Archive for category: Professional Advisors

Boiling down the alphabet soup: What actually are RMDs and how do they relate to QCDs?

If you get cross-eyed when you start reading about Required Minimum Distributions (RMDs) and Qualified Charitable Distributions (QCDs), you are not alone! And, given the December 2022 passage of SECURE 2.0 legislation, changes to RMD rules are especially important to understand if you are involved in charitable giving and have reached the age of 70 1/2.

What is an RMD in the first place?

A little history may help here. RMDs date back to 1974 when the Employee Retirement Income Security Act (ERISA) was enacted to provide for pension reform and to offer a retirement savings vehicle to non-pensioned workers through vehicles referred to as “qualified retirement plans” that are allowed to grow tax-free while assets are in the plan.

By requiring that a taxpayer start taking distributions from qualified retirement plans when the taxpayer reaches a certain age, the United States government is able to start collecting tax revenue on these “required minimum distributions” from assets that have grown tax-deferred for all those years and decades.

Now here is where we get into the weeds. The distributed amount of the RMD is reported by the plan administrator on IRS Form 1099-R (but–and here’s a nuance–not if the RMD was “satisfied” by a Qualified Charitable Contribution [QCD]—see below!). A taxpayer enters this amount on Line 4B of the Form 1040 Federal income tax return, and, of course, the amount is included as taxable income for the year it was distributed. So, the net-net here is that RMDs add to taxable income but not in the case of direct transfers to qualifying charitable organizations (the QCD).

 

What types of accounts require RMDs?

For 2023, account owners aged 73 and older who participate in qualified retirement plans such as these are subject to RMDs:

• Traditional IRA
• Simplified Employee Pension (SEP)
• SIMPLE IRA
• Employer-sponsored 401(k), 430(b) or 457

Once begun, RMDs occur annually, until account depletion or the owner’s death. (Note that distributions must also be taken from inherited IRA accounts, though under different rules.)

How is the RMD amount calculated?

A qualified retirement account’s entire balance is considered for calculating an RMD calculation, although of course only a fraction of the balance must be distributed each year. Unfortunately, the distribution amount is not easily or consistently determined. This contributes to some retirees’ confusion about RMDs and the requirements. Online RMD calculators can be found here or here, and your retirement account administrator can provide guidance.

When do the RMDs start?

That’s tricky, too! For years 2023 – 2032, the start date is your age-73 calendar year. For example, a 1955-born account owner would begin in 2028. Beginning in 2033, it’s your age-75 calendar year. Account holders born in 1960 enjoy a sort-of “two-year extension,” given that they would turn 73 in 2033. But since the age-75 provision begins January 1, 2033, their RMD begins in 2035.

For all account owners, the big benefit of the now-later RMDs comes from retaining account balances longer. You avoid adding unnecessarily to your taxable income and therefore reduce the risk of bumping to a higher tax bracket. Prior to SECURE Act increases passed in 2019 and 2022, RMDs began at age 70 ½ and age 72. So taxpayers can now enjoy a few more years of tax-free investment growth.  

How charitable taxpayers can check the RMD box with a QCD

Here’s where the QCD comes in (finally!) Now, armed with an understanding of how the RMD rules apply to your situation, you can begin to see how the QCD can provide a huge benefit if you own IRAs. QCDs are truly taxpayer and charity-friendly vehicles.

For starters, you can start making QCDs at age 70 ½–well before you’ve reached the age when you’re required to take RMDs. A QCD happens when you direct a distribution from an IRA of up to $100,000 annually (or $200,000 if you file tax returns jointly) to one or more qualifying charitable organizations, including a designated, field-of-interest, or unrestricted fund at The Community Foundation. While the QCD is itself not tax deductible per se, the overall effect of the QCD is to lower your taxes because the QCD counts toward your RMD but, unlike an RMD, it is not included in your taxable income.

The bottom line? If you have reached the age of 70 ½, own an IRA, care about charitable causes, and don’t need a full RMD income to cover your living expenses, reach out to The Community Foundation to learn how a QCD could work beautifully for you.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Private foundations and donor-advised funds: Debunking three myths

If you’ve been involved with charitable giving for a few years, you’ve no doubt become familiar with both private foundations and donor-advised funds and their popularity as charitable giving tools. As is often the case with tax and estate planning-related topics, the differences between private foundations and donor-advised funds are sometimes the subject of confusion and misunderstanding.

As you work with your advisors and the team at The Community Foundation to establish your immediate and long-term charitable giving plans, take a few minutes to check out how to debunk these three common myths.

Myth #1: Donor-advised funds are all the same and only private foundations can be customized

Private foundations will always differ from donor-advised funds in important ways not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it is a mistake to think that a donor-advised fund is a cookie cutter vehicle. Indeed, “donor-advised fund” is simply a term used to specify the structure of a fund and its relationship with a sponsoring organization such as a community foundation. The donor-advised fund vehicle itself is extremely flexible.

• Donor-advised funds are popular because they allow a donor to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. The donor can recommend gifts to favorite charities from the fund when the time is right.
• A donor-advised fund at The Community Foundation is frequently a more effective choice than a donor-advised fund offered through a brokerage firm. That’s because, at a community foundation, you and your family are part of a community of giving and have opportunities to collaborate with other donors who share similar interests.
• The Community Foundation can work with you and your family on a charitable giving plan that extends for multiple future generations. That is because the team at The Community Foundation supports your family in strategic grant making, family philanthropy, and opportunities to gain deep knowledge about local issues and nonprofits making a difference.

As you explore the many opportunities to deepen your work with The Community Foundation, consider the unique mix of flexibility and services available to you and your family when you establish a donor-advised fund.

Myth #2: Deciding whether to establish a donor-advised fund or a private foundation mostly depends on size

The size of a donor-advised fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. (Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns. That is not the case for individual donor-advised funds.)

Similarly, donor-advised funds are not subject to an upper limit. Although information on the asset size of individual donor-advised funds is not publicly available, anecdotal information indicates that some donor-advised funds’ assets may total in the billions of dollars.

Indeed, a donor-advised fund of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).

The net-net here is that the decision whether to establish a donor-advised fund or a private foundation–or both–is much less of a function of size than it is other factors that are more closely tied to the objectives a donor is trying to achieve.

Myth #3: Donor-advised funds and private foundations are mutually exclusive

Many philanthropists and their advisors are aware of the many benefits of using both a donor-advised fund and a private foundation to accomplish their charitable goals. For example:

• Donor-advised funds can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation on its own.
• A donor-advised fund can receive a family’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules not available for gifts to a private foundation.
• An integrated donor-advised fund and private foundation approach can help a family balance and diversify its investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.

Some private foundations are even considering transferring their assets to a donor-advised fund to carry on the foundation’s mission. Terminating a private foundation and consolidating giving through a donor-advised fund is sometimes the best alternative for a family when the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking time and focus away from nonprofits, the community, and making grants. In addition, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming, especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other projects.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Hidden no more: Designated funds and field-of-interest funds

Most attorneys, accountants, and financial advisors are well-aware of donor-advised funds and the reasons behind their popularity. Especially when a donor-advised fund is established at The Community Foundation, this vehicle is an excellent way for your clients to organize their charitable giving and get even more connected to the causes they care about.

Enter the Qualified Charitable Distribution

Your clients can give nearly any type of asset to a donor-advised fund at The Community Foundation. A notable exception, though, is the Qualified Charitable Distribution (QCD). A QCD allows a taxpayer 70 ½ or older to make a direct transfer of up to $100,000 annually from an IRA to a qualifying charity. A donor-advised fund is not considered to be a qualifying charity.

Although donor-advised funds cannot accept QCDs, The Community Foundation offers other types of funds that can accept QCDs. For example, designated funds and field-of-interest funds held at The Community Foundation are ideal recipients of QCD transfers. These fund types are often overlooked, despite the high value they can deliver to your client and to the community.

What is a field-of-interest fund?

The Council on Foundations defines a “field of interest fund” as, “A fund held by a community foundation that is used for a specific charitable purpose such as education or health research.” Perhaps your client is passionate about rare-disease solutions, feeding the food insecure or preserving works of art, for example. Your client selects the name of the fund (family, cause-related or even nondescript) and then, the knowledgeable team at The Community Foundation distributes grants from the field-of-interest fund in a way that is aligned with your client’s values and charitable wishes outlined in the fund documentation.

What is a designated fund?

Designated funds are defined as, “A type of restricted fund in which the fund beneficiaries are specified by the grantors.” These are a good choice for a client who knows they want to support a particular charity or charities for multiple years. The client names the fund and The Community Foundation fulfills the distributions. Made over time, these funds can help the charity’s or charities’ cash flow planning. Distributions are aligned with your client’s wishes set forth in the original fund document.

QCD reminders

For the client aged 70 ½ through 72, a QCD removes funds from an IRA before the client reaches the age-73 threshold for Required Minimum Distributions (RMDs). This can lessen the eventual income tax hit that accompanies RMDs. And for RMD-applicable clients, the QCD counts toward their RMD. In both cases, the QCD transfers do not fall into the client’s taxable income.

QCDs are even more popular now that the $100,000 cap will be indexed for inflation under the new laws. Also, under the new laws, a one-time, $50,000 distribution to a charitable remainder trust or charitable gift annuity is now permitted.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.