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Retirees: Time to Change How You Give to Charity

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com The qualified charitable distribution has been around for a while, but it's particularly compelling under the new tax laws. Joining me to discuss what it is and why RMD-subject investors should take advantage of it is retirement expert Ed Slott.

Ed, thank you so much for being here.

Ed Slott: So great to be back here in Chicago, live at Morningstar.

Benz: Great to have you. Let's talk about qualified charitable distributions, the QCD. Let's talk about what it is, first of all, and why in 2018 you think it's a particularly effective strategy.

Slott: In 2018 and going forward, it's one of my favorite provisions because everybody saves taxes. The only problem with it is most people are not taking advantage. You have to change the way you give and that's not easy for people to do, especially for this crowd. By this crowd, I mean the people who qualify for qualified charitable distributions, or QCDs, are only IRA owners or beneficiaries that are 70 1/2 years old or older.

Now, the big benefit because of the tax law, the tax law eliminated lots of deductions and doubled and raised the standard deduction. More people will not be getting a charitable deduction, but they will be getting a larger standard deduction and more people will be taking that. By using the QCD, if you are subject to RMDs, which IRA owners are after 70 1/2, you can directly transfer from your IRA to charity, give that way--I'm not saying give more, I'm saying give it a different way, change the habit--and take it from the IRA. What you do, that excludes that income from the IRA and the amount you give counts toward your required minimum distribution. It lowers income. In effect, you are getting the standard deduction plus, in effect, a charitable deduction, not a real deduction, but being excluded from income is the same thing as a deduction.

Benz: The name of the game though is that, as you said, I don't want to take a check and then write a check to charity.

Slott: It's about breaking habits.

Benz: Right. So, I want to have my IRA custodian, whether it's Schwab or Fidelity or whatever, deal directly with the charity of my choice. Are all charities set up to handle this?

Slott: No. It's still old school some of them and people still bring checks to them. That's why I say it's got to change. Maybe it will take this one year. When people go to do their taxes, say, next April in 2019 and the accountant says, you know what you should have done, you didn't even get any benefit because you are taking a standard deduction. What should I have done? You should have done the QCD. Well, you can't go back now and do it, but get set up next year and then talk to the charities you are interested in and make sure they have a way. Now, the charities should be coming around …

Benz: I think they are.

Slott: … because what do charities want to do? They want to raise money. They should be more helpful in accepting, and I think, like you said, more of them are, but not enough.

Benz: Let's talk about some of the problems that can crop up. We, I think, touched on one where someone doesn't direct the money straight to charity. That's an issue.

Slott: Right. It has to be direct gift. You can't take a check made out to yourself and give it to the charity. Otherwise, it fails. And when I say a QCD fails, all that means is, you can't exclude it from your RMD. You'd have to add it to your other itemized deductions which you may not get.

Benz: Let's talk about some of the other problems that can crop up. One you say you've encountered is people who have already taken their RMDs, maybe they do them earlier in the year. If they haven't executed the QCD at that time, too late, right?

Slott: Well, you can still do a QCD, but you've already taken your RMD. It can only from future withdrawals from your IRA if you want to take more. The RMD income can't be offset. That's already locked in. You can't undo it. Just to note, if you already took your RMD, you took it, you're going to have to report the income. If you want to use a QCD, because you want to give more, many people do a lot of their giving at the end of the year, you could still use the QCD and it will still be excluded from income, lowering your IRA balance and maybe for a little bit lowering next year's RMD.

Benz: I'm not necessarily limited to my RMD in terms of my QCD amount. Let's talk about that.

Slott: Right. Your RMD can be $10,000. But let's say you want to give $15,000. You can do that. You can give up to $100,000, that's a high limit, per person--not per account--per person, per year if you want to give that much. That's a lot you can exclude from income.

Benz: Let's talk about age, because I think some people might think, a-ha, I'm retired, and I have an IRA, but you need to be 70 1/2.

Slott: You need to be, for this rule, unlike other 70 1/2 rules--which adds to the confusion and problems--you actually have to be 70 1/2. If you are watching this today and you say, oh, good, I'm going to be 70 1/2 next week and you do it today, you don't qualify. You actually have to be 70 1/2.

Benz: Another related point is, sometimes charities give freebies for making a donation or maybe you attend a dinner it's $200. How does that work?

Slott: You can't get anything back. There's a no benefit back rule. Tell them keep your gifts, keep your dinners; I'm giving to you, don't give me anything back. Otherwise, the QCD fails. Another mistake that people make--I mentioned IRA; it only applies to IRAs. I constantly get questions, can I do it from my plan, my 401(k)? No. It's only for IRAs.

Benz: How about younger beneficiaries for an IRA who are subject to RMDs? Is the QCD an option for them?

Slott: It is, but they too have to be age 70 1/2. I get this question a lot from financial advisors who say, well, it says, IRA owners and beneficiaries. But they both have to be 70 1/2. Now, most IRA beneficiaries are not that old. Most IRA beneficiaries are probably in their 40s or 50s or even younger, they don't qualify. It's only beneficiaries who are actually 70 1/2 years old themselves, IRA beneficiaries.

Benz: In terms of the logistics, how does this work? Do I go on to my provider's website? Is there a form? How would I execute this?

Slott: There's a few ways you can do it. And you have to ask your custodian, your Schwab, your TD, Fidelity, financial advisor, whoever does this and say, I want to give this amount to this charity; make sure it goes directly from my IRA to the charity. Now, somebody has to obviously contact the charity. They have to be set up to accept it. 

Or they can give you what's called an IRA checkbook, which I think is a little dangerous. Because an IRA checkbook means every time you write a check from that IRA, that's a distribution. But you can do it that way, but you have to write the check directly to the charity and obviously, you have to notify the custodian that the check was written. I mean, they will see it when the charity cashes the check.

Benz: Maintain a paper trail of this?

Slott: Oh, yeah. Yeah.

Benz: Ed, thank you so much for being here. Interesting maneuver. Thanks for discussing it with us.

Slott: Thank you.

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