RMDs & Charitable Savvy: Tax Smart Choices for Retirement Fund

Episode Transcript

Speaker 1 (00:00):
At our telephone lines. They are open to you right now.
If you've got a question for our retirement planning professionals
from Class Financial, we'd love to have you join us.
The number to get on the air six oh eight
three two one thirteen ten. That's six oh eight three
two one thirteen ten. We're going to be talking about
charitable strategies for folks looking to uh looking to do
something with their rmds. We'll get the details this morning

(00:22):
from c jan Eric. But again, if you've got a
question anything retirement planning related, we've got our professionals here
to answer them for you. Again. The number to get
on the air six oh eight three two one thirteen ten.
That's six oh eight three two one thirteen ten. Of
course you can learn more about COSS Financial on their website
coss financial dot com. That's coss k laa asfinancial dot com.

(00:42):
And the office telephone number right here in Madison six
oh eight four four two five six three seven. No
charge for that initial get to know your apployment tech
co Loss Financial. It will be complimentary to you again
their number six oh eight four four two five six
three seven. Hey, joining us this morning our CJ Closs
and Eric Schwartz CJ. How you doing this morning.

Speaker 2 (01:01):
I'm doing great, Sean.

Speaker 1 (01:02):
How are you doing? Really good? Great to talk with you, Eric,
how have you been?

Speaker 3 (01:06):
I am doing great, Sean. Glad to be here this morning.

Speaker 1 (01:08):
By the way, and I'll see j I'll bring you
in on this. Nate Briby, did he pay a little
extra to get that get that sweet placement on the website? Wow?
Eric's jealous too, aren't you?

Speaker 3 (01:23):
Maybe a little bit?

Speaker 2 (01:24):
Answer on the air, Sean, geez.

Speaker 1 (01:28):
Nate's great, obviously, he's joined us several times in the program.
A really great guy. Really cool to see him doing
great things as well.

Speaker 2 (01:34):
And I should say no, it's a good question. So
Nate Briby is one of our advisors who's been with
us for about five years, and much like Eric Schwartz
who's on the line with us here today, Er Nate
recently became a member of our LLC. So that's that's
what Sean is referencing, is we now have a sixth
member of our Class Financial LLC, which is pretty exciting.

Speaker 1 (01:52):
That is very exciting, really really cool. And again, of
course you can get to know everyone at Class Financial,
including date of course, at class financial dot com on
this morning by CJ. Class and Eric Schwartz. They are
our retirement planning professionals from Class Financial. Has mentioned got
a great conversation, important conversation ahead if you are looking
to develop a nice charitable strategy in retirement. There's some

(02:12):
great tools out there and we'll get the details on
that in just a moment. Really cool thing too about
the program, an opportunity for you to win a fantastic
prize this week. Our friends from Class Financial have provided
a twenty five dollars gift card to Texas Roadhouse for
the winner of the Class Quiz question the week. We'll
tell you a little bit later on in the program
about how you can win. That little tip though if
you listen closely, oftentimes the question and answer come up

(02:34):
on the program. And before we start this week's conversation
this week's topic, let's actually roll back to last week's
program get the question and answer there as well.

Speaker 3 (02:42):
Eric, Yeah, so thank you to everybody for listening to
our show last week on one of our favorite topics,
social security, and congratulations to our winner who was Jason
from Cambridge, and the question was how many Social Security
credits do you need to qualify for a retire benefit.
The answer was most people need forty credits or about

(03:04):
ten years of work to qualify.

Speaker 1 (03:06):
Do we have a winner? Was what Jason from Cambridge was?
Jason from Cambridge, Nice work, Jason, You too could be
like Jason. Of course, listen closely to the program. Again,
typically the question answer come up during the show, and
this week we are discussing some charitable strategies, one in
particular for folks who are retired in managing their required
minimum distributions those rmds, CJ. What do folks need to know?

Speaker 3 (03:29):
There?

Speaker 2 (03:30):
Yeah, good question, Sean. So when we talk about rmds
these days, it's a good time to also discuss charitable
giving because there can be some significant tax tax benefits
for those who are over seventy and a half. But
first let's lay the groundwork on what required distributions are
and how they've changed over time. So the Secure Act,

(03:50):
which took effect on January first of twenty twenty, changed
the required minimum distribution schedule. Now again, I just want
to remind everybody our industry loves its acronyms. So when
I say RMD, that stands for required minimum distribution or
MRD minimum required distribution. It's all the same stuff. So
rmds are designed to ensure that investments in iras don't

(04:14):
grow tax deferred forever. The IRS basically eventually wants to
collect taxes on these accounts. Now I said, I said
rmds on iras. Truth be told, you can have an
rm D on an old four to h one K
plan as well if you're no longer working and eligible
to contribute. But primarily when we think of rmds, we

(04:37):
think of pre tax irras, and the reason is because
most people are retired and have rolled over those dollars
to their individual retirement accounts. But with that being said,
here's a few key points. Under the current law, most
IRA owners must begin taking rmds at age seventy three.
This was previously seventy and a half, then it turned

(04:59):
into seventy d two and actually, believe it or not,
those who are born after nineteen sixty the required minimum
distribution ages seventy five. So think of it this way.
If you are not already drawing required minimum distributions out
of your irais, then your RMD age is either it's
one of two ages. It's either seventy three or seventy five.

(05:21):
If you were before born before nineteen sixty, your RMD
age is seventy three. If you were born after nineteen sixty,
your RMD age is now seventy five. Now, your first
required minimum distribution must be taken by April first of
the year following the year you turn seventy three. Every
year after that, required minimum distributions must be completed by

(05:44):
December thirty first. So this is really weird everybody. I'll
just be frank with you. I don't love that they
did this. It just creates a lot of confusion. So
the first year start is known as the RBD, the
required beginning date, and it matters a lot because if
you die before your required beginning date, that can change

(06:06):
RMD schedules. Blah blah blah blah blah. It's just so
much detail. I don't even want to bore you with it.
But in this first year you become eligible for these
rm ds, or I should say required for these rm ds.
You have a bypass. If you want to, you can
throw it forward to April first of the next year.
The problem with that is if you do that, then

(06:26):
you're going to have to double up that year, because
then that year's RMD will be due by December thirty first,
and every subsequent one will be due by December thirty first.
Many of you, your heads are rolling right now, and
that's fine. Talk to your account or your advisor and
they'll make sure you follow the rules. But if you
withdraw less than your RMD, you could face a penalty.

(06:47):
It has been reduced now to twenty five percent, and
in some cases even lower than that if has corrected promptly.
That number used to be fifty percent or more, but
they've kind of lessened to that, just recognizing that most
people who miss RMD it's because of health issues or mistakes.
And then withdrawals are generally taxable unless they include after
tax contributions or qualified WROTH distributions. But the RMD amount

(07:11):
is based on your IRA balance at the end of
the previous year, divided by a life expectancy factor from
the IRS uniform lifetime table. Now, if your spouse is
your sole beneficiary and more than ten years younger than
actually a different RMD table applies. But just think of
it as like, Okay, what are the factors? How do
they come up with this calculation? Well, it's all of

(07:34):
your IRA balances pre tax IRA balances on December thirty,
first of the year before you have that minimum distribution
whatever that balance is, and then there's a table that
you apply and you divide your life expectancy into that
and it kicks out a number. Now, that number tends
to be at around age seventy three. That number tends
to be right around three point four to six percent,

(07:54):
I think, give or take from there. And then it
grows as a percentage every year thereafter. So what many
people will say to Eric and I is oh, I
get it. Okay. So every year since it grows from thereafter,
my RMD will get nominally larger, and we go no,
not necessarily, because while the percentage will grow, what if

(08:15):
we have a major market decline, right and the value
of the assets with your near irray go down by
thirty percent. Even though the percentage may have gone up
by half a percent, the nominal dollar amount may decline.
So again, as I'm talking through all of this, I
know many of your heads are spinning. That's actually normal.

(08:36):
It's expected because it happened to me for the first
eight years I was in this career. It's just so
hard to understand these rules and how they impact one
another in the timelines. It's the reason why, you know,
people like us tend to have jobs because we help
you follow the rules, and we do it so frequently
that it's like a second language to us. But remember

(08:58):
this as well, Updated Life Expects and c tables. Actually
we're implemented in twenty twenty two, which is good because
people are now living longer, so that RMD schedule was
backed off, and then there are tools that help you
kind of figure out what that rm D amount would be.
You can go to Investor dot gov and search rm
D worksheet, or go to IRS dot gov for a
calculator and another worksheet there. So that's kind of the

(09:23):
groundwork for what rmds are. You know. Next, Eric will
be talking more about how that impacts charitable giving.

Speaker 1 (09:29):
Talking this morning with CJ Closs and Eric Schwartz. They
are our retirement planning professionals from Class Financial. The website
COSS financial dot com. That's Coss k l a as
Financial dot com and their telephone numbers six oh eight
four four two five six three seven. That's six soh
eight four four two five six three seven. CJ has
always did a fantastic job laying out a very complicated
thing when it comes to rmds. Let's kind of take

(09:51):
that switch then and talk about how rmds connect to
charitable giving.

Speaker 2 (09:56):
Eric.

Speaker 3 (09:57):
It's a great question, Sean, and this is where quality
charitable distributions or qcds come into play. As CJ said,
can't miss an acronym in the financial industry qcds. Basically,
these have become a lot more popular in recent years
due to the larger standard deductions that began back in
twenty eighteen. As a result of that larger standard deduction,

(10:21):
a very small percentage of tax filers actually choose to
itemize their their tax deductions today. And what that does
is it really limits your ability to write off your
charitable contributions. But qcds they provide a way for retirees
to give to charity and potentially reduce their taxbile income
even if they are not itemizing at all. Now, as

(10:42):
a quick reminder, we always tell you this when we're
talking about taxes. We are not accountants, so you should
always confirm these strategies with your tax advisor. But as
CJ said, we help clients with this on a regular basis,
so we do have some knowledge in this space. Qcds
became permanent back in twenty fifteen with the Protecting Americans

(11:03):
from Tax Hikes or the Path Act, and let's just
talk a little bit care about how they work. A
QCD it allows individuals aged seventy and a half or
older to transfer up to one hundred and eight thousand
dollars per year in twenty twenty five directly from their
IRA to a qualified charity. Now this is per person,

(11:24):
so for married couples they can potentially give up to
two hundred and sixteen thousand dollars combined from their iras.
But let's pause here for a second on that seventy
and a half number. Notice that does not coincide with
the beginning of rmds, which are currently seventy three or
seventy five. So it used to back when RMD age
was seventy and a half, but the QCD age just

(11:49):
sort of got lost in the fray when they were
when they were pushing out the RMD age. So seventy
and a half act or seventy and a half is
the age, and QCD's actually become possible before you're even
required to take an RMD, but qcds do count toward
your rm D while being excluded from your taxable income.

(12:10):
So let's say that you have an RMD and it's
twenty thousand dollars this year, and you decide to give
five thousand dollars directly from your IRA to a charity
of your choice. What that means essentially is you're only
going to report fifteen thousand dollars of taxable income from
that transaction. So you're still satisfying that twenty thousand dollars RMD,

(12:33):
but only five thousand dollars actually or I'm sorry, fifteen
thousand dollars actually counts towards what you have to report
for taxes now to count for your rm D for
the year. The funds do have to be distributed by
December thirty first, and qualified charities include you know, any
five oh one C three organization or a house of worship.

(12:54):
And keep in mind, you cannot make qcds to donor
advised funds. We're going to talk a little bit more
about those later in the show, but you can't. You
can't make a QCD to a donor advised fund in
order to you know, do giving later it diriis does
not allow that. And a big reminder here, we talk

(13:15):
about this a lot. Your kids are not charities. You
cannot give to them through a QCD. So when we're
when we're looking at the mechanics of this, you you
won't get a charitable deduction for the QCD, but you'll
reduce your taxable income overall. So essentially, you know, it's
not showing up as oh, I'm writing off, you know,

(13:36):
five thousand dollars of charitable gifts. It's it's actually the opposite.
You're not reporting in the end, five thousand dollars of income. Now, really,
really importantly, this is something we've we've worked a lot
with our clients. On the tax form you get in
in late January early February from your IRA custodian, which

(13:58):
is called your ten ninety nine R, it does not
specify the part of your distribution that was a QCD.
So what it's going to do is it's going to say,
in that same example I gave earlier, Okay, you distributed
twenty thousand dollars from your IRA. So what you need
to do is is keep records from the charity and
actually tell your accountant okay, well, I took twenty thousand out,

(14:19):
but five thousand of it went to this charitable organization,
so it should not be counted as income and then
they can they can report it correctly. But a little
bit of like work on the back end and just
something to be aware of.

Speaker 1 (14:31):
Really important guidance there. As we talked this morning with
Eric Schwartz and CG. Closs, they are our retirement planning
professionals from class financial website. It's a great one, Coss
Financial dot com. I hope you get a chance to
check that out. Coss Financial dot com. That's Klaasfinancial dot com.
They're tell for number six oh eight four four two
five six three seven. No charge for that initial get

(14:52):
to know you appointment dech Coss Financial. It will be
complimentary to you again their number six oh eight four
four two five six three seven. As Eric me, we're
going to talk a little bit about donor advised funds.
We will do that next as Money in Motion with
Coss Financial continues right here on thirteen ten, WI b
A talking with our retirement planning professionals from Coss Financial,

(15:12):
Eric Schwartz and CJ. Coss. Their website it is coss
Financial dot com. That's Coss k l a A S
Financial dot com. Great place there to learn more about
the team at COSS Financial, also learn about their separate divisions,
as well as an opportunity to stay current and sign
up further weekly Market Pulse newsletter that available to you
at Cossfinancial dot com. That's Coss k l a a

(15:34):
s Financial dot com and their telephone number six oh
eight four four two five six three seven. No charge
for that initial get to know you appointment at Coss Financial.
It will be complimentary to you again their number six
oh eight four four two five six three seven.

Speaker 2 (15:48):
Uh.

Speaker 1 (15:48):
Heard the term donor advised funds in the last segment
in CJ. Let's talk about what they are and how
those can help as well when it comes to saving
on taxes.

Speaker 2 (16:00):
Absolutely, yeah, let's shift from those qcds to donor advice funds.
As Eric was just talking there. One thing I wanted
to clarify is we, we meaning Eric and I are
not your accounts. We don't file your income taxes for you. However,
we actually do have an enrolled agent on staff and
we do now and just within the last year, we
now provide tax prep work for clients of the organization.

(16:24):
We don't just do it for the general public. It's
meant for our existing wealth management clients. But that's one
kind of just clarification for our listeners. But yes, as
we shift from qcds to donor advice funds, which again
back to the acronyms, are dafts for short, a DAFT
is a charitable investment account held at a financial institution
or a community foundation. While these qcds are great for

(16:47):
IRA owners over seventy and a half, an older, dafts
offer another kind of different, tax efficient giving strategy, especially
for those looking to donate appreciated assets or those who
are looking to bunch donations into one tax year. So
let me just kind of describe at a high level

(17:08):
where this fits in. If you are over seventy and
a half and drawing money out of an IRA, and
you are looking for ways to reduce your taxable income,
or maybe you're over seventy three and you have required
minimum distributions and looking for a way to reduce your
taxable income, then qcds are absolutely your first stop to

(17:28):
accomplishing that. That's what Eric was just talking about. Absolutely,
bar none, that's what you need to do. But if
you're not yet those ages, so you're not required to
pull money out of your iras yet, and so maybe
you aren't for that matter, but you're still looking to
get a benefit for your charitable donations. But it turns
out when you talk to your accountant, your accountant says, yeah,

(17:49):
but CJ, you're not giving enough. You don't have enough
itemized deductions to exceed the standard deduction. Well, that is
where donor advised funds come in, because a donor advised
fund can is think of it as an intermediate step
between between you and the end charity where you want

(18:11):
it to go. But you can give a large amount
to this intermediate step in order to exceed the standard deduction.
So a simple example of this would be if the
standard deduction for me is I'm just going to use
around number thirty thousand dollars, that's a lot of charitable
giving in any one year to exceed the standard deduction.
So a lot of people don't meet that. But what

(18:32):
if I gave ten years worth of charitable giving to
this intermediate step, meaning it's not the end charity, but
it's the intermediate deaf Well, that's goodness, gracious that could
be two hundred thousand dollars that is way above the
standard deduction. And when I give that two hundred thousand
dollars to that donor advice fund, I take the immediate deduction. Now,

(18:54):
now there are some rules on that you can't eliminate
all of your income. You can typically reduce your AGI
by up to fifty or sixty percent or thirty percent
if it's a highly appreciated stock. But that doesn't matter.
Your accountant will go through that with you, your advisor
will go through that with you. But you get the idea.
It's like, oh, so I put it in the intermediate
step that daff I get this really large deduction in

(19:18):
that year against my standard income, and then in that
intermediate bucket that's where I give out of right, so
now for the next ten years, I'm taking it from
that intern and actually giving it to my church, giving
it to the Boys and Girls Club, giving it to
the Big Brothers, Big Sisters, whatever charities you're a part of.
You get the idea. This can be huge. This is

(19:41):
known as a tax bunching strategy. You are bunching multiple
years of giving into one year. But here's the key.
Without having to actually give it all to the end charity.
You're giving it to the intermediate charity. Now here's what's
really critical. When it goes into the donor fund, it
is gone. So some people misunderstand me. They go, oh, intermediate,

(20:04):
So if I change my mind, I can pull it back. No no, no, no, no, nope.
The donor Advice Fund is a charity, be charity. It's
just an intermediate charity that facilitates the transfer to the
end to charity. So contributions to donor Advice funds are
errevocable or irrevocable. They must go to an eventual charity.

(20:24):
And obviously if you die along the way, you've got
to either list final charity beneficiaries or list other people
to make those decisions for you. So tax benefits can
include tax free growth within those accounts. So often when
you put it in there, if you're going to give
out of there for the next ten years, you've got
to invest the money so you can get tax free
growth of that money. You can put an appreciated stock.

(20:46):
So think of if I have Facebook that I bought
at a really low price point. Now it's worth a lot.
I don't want to sell it to pay the capital
gains tax. So maybe I donate the stock I bypass
realizing the capital gain and get to reduce the fair
market value of that stock off of my AGI with

(21:06):
a limitation. There is a limitation on how much you
can do and then carry forward to future years. But
you get the idea this can be huge. Now, I
will admit this is kind of the wealthier slash higher
end strategy because you do have to be number one giving,
you have to have enough access to be giving, and

(21:27):
number two you have to have a long term strategy
of giving. If those two things apply, and then finally
number three you have the cash to give a bunch. Now,
if those three things apply, then a donor advice fund
could be a huge advantage to you. If anything I've
said has kind of perked the interest of anybody, call
into our office. We can tell you more about it,

(21:48):
or talk to your advisor or your accountant.

Speaker 1 (21:50):
Really great stuff from CJ. Class and Eric Schwartz. They
of course are our retirement planning professionals from Class Financial.
A lot of great information in this week's program. As always,
that means you want to listen back to the podcast,
and you can listen back to this in previous shows
right online at Cossfinancial dot com. You can also subscribe
at cossfinancial dot com. That's class k l aas Financial

(22:11):
dot com. There telph number six O eight four four
two five six three seven. We'll talk about a little
bit more about with Eric and CJ about stuff going
on at Class Financial, including the listener Money and Motion
listener question corner. We'll get to that so much more
next as Money Motion continues here on thirteen ten WIV
eight talking with our retirement planning professional CJ. Closs and

(22:36):
Eric Schwartz. Of course they come to us from Class
Financial website coss Financial dot com. That's class k l
aas Financial dot com. Great website to learn more about
Coss Financial. Also an opportunity there to submit a question
to be answered right on the program and the Money
in Motion listener question corner. And Carol writes in she says,
I'm in my early seventies and I'd like to start
giving money to my grandchildren each year for college and

(22:59):
future your needs. Now, I've heard gifting can help reduce taxes,
but I'm not sure how it works. Can I give
them without getting taxed? And does it help me avoid
other taxes down the road. In Eric, I'll drop this
one on you.

Speaker 3 (23:15):
Yeah, thank you Carol for writing in and for this question.
It's a great question, and it coincides coincides with a
lot of the topics we talk about on the show.
Giving money to your grandchildren it can be generous, obviously,
but it can also help you on taxes. Now, much
like your children, they're not considered a charity, so we're
not getting any sort of tax deduction or immediate tax

(23:39):
benefit from giving to the grandkids. But you are able
to gift to your grandchildren without triggering a gift tax
or any sort of filing requirements. So you can gift
up to nineteen thousand dollars per person per year, So
not just your grandchild, but any individual and if you're married,

(24:00):
spouse can actually each give nineteen thousand dollars, so that's
a total of thirty eight thousand dollars per person per year.
These gifts down the road could reduce the size of
your taxable estate, which could help you avoid any future
federal estate taxes, especially large estate. Now, if you're if

(24:21):
you live in a state that has a state level
a state tax, this could also help reduce the amount
that you owe at death. If you're helping with college
costs directly, which was one of the things that Carol
mentioned there, you can pay tuition directly to the school
and that actually doesn't even count towards the nineteen thousand
dollars limit at all. And if you're making maybe you're

(24:43):
helping a grandchild out with medical bills, if you make
payments directly to hospitals or doctors, that actually also does
not even count towards that that nineteen thousand dollars limit. Now,
while these annual gifts don't give you an immediate income
tax seduction, right they're not charities, they do help reduce
the overall state in you know, could keep your your

(25:05):
federal estate under the federal tax threshold and potentially reduce
state level inheritance taxes. So yes, with the right strategy,
gifting to your grandchildren can absolutely help you avoid extra
taxes and support their future at the same time, especially
if you have a large estate.

Speaker 1 (25:22):
Great stuff, Carol, thank you for the email, and of
course you can submit emails right at class financial dot com.
That's coss k l aa as financial dot com. Also
learn more about the team and listen back to this
in previous shows podcasts. Again all at Cossfinancial dot Com.
Telephone number six oh eight four four two five six
three seven. No charge for that initial get to know
your appointment Tech COSS Financial. It will be complimentary to you. Again.

(25:44):
They're telephone number six oh eight four four two five
six three seven. You want to hold on to that
telephone number because it's time now for the Coss Quiz
Question of the week. Works like this. In just a moment,
I'll ask you the coss Quiz question of the week.
You will then have thirty minutes from the end today's
program to call the Class Financial office right here in
Madison at eight four four two five six three seven.
If you are the first call correct answer, win this

(26:04):
week's prize, which is a twenty five dollars gift card
to Texas Roadhouse. This week's closs Quiz Question the week
is this you can begin to utilize qualified charitable distributions
at age seventy and a half. True or false telephone
number six oh eight four four two five, six three seven.
First call correct answer win this week's prize. That's twenty

(26:26):
five dollars gift card to Texas Roadhouse. No forget as well.
That's Class Financials office right here in Madison. That number
six oh eight four four two five, six three seven
CJ Eric. Always great chatting with both of you, guys.
Enjoy this beautiful Dan. We'll talk real soon.

Speaker 3 (26:39):
Thanks Sean, Thanks Sean, Take.

Speaker 1 (26:41):
Care, guys. News comes your way next to here thirteen ten.
L W youive you. This is Money in Motion with
COSS Financial Asset Advisors, LLC, a registered investment advisor registered
with the SEC. The contents of this show are for
informational purposes only and should not be considered individual investment advice.
Class Financial does not offer tax or legal advice. Any

(27:01):
opinion offered during the course of this show is the
opinion of that particular investment advisor representative, and not necessarily
the opinion of Class Financial. News comes your way next
right here on thirteen ten.