An IRA Strategy That Lowers Your Tax Bill

Hi, I'm Christine Benz from Morning Star and thanks for joining us for the final installment of this limited edition series, Your Tax Playbook for Retirement with Ed Today, Ed and I will be discussing one of his favorite retirement tax strategies, the qualified charitable distribution. Ed, thank you so much for being here. >> All right, great to be back. >> It's great to have you. We want to discuss what's called a qualified charitable distribution. It's something that you are a big fan of. Yes. Uh, and talk about the QCD and who can use it. >> It's one of the best provisions in the tax code other than my favorite Roth IRA, which nothing tops that cuz taxfree for everybody. But I if if you give to charity, and that's what I want to start with. if you're charitably inclined. I always say for people who give to charity anyway because over the years lots of people went through all these shenanigans and things to save money, but they didn't really want to give to charity. And when they found out they actually had to give the money away said, "Well, I didn't want I didn't sign up for that." So, you have to be charitably inclined. So, if you're giving money away uh to charity, which is great, do it this way. So, a qualified charitable distribution allows IRA owners only, not 401ks, IRA owners to transfer if they're 70 years old or older. I know the RMDH is now 73, but the QCDH did not change. It's still 70 and a half. So, you can actually do them even before RMDs kick in to bring down your IRA balance at zero tax. So, you can transfer from your IRA, a direct transfer to a qualified charity, from your IRA to the charity, and it's excluded from your income. Normally, if you took a distribution from your IRA, it would be included in income. And if you wanted to give to charity, you could do it maybe as an itemized deduction, but for years, people didn't take itemized deductions because of the salt cap. But that's a lot of that has gone now to the ABA rule for especially high tax states where it's now a much higher threshold. Not 10,000 of state and local taxes but 40,000. More people can itemize. But even if you can itemize, it's still better reducing adjusted gross income, the key number on the tax return that determines your Medicare Irma charges, the 3.8% tax on net investment income, taxation of social security. So, it's an exclusion from income. It will always save you money if you're charitably inclined. And here's the good thing. The Secure Act made IRA the when they did away with the stretch IRA, which we talked about for years, and replace it with a 10-year rule, it made IAS probably the worst asset for wealth transfer or or estate planning. But IRA are good for something. They're the best assets to give to charity. Why? Because give them the taxable stuff. Give them the dregs. The IRA, the the charity doesn't pay any tax. They don't care what kind of money it is. Give them the IRA and save the rest of your money, the nonIRAS, for your beneficiaries that get step up in basis, which you don't get with IAS. So, they're the IAS are the best assets hands down to give to charity. And this provision, the QCD, allows you to do it. And in 2026, you can give up to 1,000 a year, not per IRA, per IRA owner. >> Okay. So, just to clarify, Ed, this would be for traditional IRA assets only, right? I'm not going to uh be able to do it with a 401k, even a traditional tax deferred 401k. And a Roth IRA would automatically not be a good idea in this context. >> You never give away money you already paid tax on. That's the beauty of using the traditional IRA. Never do it with a Roth IRA. Last question for you, Ed, is wondering if you can walk us through how do I make sure that my QCD counts toward my tax bill and also helps fulfill my required minimum distribution. What are the steps to follow and what documentation do I need? Because I think there's been a lot of confusion about how to make sure that this is all accounted for properly. What steps should people take? Well, you will be relying on the financial institution to code it properly on the 1099. There's been some issues with that, but they're not the police. If you say you're giving to a qualified charity, they they believe you. That's up to IRS. So, they'll give you a 1099 and show a QCD. But the ordering especially when you're in RMD territory and that's where QCDs really shine because let's say you have an RMD of 10,000 just as and you want to just for example and you want to also give 10,000 to a certain charity and you're 70 and a half or over from your IRA you can transfer from your IRA 10,000 to the charity. Now you don't even have to take the RMD. It's automatically satisfied. Just make sure you did the QCD first. If you did the RMD first, it doesn't work work out that way because once you take an RMD, that can't be undone. So, you do the QCD first, but that satisfies an RMD. Norm normally an RMD would add income to your adjusted gross income, taxable ordinary income. The QCD takes that right off the table. In essence, you're getting an IRA distribution out at 0% tax rate. Yes, you're giving the money away, but you were going to give that money away anyway in a less efficient manner. >> Okay, Ed, thank you so much for your perspective as always. >> All right, great, Christine. Thanks. >> Check out all the videos in this series on taxes and retirement at the link below. Thanks for watching. I'm Christine Benz for Morning Star.