The Qualified Charitable Distribution

The Qualified Charitable Distribution (QCD) rules can help you leverage your donation—and minimize your taxation. This short article will explain how to get a tax break, without even itemizing, by directing your custodian to donate your Required Minimum Distribution (RMD) directly to the charity of your choice.

The qualified charitable distribution rules have, in previous years, not been set in stone according to the IRS. Starting in 2018, however, the IRS has declared that charitable donations made from one of your tax-deferred accounts will be exempt from taxation up to $100,000 as long as the distribution comes from a qualified account and is donated to a charity that meets the IRS stipulations. The IRS has enacted this as a permanent rule moving forward as of next year.

Under the 2018 tax law, now fully in effect, a couple over the age of 65 will receive a standard deduction of $26,500 ($24,000 plus $1,250 per person over age 65 per person additional deduction). So, it is possible your charitable contributions, along with your other deductions, may not be enough to exceed the standard deduction under the new tax law.

However, reducing your income, by taking advantage of the Qualified Charitable Distribution could accomplish the same objective. This lowers your adjusted gross income and taxable income, resulting in a lower overall tax liability.

This is good news for IRA owners that would like to be generous with their funds, while at the same time lowering their overall estate and avoiding taxation on their distribution.

What Are the Qualified Charitable Distribution Rules for 2018?

The new qualified charitable distribution (QCD) rules for 2018 can and should play an influential role in how you withdraw funds from your retirement accounts. As an example, when you reach the age of 70 ½, you will need to withdraw a required minimum distribution from all of your qualified accounts (the specific amount will be calculated using your age and total account value).

The IRS determines the amount of money that you are required to withdrawal from your qualified accounts, therefore guaranteeing that you will be paying taxes on that previously untaxed money. However, if you are able to leverage the qualified charitable distribution rules, you can avoid paying taxes on IRA distributions of up to $100,000 a year.

Refer to IRS Publication 590-B for further information or consult your Tax Professional.

End of Life Issues

We all have denial about dying. End of Life issues can divide and bankrupt your family. Plan now in case you end up seriously ill.

I have had several conversations about estate planning and last wishes lately with clients. A client today said she sat down with her daughter, who is a nurse, and went over line by line the clients wishes should she ever be in the last stages of life.  I think it is such an important topic, that I suggested she record a video for her 4 children so there was no misunderstanding.

In the US, the total health care expenses in 2016 was $3.4 TRILLION. According to Kaiser Health News, in 2011 Medicare spent $554 billion and 28% of that number or $170 billion was spent on the patients last 6 months of life. That doesn’t even include the enormous amounts spent by families for home healthcare, travel to specialist, co-pays and the list goes on and on. Even after spending $170 billion PLUS the patient was still dead. (Remember – last six months of life)

I know of a gentleman with Alzheimer’s. His wife was his primary caregiver and as is common, she predeceased him. The children stepped in to take care of their father but as is also very common, when it became over bearing they hired caregivers. (I have a client whose family hired round the clock caregivers – not nurses – at a cost of over $8,000 a month for over a year.) When the gentleman contracted pneumonia, he was rushed to the ICU. The children were then split over this “exit event”. Two children wanted to do everything possible to keep their dad alive and two children wanted to make him comfortable and let him go.  The out of pocket care for their dad, who had Alzheimer’s, was over $250,000.  The daughter believes her dad would have been horrified to watch that much money being spent to keep him alive.

This gentleman had a will and a Living Will. He thought he had done everything he needed. But they had not discussed his explicit wishes for this end of life situation.

In a 2014 lecture Dr. Michael Mitchell said “When someone is dying, there is no such thing as a functional family”

Every person should have a Last Will and Testament, Health Care Power of Attorney with Advanced Directives (including the Living Will) and General and Complete Power of Attorney (Durable) as a start. There are advanced planning tools that deal with this issue explicitly.

I watched my father die of bladder cancer almost 12 years ago. My mom, sister and I knew what his wishes were, and he passed peacefully, with the help of wonderful people from Hospice, at home in his bed.

Please plan ahead and spare your family the pain of making those decisions in a very stressful emotional time. It may be the most loving thing you can do for them.  

IRA Investment Choices

Like it or not, we are all heading for retirement and according to experts, most of us are terribly unprepared. For most people still working, pensions are a relic of the past. Hopefully the company you work for offers a 401K and you are taking full advantage of any matching opportunity. But for the majority of people, besides their homes, their IRA account is their largest asset. IRAs are wonderful accounts to save for the future. There are many benefits to consider in choosing either a ROTH and Traditional IRA account, depending on your current and future anticipated needs, but the question today is what are the basic investment options to consider for your IRA.

I believe the most common IRA investments are Mutual Funds. Established and managed by an investment company (think Vanguard, Fidelity, Schwab or 1,000s of other companies), these funds pool your money with the money of other investors to invest in just about any asset class, region, industry, or index you can think of. As a matter of fact, I dare you to think of something you can’t buy in a mutual fund somewhere. The main benefits of mutual funds are professional management and diversification, getting a broad exposure to many stocks or bonds in a single investment. For example, buying a fund focused on Brazil would allow you to own just about every listed company in Brazil. Investing in Brazil may or may not be a good thing, but I know I would rather have an expert on the Brazilian economy to pick companies rather than try myself. You also gain management expertise, a manager or management team whose sole job it is to try to make their funds one of the best.

Considering costs, there are basically 2 types of funds – Load and No-Load Mutual Funds. Loaded Funds charge an upfront commission, typically 3% to 5.5%. No-Load funds do not charge that upfront commission. All mutual funds have annual management expenses, these are the fees the company charges to pay salaries and keep the lights on. There are over 20,000 mutual funds in the US so picking a good fund can be tricky. For this reason, many people have defaulted to using Index Funds. These funds just buy an index, think S&P 500, and accept whatever the market returns. The tradeoff is since there is no active management, the costs can be much lower.

Another common investment is regular stock. If you love your Apple iPhone and think Apple is a great company, you can buy shares in Apple with your IRA. If you guess right, you can do very well, but the problem is you give up the diversification of a mutual fund because you own the shares of one or just a few stocks. Individual stocks usually make more sense as an IRA investment when you have a larger account and can buy shares in many different companies, building your own diversified portfolio. There are commissions to consider when buying stocks but there is no annual management fee.

A relatively new (10 years) choice is Exchange Traded Funds (ETFs). These trade like stocks, but look like mutual funds. Once again, you can find an ETF that invests in just about any asset class, country or industry. The main benefit is diversification and typically much lower management costs than mutual funds. ETFs typically just own indexes, but lately there have been actively managed ETFs. ETFs are many times used for short term trading rather than long term investing.

Other investment choices can include rental real estate, precious metals, private placements, and other unusual things. Tread lightly and seek out an experienced advisor who deals in these types of investments because you can get in real trouble with the IRS if you don’t follow very exact rules. You are not allowed to invest in collectibles within your IRA.

If you are starting out, I would suggest you spend a few minutes with a Fee-Based Advisor. These advisors can direct you in the direction you need to go based on your specific time horizon, income, risk tolerance, and general beliefs about investing and the world in general. You should be able to find an advisor that will give you an hour of their time for free or at a very low cost. But above all, be proactive. You and you alone are responsible for your IRA and the ultimate success of your retirement. Wishing you much success.