Join Jamie Hopkins and I as we discuss Qualified Charitable Distributions and how you can utilize them as a part of your annual giving strategy later in life.
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JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR
Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com
1780 Hughes Landing | Suite 570
The Woodlands, TX 77380
Music by bensound.com
Join Jamie Hopkins and I as we discuss Qualified Charitable Distributions and how you can utilize them as a part of your annual giving strategy later in life.
music by bensound.com
Please check out and subscribe to my Youtube Channel and Newsletter!
JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR
Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com
1780 Hughes Landing | Suite 570
The Woodlands, TX 77380
Music by bensound.com
Joshua Klooz 0:01
Welcome to the wisdom and wealth podcast, a series of conversations designed to equip our listeners with helpful insights necessary to simplify the critical decision points of life. We believe true wealth is the thing Money cannot buy, and death cannot take away. Furthermore, we also believe our calling is to enable others to fulfill their own. And to that end, we endeavor investment advisory services offered through CWM LLC, an SEC registered investment advisor. Welcome in again to the wisdom and wealth podcast. This is Josh Klooz. You're the senior wealth planner here for Carson wealth in The Woodlands, Texas. I'm joined today by Jamie Hopkins, our Managing Partner of wealth solutions. And we're going to talk more in depth about charitable contributions in two frameworks that we believe makes sense for clients given their different phase of life. But, Jamie, welcome into the podcast once again.
Jamie Hopkins 1:00
Hey, Josh, good to see ya. And thanks for having me on.
Joshua Klooz 1:04
Our pleasure. So, Jamie, we'll go ahead and go to the strategy that we believe clients and neighbors can use later on in life, but it's called a qualified charitable distribution. And it's typically from an IRA. Right. But typically, it's it's overlooked. And there's some some stipulations that have to be taken into consideration. And just to kick it off, why don't you tell us a little bit more about the QCD, as it's come to be called in the in the vernacular sense.
Jamie Hopkins 1:42
Yeah. And look, QCD is are a way to give, that can be a very effective way. If you're, you know, past certain age, so over age 70 and a half, and you have an IRA, those are the two qualifications on the front end, and then you've got to want to give money away. Like, if you don't want to give money to charity, then like, there's no need for this. So you've really got to dive into like, do I have charitable intent? And what do I want to impact with my giving and why? Now, if you dive into this really quickly, it's due Are you past age 70 and a half, even though we've seen some other rules push out the 72, this one still sits at 70 and a half. So it's not one that's been changed by the secure Act, or the Cares Act or anything else, it still have you reached age 70 and a half, and you really actually have to get there, it's not in the year in which you reach 70 to 70 and a half, you got to pass that 70 and six months day, and then you can do a QCD. And money would then come directly from this IRA, over to a qualified charity, and up to $100,000 a year can go out as a QCD. And that can actually go against satisfying an RMD. If you have one. Now, if you're 70 and a half, you probably don't have an RMD from the account. And I'd say probably it could be an inherited account. So there are situations you could be passing a half inherited account and subject to an RMD. Fine, not as common, usually we're thinking about the owner of the account 72 Now RMDs, and can offset RMD. So if you had enough money coming in from other areas, but you still need to meet your RMD, you could send the entire thing it feels like 50,000 to a charity not have to take any RMDs additionally out. Now here is the more important part is that money that is treated as a right QCD is not an ends up not being included, in an essence, your taxable income. So it just doesn't show up. It's like it didn't happen. Whereas a normal distribution, if you took out 50 grand in that case, right would have been treated as $50,000 of taxable income and then eventually impacted your tax rates. And otherwise, potentially, even if you gave that money away to charity, it would be deducted further on down the line. And so like even that deduction isn't as good as a QCD, there are still certain things that you would be subject to, potentially from a tax standpoint, even if you gave the whole amount away to a charity anyway. So if you're looking to give to charity, you're over age 70 and a half, you have an IRA, you should start with one of the main conversation points is should it be sending the money directly from my IRA to the charity, and it does have to go directly there, you can't take the money out and go, you know, cash it out and go hand it to him. It doesn't work that way. I had a really good conversation one time somebody wasn't giving that much was like $500 a year to their church. And I said, Well, you should still do it this way. One of the reasons was they were under, right, the standard deduction, limit versus itemized. So they weren't getting any tax benefit from giving the $500 a year to their charity, their church and that situation. And they said, Well, I don't really care about the tax savings, I just I do it because I care about my church. And I said, Well, if you think about it this way, you know, at 20%, you're saving $100. Right? So you're now saving $100 by doing it this way, versus cashing it out. Like, you can now give an extra $100 If you want, and you end up with the same amount of money. And like to them, that was the impact. And so they were like, Oh, I will do it. And I will raise it up $100. Now, you could add some extra zeros to that, if that's your situation, right. And we'll be talking about, you know, 5000 or 50,000, and moving up to 60,000. But that can allow you to be more efficient with your giving, and allow you have a bigger impact, right on the charity you want to give to or just save yourself more in taxes. This is one of those situations when I ask people, do you want to pay optional taxes? And Josh, how many times if I said, Do you want to pay optional taxes? Are you going to say yes,
Joshua Klooz 5:56
I'm still trying to find that person that believes the United States government has a better steward of the resources than them? I haven't found them yet.
Jamie Hopkins 6:07
Like paying optional taxes, ignore the strategy. But if you don't like paying optional, taxes, right, look at this, the government is trying to encourage charitable giving here and create more effective ways in which you can give and this is one of them, it's a very effective way to give if you meet those qualifications over 70, a half IRA owner.
Joshua Klooz 6:27
Yep. And again, just just for hypothetical purposes, Jamie, what you're saying is and what what the this what this giving strategy allows you to do is to take your full standard deduction, and stack your QCD on top of it. So why would you take the standard deduction, and then pay out of cash, your charitable deductions of 5000, or $10,000, when you could have $25,900 worth of standard deduction, and stack your deduction on top of that, if it's $10,000, that'd be $35,000 worth of tax deductions that you're essentially giving getting once, especially once you are at RMD age where it would have been required money that you would have been required to take as well. Right. So it just makes sense. And it's one more way to ensure that you're, you're getting the full benefit of the charitable inclination.
Jamie Hopkins 7:30
And it's, it's not to say, Josh, there aren't situations in which other giving is more valuable. But it's pretty rare. You know, in my view of things, if you're looking especially at what I'll say is the medium size giving, you know, we're talking about 500 to $50,000, a year somewhere in that range. And some people might say, Wow, 50,000 is a lot. And some people might say it's not a lot. So I'm gonna say medium size. And that's a personal right. But
Joshua Klooz 7:58
that way, I'm giving right I never want to rob somebody of the joy of spontaneous giving, right? I always ask, Hey, what is the last thing you spent money on that brought you true joy, right. And typically charitable giving is is in there somewhere. And so there's there's going to be moments where you see a need, and you just spontaneously meet it because you you believe that's the right thing to do. And, you know, Praise Lord, go do it. Yeah. But if at all possible, hey, here, here's how you can get some more leverage.
Jamie Hopkins 8:29
Yeah, well, what I was getting to the next part was when you start getting higher up on those dollar amounts, and you start talking about things, I mean, honestly, I'd even say at the top end of what a QCD is allowed per year, when you start talking about doing $100,000 per year and 200,000 a million dollar gifts, it is not always clear that a QCD is going to accomplish the objectives that you're looking for anymore. So we could start looking at other things right, the donor advised fund world right charitable remainder trust you charitable gift annuities, like there's a bunch of other gifting techniques, charitable lead trust, that might start meeting your desired outcomes more. But if this is just the general plan giving, you're giving because you care, and you want to, you know, put money aside, this can be an effective way to do it.
Joshua Klooz 9:18
And I know I'm probably harping here, but what is the one surefire way to know whether your client is charitably inclined when you're a financial planner? Jamie?
Jamie Hopkins 9:28
I mean, I would say ask them.
Joshua Klooz 9:31
Yep, that's the start. And the second one is actually reviewing their tax return. Again, I find that so few advisors in the industry take the time to actually look at the tax return of their clients. And again, it's just basic homework for knowing what's important to your clients and then looking around the corner to see what might be on the horizon for them and what what they may want to look at. It's it's just A basic, a basic tool that should should be utilized in almost every engagement, if for no other reason than to just ensure that your your investment portfolio is is efficient, but especially with regard to charitable planning, if you didn't ask and you didn't review your clients tax return, odds are you don't really know what's that important to them?
Jamie Hopkins 10:25
Yeah, the tax return ones a great piece of it too. And, you know, if you can see that in there, as I went back to, you know, depending on you know, if their standard deduction file or you might not see it, right, so you might have to go a little bit further, sometimes, depending on what they include with it. Some people are pretty good with keeping receipts and giving in addition to the standard deduction, not everybody and the Yeah.
Joshua Klooz 10:53
What you've what you've encountered, I still don't, I think there's still a lot of confusion over how high the standard deduction is. And people still send a ton of their I'll typically I'll get this giant folder, and it'll still have a ton of charitable contributions in it, even though it's, it falls below the standard deduction, which is still great, because it still accomplishes the same thing. When people are like, hey, all the informations in there, review it and tell me what you think about it. But it's, it's, it's just, I think, old muscle memory of when when the way we used to do things anyway, before Well,
Jamie Hopkins 11:26
it's the right way to do things, right. Because ultimately, I don't know if you're a standard deduction filer or not, until we have all the receipts of everything, right. Like, do we actually add it all up? When I'm
Joshua Klooz 11:37
not saying in years past? Right, like, yeah, so it's the the accountant passed it off, and you get it back. But it's just,
Jamie Hopkins 11:44
yeah, you keep records of everything, right. And that's not a bad thing. Because it, what that could do is lead to and I think you briefly mentioned the term like bunching. And if I go back and look at the last five years, and I see your standard deduction, filer, but it didn't have any of your gifting information, I might say, okay, like, let's just keep on rolling. Let's do the same thing we've always done, definitely go back and see, it's like, wow, you were given $10,000 a year, you're a couple and you had $10,000 of you know, salt deductions and some income tax deduction stuff, maybe you're getting around $20,000. But you weren't getting over the standard deduction, but you had about $20,000 of itemized stuff. And you gave $10,000 For the last five years to charity? Well, reality is you would have been better off, not giving for four years getting that into a $50,000 sum and giving on one year, and then all of a sudden, I would have had the 50 from the one year as a charitable deduction, and that 10 grand of other itemized deductions, I would have gotten, right $60,000 Well, above the standard deduction, we'll just say, you know, $35,000, above rough math there for a couple, and, you know, maybe at a 20, you know, 25%, you know, right there, we're talking about eight 9000, you know, 910 $1,000 of tax savings. And so you essentially, by spreading that money out, cost yourself an additional $10,000 In five years of taxes versus lump summing all of that in one year, and what we call bunching strategies. So we got a bunch together a bunch of standard deduction, or a bunch of itemized expenses into one year to improve our tax outcomes. That's something that we might not be able to figure out unless we look back in time, right? And actually said, like, hey, look like, here's this great, you know, resource, you know, by looking at all of our itemized deductions over the last five years, and we can put together with a strategy. So it's a good reason to keep documentation of what you've been doing.
Joshua Klooz 13:47
Yep. And if you don't pencil out, what that bunching strategy looks like, it's it's hard to conceptualize that, hey, I'm actually getting a better a better deductive outcome. But it works. When you look at the the overall deductions that you're getting by, by bunching your charitable contributions, even if it's just two years into one and then taking the the next year as your standard deduction. The other piece that I find that is really helpful, is looking at, especially when someone is charitably inclined, is looking what that charitable inclination allows them to do from a Roth conversion perspective. Typically, you can offset the two and it allows them to get a conversion at a favorable marginal tax rate as well. Now, you probably don't want to go overboard, but it still allows you an opportunity to look at it at least raise the question of, hey, while we have this remainder at this marginal rate, what does this do for your overall outcome and are you are you comfortable with that?
Jamie Hopkins 14:53
And Josh, probably the bigger statement there to make to is Roth conversions are One, but large charitable giving, like truly transformational gifts when people want to give back and as part of the guilt, like a building campaign at their college or their, or their church, or you know, whether it's like the local hospitals building a new wing, and you really want to do something transformational. A lot of times people, the most efficient thing to do is to actually align those with really big income year. So maybe you're selling a business, you're liquidating a bunch of investments, you are doing a very large Roth conversion from a traditional IRA years in which you're realizing a lot of gains. And often those were the years that you also have positive cash flow. Now, an IRA to Roth conversion year might not be the same case, right? Like you're, you're moving the money. So like those other years, you're selling a business, you're liquidating some investments and some property, those are great years to think about giving to charity to offset some of the gains. And so you might get a million dollars of gain and decide that's the year that you're making that transformational gift, that's super important to you, and the value you provide out there in the world, and you're gonna, you know, you're changing the world for the better. And you're doing it in an intelligent and like, you know, coordinated fashion. And it's,
Joshua Klooz 16:17
in those years, typically, what I found is that it's, it's hard for clients to wrap their mind around the, the size of the gift, because they've never given a gift quite that that large. And you break it down and say, hey, now that you have gotten this big, you know, you've sold a business or something is happened, here's what you're going to be able to what do you forecast that you'll give over the rest of your life lifetime. And typically people give a certain percent or have goals of certain percentages of their wealth that they want to give away each year, or their income that they want to give away each year. And when you've put that into perspective, you say, Well, hey, in this up income year, you have the opportunity to basically just literally set in a separate account the same amount of money that you're going to give away and your lifetime anyway. But the difference is that you get to direct where it goes rather than going to the government, you know, full swoop and that that that same year, and obviously not going to fully offset taxes in all cases. But you know, typically, there's there's a, a comparison ratio, where people say, Yeah, I'm okay with with this amount, because it's, it's basically rather than giving it to the IRS, I'm gonna give it to something that I know, that I'm fully passionate about, or that I really know I can influence today. And by putting it in that donor advised fund, you don't have to give it all in the same year, you get to spread it out over a series of years, which can become it can take on a life of its own as well, by passing that on to future generations.
Jamie Hopkins 17:56
And Josh, one other thing, I'll say, as you brought this up, which was that that large transformational gift can seem really daunting, because they've never dealt with those numbers before. And look, that's true for every, you know, kind of large gift exchange purchase, you always have that first one, a lot of times, I think when it comes to charitable giving, and so look, I worked at a nonprofit for a long time I helped raise funds. So I've been through this. And my first mentor was a plant giving expert. And one of the things that I realized and learn from others was a lot of people haven't spent enough time with the organization to really make that big gift yet. And so a lot of times when people are coming in, they had that liquidation, they had that financial moment, and they wanted to give, but they kind of know they like the place. They don't know that they love it, they don't know the inner workings of it, they haven't donated their time and experienced it, they don't know the outcomes that the place can truly drive. And that drives a lot of that uncertainty. So you know, really good, you know, plan giving departments will get people involved first, which is like, give us some of your time first, like come here and see the solutions we can deliver. And then let's work on that together. And so by the time you're ready to make that larger gift you've already given, you know, time and treasures, what they say they look for, and you've given that time, so you feel confident that we can deliver on the impact that you want to make. And you know, if you're not ready for that, start there first, right, and that's that charitable Inkling inclination and start there and build up that first so that you can get the full amount of that enjoyment out of a truly big and transformational gift.
Joshua Klooz 19:40
Absolutely. Jamie, thank you so much for your time. Giving and charitable inclination is one of my favorite topics. And I can tell just by your responses that it's one of yours as well. But thank you again for your time and we look forward to meeting again in the future.
Unknown Speaker 19:57
Thanks, Josh. Well,
Joshua Klooz 19:59
that It's all for today. Thank you again for joining us. We trust that you are better equipped to steward both your wealth and your financial resources. If you have questions or suggestions for future topics, please direct those to info Houston, Carson wealth.com. But you and your family uncover truth, beauty, and goodness. The opinions voice in wisdom and wealth with Josh Quinn's are for general information and are not intended to provide specific advice or recommendations for an individual as performance is no guarantee of future results. investing involves risk, including possible loss of principal. No strategy assures success for protects against loss to determine what may be appropriate for you. Consult with your attorney, accountant, financial or tax advisor prior to investing. Investment Advisory services offered through CWM LLC, an SEC registered investment advisor. Our address is 17 at Hughes landing, suite five, seven Woodlands Texas
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