right? But because this year is different, go into some of that.

Okay, so 2020 is different for a lot of reasons, obviously. And for tax purposes under the CARES Act, they gave everybody a freebie on minimum distributions for this year. So if you've been taking minimum distributions or this was your first year, you don't have to anymore. And my guess is you already know that.

If you didn't know that, now you do. You don't have to worry about that during 2020 regardless of how old you are. Now, if you've taken no distributions during 2020 and you want to do one of these QCDs and you're not worried about the RMD limit and you just want to give the money and you don't want the tax thing, you can get that done between now and December 31st and the money will go to the charity. It won't be taxable to you. And it'll effectively count as your RMD even though you didn't have one required this year. If you don't want to do that or you want to get the RMD required minimum distribution credit, well, then you can just wait until January.

And in January, you're going to want to decide how much you want to give to the church or other charity in January and it needs to be your first distribution. You can do it all out of one IRA. So if you have multiple IRAs, we can do the QCD to the charity just out of the IRA, out of one of the IRAs. And we could get into why we would pick one or the other. We don't have to spread this around and do several checks.

That would get even more complicated. But it's important that the money goes directly from the IRA to the charity. It doesn't pass through your hand. If it passes through your hands, you're going to get taxed. I don't care if it ends up at the charity, you're going to get taxed. So that needs to be the first distribution of the year, needs to go directly to the charity. You need to be 70 and a half or older. It needs to be less than $100,000 a year in a year. It can be out of just one IRA.

Another one was the whole idea that actually I learned from watching your video, which by the way, they're all on YouTube and Facebook. So apparently, if you got a 401k now, you know, that just seems interesting to me that here you got somebody that is over age 70, the only reason they would be able to qualify for a QCD. And the only way they'd have a 401k, I would think, and hadn't already rolled it into an IRA is if they're still working.

Or if they're still working or they just leave it there. There are reasons to leave money in a 401k after you retire. I mean, first of all, some 401ks won't let you. Once you leave, you got a certain amount of time, you got to make it the money out of there.

Some will, and we could just go over the reasons for that. But do you have to make a RMD or do you have to make a distribution every year out of a 401k as well? Yeah.

Shows how ignorant I am. Yeah, no, you do. Okay, so but you can't do a QCD. So this would be a time to think about rolling it over.

Sure. I mean, if you wanted to do a QCD and your money was in a 401k, then we would need to roll your 401k or transfer it into an IRA, which is pretty easy to do. And you don't want to do it yourself or do it at home.

You don't want to try it at home or go to a professional, but that'd be pretty easy to do. And then from the IRA, you can do your minimum distribution and you can do a QCD. Right. So, you know, this brings up another valid point from my perspective. It's like it seems that if you have a bunch of money in a 401k or an IRA or a Roth IRA, that all these things would be really good to have a financial planner to go, hmm, you know, I see why you've got it in this.

Had you considered that? Because, you know, obviously from what I understand, many people have hundreds of thousands, even millions, in these large 401ks or large IRAs. Well, they do.

They do. And a lot of them through their 60s and into their early 70s don't really have a plan for distribution for their IRA. I mean, when you're younger than 70, your IRA is all about avoiding taxes or postponing taxes is a better way to put it, because the IRS is going to get their money unless you give it to the church through QCD. They're going to get their money.

And so people's thinking is just not there. And when they go to an investment advisor, a financial planner, typically those folks are interested in the investment of the money and earning you a return. You're interested in growing it.

All the focus is around accumulation and growth. When you get to be 70, now the government's telling you you now need to turn this growth, this fund, into an income. In fact, if you haven't done it by now, we're going to require you through this complicated system of RMDs or required minimum distributions. Now, they budged that a little bit. They moved it to 72 under just the most recent thing, the SECURE Act. That's what it was.

So that's now 72. And then they gave you a freebie on this. You're in that category where you don't have to take one for 2020, but it's going to be back in 2021. And then the QCD is just something kind of back there in the background, which is a way to satisfy the required minimum distribution or more and give it directly to the charity. So this just makes sense. Right. And so in this case, in the year of 2020, right, and somebody hasn't made a distribution this year, there might be an advantage in actually doing the QCD in December rather than wait until January? Well, if they're not going to do another one in January, probably not. I mean, but if they've got the money there, they haven't taken any withdrawals from their IRA in 2020.

They haven't needed to, but they're over 70 and a half. Well, then let's just go ahead and get it done. And now if you don't do it, if you wait till January, the QCD needs to be your first distribution of the year. So if you might want to withdraw other money just to live off of or buy something or whatever at some point during the year, you need to make sure this QCD is done at the beginning of the year. You don't want to get these out of order or you're going to get yourself in a tax problem.

That's why January is a good time to do them. And as always, we seem to run out of time before we run out of information. So that's why there's a whole book, The Complete Cardinal Guide to Planning for and Living Retirement, as well as Hans' website, cardinalguide.com. And I can just assure you, he would love, love, love to begin this process of putting all this stuff together.

You know, where's your Social Security and where's your income coming from and all it seems like all this stuff in order to finish well. And so that's why just go to Cardinal Guide, contact Hans. He would love to help you along these lines, especially, you know, this time of year when the joy of giving can be, you know, really, really fun from my perspective.

And, you know, just amazing things that God could be glorified for. So thank you for another great show, Hans. Thank you. We hope you enjoyed Finishing Well brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and the workbook. Once again, for dozens of free resources, past shows or to get Hans' book, go to cardinalguide.com. If you have a question, comment or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.