The Smart Retirees Guide to Giving

February 17, 2022

Qualified Charitable Distribution giving strategy in retirement can mean big tax savings simply by repositioning how you are giving.

The Tax Cuts and Jobs Act tax reform caused most givers to lose the tax benefit. 90% of taxpayers now file with the standard deduction (instead of itemizing)!

The Qualified Charitable Distributions: “Donating RMD to Charity”

Case Study: Retired couple with modest investment portfolio, simple but pleasant lifestyle, paid off mortgage, saved $3000 in Federal taxes by simply repositioning giving as QCD.

3 impactful outcomes of tax savings above meeting their living expenses:

1. Increase giving

2. Save for healthcare “what ifs” (priority not to be burden to children)

3. Leave an inheritance

Watch Here:

Show Notes:

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Alex Okugawa 0:00
If you want to make a charitable impact in retirement and save taxes along the way, today we are discussing the qualified charitable distribution strategy and are going to show you how a retired couple can save significant taxes.

Hi there and welcome back. This is Alex Okugawa and Anthony Saffer, from One Degree Advisors. If you enjoy today’s video, make sure to like and share for more content. Anthony, let’s get right into it. So let’s briefly describe, you know, what is a Qualified Charitable Distribution, aka “QCD”.

Anthony Saffer 0:36
Yeah, it’s giving out of a retirement account like an IRA or 401k directly to the charity. This is often coordinated with a required minimum distribution, or we call an RMD, which is basically where there are mandatory distributions that must come out of those retirement accounts.

Alex Okugawa 0:50
Now, this is a strategy that we look at a lot with our clients, especially when we’re reviewing their tax returns every year. So we thought it’d be helpful to break down a real-life case study of how this strategy can help save people a lot of taxes.

Anthony Saffer 1:03
Yeah, we’ll run through an actual case study. This is a retired couple they are an ordinary couple, they have several $100,000 in IRAs, it’s not anything extravagant. But they’ve set themselves up good for retirement. So we’re going to look at two sides by sides. The first one is when there’s no QCD. And then the second one over here, the second column is with the QCD. And so you’ll see a lot of the numbers are the same because they’re meant to be that way. Yeah, but there are some differences, particularly here is taxable income if they take their RMD without giving it to charity. Yep. Okay, versus if they do give it to charity, this becomes no taxable income.

Alex Okugawa 1:41
Right now. And I know this is a point of confusion for some people, because they go, Well, hold on. Why would I, you know, do this strategy if I’m not going to be able to like, take the deduction, right? Because if I don’t, if I don’t show any income for it, then I can’t take a deduction for that. Why would I want to do this in the first place?

Anthony Saffer 1:59
Yeah. So actually not showing it as income, in the beginning, is better than taking it as a deduction after your adjusted gross income. So this is more beneficial right here. And one of the reasons that it shows up for their particular case is it lowers their Social Security taxability, they have $46,000 combined of Social Security income, in the first case, 39,000 of it is taxed. And the second case only 29,000. Yeah, different much better. It’s a byproduct of that. So what does that end up it means that their total income goes down about $26,000. Okay, now, in their case, what we did is we just reposition their giving.

Alex Okugawa 2:40
I didn’t change the nature of their giving, right, they’re still giving the same amount. I know, for some folks, if they do tithing off of this, it’s not like they’re cheating. They’re tithing in it anyway. It’s just instead of giving from here, you’re just gonna give from here in the same amount, right.

Anthony Saffer 2:55
And because of the tax reform in 2018, tax cuts, and the job Act, the standard deduction ended up being a lot higher. Well, previously, their itemized deductions, if they do not do the qualified charitable distribution is only 29,000 is barely higher, which means they’re getting very little benefit out of their charitable giving. Yeah, a lot of people are in this situation, they don’t realize they’re not getting the tax benefit, significantly. So how does that look here is their taxable income goes down. And bottom line, which we’re interested in, is 7700 would be their tax their federal tax, without the QCD. But if they just reposition their giving, it goes down by about $3,000.

Alex Okugawa 3:35
Yeah, and that’s a huge benefit of $3,000 of tax savings. You haven’t even changed the nature of your giving, you’re giving the same amount, but you’re paying fewer taxes, the charity gets the full amount, that’s a win for everyone. So I mean, in this specific case, with this specific couple that we’re talking about, there were three impactful outcomes. Yeah.

Anthony Saffer 3:55
So everybody has their priorities and what’s important to them, and that’s part of the financial planning process. For them. It was okay, we’re saving 3000 or more, not even including the state taxes, we can give more. And so it makes a greater impact for them. Okay, the second thing that was important to them, and then they’ve communicated this at the, when we started working them years ago, was that they never wanted to be a burden to their family in retirement, especially when that comes to health care. Yep, those potential what-ifs of long-term care. So by saving more, along with other good money, money management techniques, is not being a burden to their family. And then anything leftover, leaving an inheritance to their family was also a priority for them.

Alex Okugawa 4:41
Now, again, the QCD is a great strategy for a lot of folks, we review this strategy when we look at people’s tax returns, but who can do a QCD I mean, Kiplinger has a really good article which we’ll post in the show notes called 10 things anyone should consider, or I’m sorry, 10 things anyone considering a QCD should Know. So we’ll post that because that’s really good information to know. The other thing here is that we’ve used a lot of acronyms today, right? RMD QCD, again, qualified charitable distribution as the QCD required minimum distribution as the RMD. Knowing that these two distributions, the ages, just don’t necessarily align.

Anthony Saffer 5:20
There’s a lot of overlap. But yeah, you’re right. So 70 and a half is when you can start to do a QCD 72 is when those mandatory distributions start. Yep. So there’s that year and a half gap.

Alex Okugawa 5:33
Basically, the other thing too is I know, this is a lot of money for folks. But some people have larger IRA accounts, the maximum that you can give via a QCD is $100,000 per person per year. So that’s something to consider. And then this is a really big one is the money has to go to a qualified 501 C three, charity because I know we have a lot of folks who look like hey, you know, I got a niece who’s going to be going on a missions trip out here. Can I give the money to her for that upcoming trip and it’s sure if this ministry or whatever she’s doing this through is a qualified 501(c)3 and it goes directly to the ministry.

Anthony Saffer 6:10
And we’ve had people ask, Well, can I give it to my kids or grandkids is almost like a pre inheritance. That’d be great. Just doesn’t work that way.

Alex Okugawa 6:16
Yeah. Awesome. And now let us know what you think. How do you coordinate your giving in retirement? Let us know in the comments below. And if you enjoyed this video, please like and subscribe for more content like this. Until next time, see you soon.