[INTRODUCTION]

Andrew Rafal: On today’s episode, we’re talking all things QCD, that is qualified charitable distribution. So, whether you’re getting close to 70 and a half or you have a family member that is 70 half or older, today’s episode is going to be for you. And I’ve got Sarah Brenner who’s going to join us today. I’ve known Sarah for over seven years. She’s been part of the Ed Slott team. Her background has been in tax. She’s got a background in law and she is an integral part of helping us here at Bayntree, help our clients when it comes to all matters in regards to retirement accounts.

So, today, we’re going to talk high level on the benefits of the QCD, how to actually do a QCD, and some of the mistakes that people make that you want to avoid when you do a QCD. So, take some notes. Without further ado, my episode with Sarah Brenner on qualified charitable distribution.

[INTERVIEW]

Andrew Rafal: Sarah Brenner, welcome to the Your Wealth & Beyond podcast. How are you this morning?

Sarah Brenner: Hi Andrew. I’m doing great. Nice to be here.

Andrew Rafal: So excited to have you on today. We’re going to be talking about the hot topic of QCDs, qualified charitable distributions. But before we jump in, I want the audience and the listeners, let’s give a quick background. I’ve known you for a couple of years as part of the Ed Slott’s Elite IRA Advisory Group, but give the listeners a little background on tax and law, etc.

Sarah Brenner: Well, I’ve been with Ed for about seven years now, focusing exclusively on retirement accounts. Prior to joining Ed Slott and company, I worked for Pension Management Company. We were an IRA-based consulting firm. And prior to that, I practiced law. I worked with a lot of estate planning issues and tax issues.

Andrew Rafal: Awesome. And yeah, you’ve been an integral part of the Ed Slott team, and not only for the education the 400 of us, advisors, CPAs, CFPs have, but you’ve helped our clients as well when giving the helpful suggestions and tips when there’s usually a situation that arises where we need to be a little bit more complex in the thinking of it. So, I thank you, and our team here thanks you over at Bayntree Wealth Advisors.

Sarah Brenner: Thank you for the kind words. It’s a team that I am proud to be a part of.

Andrew Rafal: Yep. You guys are awesome. So, today, the topic is qualified charitable distributions. It’s one that, from our standpoint, we’re very passionate and we think it’s one of the better benefits that are out there and sometimes not used, and the mistakes people make, the mechanics of it. So, that’s really what I wanted to do today is chat with you about QCDs coming up at the end of this year, and then I know you guys are big proponents of starting in ‘23, looking at it earlier, the better. So, for those that don’t know, let’s just talk through on a high level, first and foremost, what is a qualified charitable distribution.

Sarah Brenner: Andrew, you are so right. QCDs, qualified charitable distributions, are often overlooked and they are a great strategy for clients who are charitably inclined. And the basics are really pretty easy. The idea is you move money directly from your IRA. It can only be your IRA if you have a 401(k). This is a tax break that you can’t use. It’s an IRA, move money right from an IRA to a charity. And the beauty of the QCD is the money goes directly from the IRA to the charity. And this is a tax-free transaction, so there are no tax consequences.

Andrew Rafal: And so, when we think about the RMD rules now have pushed to 72, but the limit or the beginning minimum age is still 70 and a half for the QCDs, correct?

Sarah Brenner: Yes. Congress and the IRS, they like to keep us on our toes. They never make things simple. So, you’re exactly correct. The RMD age has been pushed back. It used to be 70 and a half, but the SECURE Act that was passed in late 2019, effective for 2020, that pushed the age for RMDs back to 72. However, the age for QCDs remains at 70 and a half. I guess the bad news there is it’s a little complicated, but the good news is that more people, people who are younger, people who are 70 and a half but not 72, those people can do QCDs.

Andrew Rafal: Okay, so while we’re on age then, before we go to kind of the mechanics of it. So if somebody is 70 and two months and they go to their custodian and they authorize a QCD through the direct transfer, that would not qualify then if we really looked at the specifics and the details of everything that would be…

Sarah Brenner: That’s right. Yes. That could be a trap for somebody who doesn’t know the rules. Strangely, the rule requires you to be 70 and a half. So, that would be six months past your 70th birthday. I mean, if you’re only two months past your 70th birthday, you’re not quite eligible for a QCD yet.

Andrew Rafal: And the thing is too, Sarah, as you know, the custodian isn’t going to stop you. They don’t really, that’s not their job. I mean, they may, but I would say 95% of the time, they’re not going to sit there and say you can’t do it. And that’s ultimately where it comes to either if you’re doing a do-it-yourselfer or you’re working with an advisory team or a tax professional, hopefully, they know those things, but unfortunately, as you know, Sarah, that a lot of them, even the advisors, don’t even know those rules.

Sarah Brenner: That’s right. These rules are so specific and so complicated. Many times, custodians, they’re not familiar with the rules at all. And unfortunately, as you just said, a lot of advisors don’t know these rules either.

Andrew Rafal: It’s very tough out there, yeah, because it’s constantly keeping us, you got it.

Sarah Brenner: Right into a lot of work, yeah.

Andrew Rafal: Right. And that’s why we go to the workshops and spend two, three days learning and diving in. Especially with the standard deduction having doubled over the last few years and we’re seeing a lot more people utilize the standard deduction versus itemizing. And so, one of the benefits there is that we’ve doubled, but then people that are charitably inclined that are just taking money and donating it to charities, foundations, 501(c)(3), etc., in that case, and most of the time, they can’t utilize that as a write-off because they’re taking the standard deduction. And let’s talk about how that benefits with the QCD and the RMDs, and down the road, how somebody can help avoid paying more taxes on their IRAs.

Sarah Brenner: Yeah, you’re exactly right. With the standard deduction currently being so large, a lot more people are taking it. And this is especially true of older people, people in their 70s, they may not be itemizing anymore. They’re using the standard deduction. And when you use the standard deduction, then you lose the ability in many cases to get a break for your charitable contributions. QCDs are a great solution to this problem because you can use the standard deduction, you can do a QCD, and that way, you’ll get a tax break for your charitable contribution.

Andrew Rafal: So, in theory, then, if somebody takes money out of their IRA and that’s going to flow down in 1099 income and it hits their AGI, and then they go write a check to the charity and they’re using the standard deductions. They basically took that money out and they pay taxes on it, and then they take any benefit. With the QCD, we get to take the money out. And again, this isn’t where they can take it out and then have a go. They have to have it go directly from the custodian, correct? It has to be…

Sarah Brenner: That’s right. Yeah, that has to be a direct transfer. So, you’re not getting a check from the IRA and then turning around and making the charitable donation. You have to set it up with the custodian so the funds go right from the IRA to the charity for it to be a QCD.

Andrew Rafal: And that’s where a lot of mistakes people make first and foremost.

Sarah Brenner: Right.

Andrew Rafal: It’s something they do it that way and they think, oh, I’m just not going to show it. And then, ultimately, that is not following through on the proper mechanics of how the QCD works. So, custodians, whether it’s TD Ameritrade, Fidelity, Schwab, Vanguard, etc., they all have a form that the individual account holder will fill out. And then this is something that I know can kind of get into the weeds of things, but maybe more so what disqualifies if somebody is going to go to their custodian and say, I want that money to go to this particular organization. Is there something that the listeners and the viewers can look at to make sure that that will qualify for a QCD?

Sarah Brenner: Unfortunately, it isn’t that simple. The IRS does have some lists on their website where you can go and you can see what would qualify as a charity for QCD purposes. Also, outside of those lists, religious organizations, schools, they can qualify as well. So, there isn’t really a one-stop place to look and see everything that’s covered. I can tell you what is not going to work because we see this a lot. Donor-advised funds, if you have any intention of giving money to a donor-advised fund, a QCD won’t work for that. The tax code is very clear on that.

Andrew Rafal: That was one of my topics we’re going to bring up is that. The donor-advised funds are great, but you can’t co-mingle that with the QCD.

Sarah Brenner: Right. They just don’t work well with QCDs.

Andrew Rafal: And then let’s talk about the annual limit. How much can we do each year in regards to the QCD from the IRA account?

Sarah Brenner: You can do up to $100,000 annually. We get a lot of questions on this. You don’t have to do the full $100,000, you can do less. You could do multiple QCDs if there are several charities that you want to support. You could do several QCDs to the different charities. One thing you do want to watch out for, need to get the cooperation of the custodian. Some custodians do limit the number of QCDs that you can do. So, you want to make sure that you’re playing within their rules.

Also, you want to make sure that you give them plenty of time to process the QCD. So, another big issue that we see. It may seem as though there’s plenty of time before the end of the year, but with the holidays, things start to move quickly with custodians. There are vacations. People aren’t on the job. Lots of things can happen, and the QCD could fall through the cracks. To get it to count for 2022, you got to get it done this year. So, sooner is better than later.

Andrew Rafal: Okay, so two quick things on that. So, the timing of it, if and again, this is where we’re October 3rd. So, you’re right, you don’t want to wait till the 23rd hour. But let’s say somebody waits until the 23rd hour and the money leaves the IRA account on December 28th and doesn’t get cashed, received in cash by the charity until 2023, does the individual get to count it because it left the account in 2022? Does it get to count towards ’22 or is it ‘23?

Sarah Brenner: It’s kind of a murky area. You want to make sure that you have the distribution. The QCD is going to be reported. There’s going to be a distribution reported on Form 1099-R. So, you want to have a 2022 1099-R. There’s some dispute as to whether it’s still going to count for 2022 if the charity doesn’t cash the check until the next year. What I would suggest is don’t mess around with any of these. Get it done early enough that you can be sure it’s processed properly by the custodian and also handled properly by the charity.

Andrew Rafal: Yeah, don’t wait. Earlier the better. And then on the limit, the $100,000, if you’re filing jointly, can we each do $100,000 or up to that?

Sarah Brenner: Yeah, that’s a great point. That $100,000 limit, that is not for a couple, that is per person. So, absolutely, if you have a married couple, they are charitably inclined, they could potentially each do $100,000 QCD, grand total of $200,000. That’s a pretty good strategy.

Andrew Rafal: And then before we jump in, a few of the mistakes people make or what to look for, so when you think about, just to recap, if we’re giving to charity, which most people do, even if it’s a little bit and you’re doing the standard deduction and you’re over 70 and a half and you have an IRA, I mean, you can’t give necessarily. I’m giving all of you tax advice, but just think of that, you’re getting to take money out and give to the charity and it reduces your IRA and you’re not paying taxes on that, which is going to reduce your RMDs, so win-win there, right? It’s just a lot of people think about it, oh, it’s a thousand bucks, but if it’s just a form you’re going to fill out, I would not do it.

Sarah Brenner: Right. There’s no downside. And here’s an additional tax benefit. With a QCD, the money in the QCD never gets included in your adjusted gross income. It goes right from the IRA to the charity. And that’s a good thing because by keeping your adjusted gross income lower, you can avoid all sorts of stealth taxes, the dreaded IRMAA surcharges, all of those are based on your AGI. So, a QCD is a good way to keep income out of AGI. Once you get into your 70s, you have to start taking RMDs that infuses income into your AGI. QCD is a good strategy to get those funds out of AGI.

Andrew Rafal: Excellent point there because with the IRMAA surcharge, if you’re $1 over, then you get hit with that penalty. So, these little wins can add up to big wins. So, very, very good point there. So, with some of the mistakes, talk about 401(k)’s, we cannot do it from a 401(k), no matter what?

Sarah Brenner: Yes. A lot of people, they don’t realize that they think all retirement accounts are the same. That really isn’t true. We have special rules for IRAs that don’t apply to 401(k)’s. And currently, you cannot do a QCD from a 401(k). I say currently because there is some legislation in Congress that would potentially change that, but we’re not there yet, that has not been signed into law. So, if you want to do a QCD, it’s got to come from your IRA.

Andrew Rafal: Okay, now, on that point, what about an inherited IRA? There’s been obviously some changes to the rules with the SECURE Act, but if we inherit an IRA from a non-spouse, I inherited from a family member, can we utilize the QCD on that end?

Sarah Brenner: You can. A beneficiary can do a QCD. The one thing that you need to watch out for, the beneficiary needs to be 70 and a half. So, if you’re 70 and a half and you inherit an IRA, you could go ahead and do a QCD.

Andrew Rafal: That’s a good point on the age there. So, then with Congress changing rules on us, like they always do, one thing they changed recently over the last few years is that if we’re over 70 and a half, we can contribute to an IRA account still where we used to not be able to. So, this double dipping, this potential risk we get into where somebody’s over 70 and a half, they contribute to an IRA, but then they are like, well, I’m going to be really smart here and I’m going to take that and I’m going to do the QCD. Walk through this double dipping role and what to look for and how Congress said, you can’t do that.

Sarah Brenner: Yeah. This is a big mess. This was part of the SECURE Act. And you’re exactly right, Congress was trying to prevent what they considered to be double dipping, where people would make these deductible traditional IRA contributions and then take the money and do a QCD. And Congress did not like that idea.

So, they came up with a very convoluted set of rules where if you’re over 70 and a half and you’re contributing to a traditional IRA and taking a deduction, that’s going to count against you. Essentially, Congress, in their infinite wisdom, they created taxable QCDs. They say if you do that, you make those deductible contributions, your QCD is going to be taxable.

What I would say is if you’re over 70 and a half and you want to make an IRA contribution, put it in the Roth, make your contribution to a Roth and not a traditional, just avoid the deductible traditional IRA contribution if you’re interested in doing QCDs because it’s a big mess. Another strategy that we sometimes recommend is have one spouse, make the QCDs, and the other spouse, make the deductible traditional IRA contributions as a workaround.

Andrew Rafal: Oh, great. Two wonderful points there. And yeah, if you’re over 70 and a half and you’re putting money into the IRA, regardless of the QCD, you’re probably just kicking the can down the road anyway. And at the end of the day, you’re most likely not making as much income as you were, so the deduction moving it to the IRA anyway isn’t going to be probably as effective for you. And then you’re going to just get down the road, have to pull that money out and maybe be at a higher– well, we know the tax rates are going to be higher in ‘26, if not earlier, and then ultimately, you’re just making those RMDs even higher.

So, those are all just things to think about, but excellent point about if we’re filing jointly that one can do it and one can if you really wanted to put money in the IRA, but the simplest is use the Roth. As long as you have earned income, most of you put money into the Roth just because it’s growing tax-deferred and it’s tax-free later, no RMDs, etc.

One of the last points and this is one that hit home and it’s this reporting of the QCD. What goes to the hands of the individual? And I’ll give you a personal example. My father who’s a CPA and does his own taxes, and he’s 75. He recently sold his business. So, he didn’t have to take RMDs out for a while just because of certain things because he had an account where it wasn’t 5%. Long story of how the pension was created, and this year, he had to start taking out, or last year and then this year RMDs. And so, he did like $12,000 out of his amount that he had to do and he did a QCD. And he just figured that the 1099 would reflect it.

So, we were talking about a week ago, week and a half ago before he filed for ’21 and I explained to him that you need to closely look at the 1099 because the custodian a lot of times or at all times, they’re not going to show it that it went directly to that charity. So, if somebody took out 50 and gave 12, had it go directly out, in most cases, they’re right. The 1099 is going to show 50. So, what has to happen? What do they need to do? Whether they tell their CPA or if they’re doing it on their own, what do they need to do in order to take that, in this case, the $12,000 that he had and not have to pay taxes on it?

Sarah Brenner: Yes, it’s a really good point. With the QCD, the 1099-R isn’t going to tell the whole story. If a person does a QCD, there’s going to be a 1099 issue, but there’s not going to be any coding on that 1099 that’s going to show that a QCD happened. So, it’s really important that individuals are proactive because they’re going to want to get that QCD tax break. What they need to do is report the QCD on their tax return.

And this can be a problem because the 1099-R isn’t going to show a QCD. Tax preparers during tax season, they’re going nuts. They’re super busy. So, it would be very easy for them to look at the 1099-R, not see anything indicating a QCD, and the tax break could be missed on the return. So, it’s really important that individuals and their advisors are proactive with the tax preparer. Make sure the tax preparer is in the loop. Let them know that the QCD happened because they will need to report that on the tax return, despite there not being any special coding on the 1099-R.

Andrew Rafal: Yeah. Imagine you did all the things right at the right age. You did it correctly from the custodian to the charity. And then at the final goal line to punch in and for the score, you didn’t do it right. I know, I joke with my dad that that 10-minute conversation, it saved him four grand, which you did.

Sarah Brenner: That’s right. It’s an easy mistake to happen. So, it’s good to get out ahead of it and be sure that everybody’s in the loop.

Andrew Rafal: Yep. So, when he comes out to Arizona from Cleveland, I’m going to make him take me out to a nice dinner. Don’t you think?

Sarah Brenner: I think he owes you one there.

Andrew Rafal: And then, the last point, and this is after 72, the taking too early versus like this, more people sometimes make mistakes as well with the RMD if their RMD is $20,000 and they end up taking out that RMD, first, thinking, yeah, I did it, and now, I’m just going to then use that to show that we talked about this a little bit earlier, but got to get out of that mindset that I’m going to take it out. What are the rules, the first out rules? Let’s go through that.

Sarah Brenner: Yeah. That could be a little tricky. There is a rule that says the first money that comes out of an IRA during a year if you have an RMD, first money that comes out is your RMD. So, you need to be thinking if you want to do a QCD and have that count as your RMD, which you can do, you got to do that before you take a distribution. We sometimes run into situations where somebody has taken out enough money to satisfy their RMD, and then they hear about this QCD thing and they think, oh, well, I’d rather do that. Well, you can’t because you already took the money out. You can’t go back. So, that’s a really good point. It kind of goes back to what we were saying earlier about you got to think about QCDs early in the year, it’s not just an end-of-the-year kind of thing.

Andrew Rafal: Yeah. And if you ended up doing that and you took money out and did the QCD because you didn’t have the right advice, it’s not the end of the world. It just means you got to take money out and you took more than you needed to, maybe, but you did get that out of the IRA and you did it.

Sarah Brenner: Right. It would be a valid QCD. It just couldn’t count towards your RMD. So, that distribution that you took out prior to doing the QCD, it’s going to be taxable to you and that satisfies your RMD. Yeah.

Andrew Rafal: Wonderful. So, this has been great. Listeners, I hope this provided a high level as well as the mechanics as well as kind of the mistakes to look for so you don’t make those mistakes. But the key, Sarah, is to be proactive in planning, think early, have a trusted team, know the rules, and you’ll be putting yourself in the charity and your family, if you do this correctly, in a much better position by knowing the ins and outs of the fabulous QCD. Anything we missed?

Sarah Brenner: I think that’s it.

Andrew Rafal: Well, we brought the fun back into QCDs today.

Sarah Brenner: The fun part of the QCD, yes.

Andrew Rafal: Sarah, this has been great. Hopefully, we can do it again.

Sarah Brenner: Yeah, definitely.

Andrew Rafal: You and the team, Ed Slott and company, are awesome. I will see you in a few weeks and…

Sarah Brenner: Yeah, I heard you had Ed out visiting a few weeks ago.

Andrew Rafal: He did. We had a wonderful time, had a packed house, and he was entertaining as always.

Sarah Brenner: Yeah, he always brings it there, right?

Andrew Rafal: He does. He just gets out there and he turns it on, and it’s awesome. So, it was great to see him. And I look forward to seeing you guys in a few weeks.

Sarah Brenner: Yeah, see you in a few. Thank you for having me.

Andrew Rafal: You’re very welcome. And listeners, stay tuned for another episode of Your Wealth & Beyond later this month. Happy planning, everybody.

[END]