Retirement Accounts: A Big Opportunity for Charitable Giving | Lord Abbett
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Retirement Perspectives

A “MEGA” qualified charitable distribution can help you do good and provide potential tax benefits—but you must act before year end 

Read time: 4 minutes

Recent changes to federal tax laws mean that 2021 is the final year investors can use their retirement funds for unlimited charitable giving. While retirement funds are generally subject to ordinary income taxes in the year of distribution (with the exception of Roth accounts), it’s always a good idea to explore ways to pay less tax, or better yet, take a tax-free distribution. If advisable, a retirement investor should take full advantage of the opportunity.

 

Act now

A limited-time, tax benefit Ed Slott cleverly calls the “Mega QCD” is only available for the remainder of this year (2021). This QCD-like tax benefit is available for those retirement investors who aren’t otherwise eligible to make a QCD, thanks to provisions in recent tax laws.

 

Recently we wrote about the benefits of Qualified Charitable Distributions (QCDs). A QCD is a tax benefit that allows eligible retirement investors to use their IRA funds to make charitable contributions by directly transferring otherwise taxed IRA funds, tax-free to qualifying charities. The charitable donation is excluded from taxable income, although the investor is not eligible for a deduction. Notably, a QCD can be done even if you’re taking the standard deduction rather than itemizing. QCDs can also be used to satisfy IRA required minimum distributions (RMDs) in the same year of the QCD.

But QCDs have numerous eligibility requirements. For example, QCDs can only be made from IRAs, are only available to IRA owners and beneficiaries who are 70½ (the investor’s 70 ½ birthday) or older, and are limited to $100,000 annually. Importantly, QCDs are not available from an employer-sponsored retirement plan such as a 401(k) or 403(b).

How to sidestep normal QCD rules with a MEGA QCD

The myriad of rules for QCDs prohibits many charitably-inclined retirement investors from making them. For example, would you like to use your IRA to make charitable contributions but aren’t QCD eligible because you are not yet 70½? Or, are all your retirement savings held in your 401(k) or other employer-sponsored retirement plan? Any of which makes you QCD ineligible.

Enter the tax benefit that Ed Slott, CPA, IRA Expert and author, cleverly calls the “Mega QCD.” For the remainder of this year (2021), there is QCD-like tax benefit available for those retirement investors who aren’t otherwise eligible to make a QCD, thanks to provisions in recent tax laws. This creates an attractive opportunity. It’s not a regular QCD, so it’s not limited to a $100,000 annual donation. For 2021, there is no maximum!

How a MEGA QCD works

A limited-time opportunity due to recent legislation - Ordinarily, itemized deductions for charitable contributions can’t exceed 60% of your adjusted gross income (AGI) annually. However, due to recent legislation, the AGI limit on tax deductions for cash gifts to charity has temporarily been increased to 100%, but that ends at the end of this year (2021). The increase is due to the Coronavirus Aid, Relief, and Economic Security Act (CARES) that eliminated the 60% of AGI limit for 2020 and the Tax Relief Act (enacted in late 2020) that extended this potentially valuable tax benefit through the end of 2021. Therefore, an eligible taxpayer can receive tax deductions of up to 100% of their AGI for cash donations through 2021!

The result of combining these two provisions creates a MEGA QCD opportunity allowing unlimited distributions from any retirement account (not just IRAs) to be given to a charity for a 100% tax deduction for those itemizing deductions. The ability to use unlimited amounts of funds in IRAs or company plans to give to charity and receive a 100% deduction (or up to 100% of AGI) can be a huge tax benefit for those who would normally make large charitable gifts but are not able to maximize tax benefits.

If you itemize - Most taxpayers no longer receive tax benefits for their charitable gifts because they take the standard deduction and do not itemize their deductions. The Mega QCD is only available for 2021 and only applies if you’re itemizing tax deductions.

Best used if you are between 59½ and 70½ - Unlike with a QCD, you don’t have to be 70½ to be eligible. But, if you’re under age 59½, you’ll be assessed a 10% penalty on a withdrawal from your retirement account, making a MEGA QCD inadvisable at this age. Therefore, this strategy can be beneficial for those investors between age 59½ and 70½, when withdrawals from IRAs can be made without the 10% early withdrawal penalty tax.

Does not apply to donor-advised funds - Be aware that the 100%-of-AGI limit for deducting cash gifts to charity does not apply to donor-advised funds or gifts to other supporting organizations.

Does not offset RMDs - While a QCD can offset the tax on RMDs and exclude that amount from AGI, using the MEGA QCD cannot. However, the corresponding itemized deduction for the charitable contribution can still offset the tax on the IRA or 401(k) distribution.

Practice Tips:

  • A MEGA QCD is eligible to be used to offset RMDs like QCDs can. However, you can (assuming your eligibility) do a QCD up to $100,000 to offset any IRA RMDs and also use the Mega QCD to make charitable gifts beyond $100,000.
  • Avoid using a Roth IRA. Why? There is no tax benefit. Roth funds are generally distributed tax free.

Key Takeaways

  • The potential tax benefit of the MEGA QCD is the ability to reduce taxable retirement account balances at a zero percent tax rate by using these funds to make charitable gifts.
  • Those who do qualify for the QCD can still use that for IRA transfers up to the $100,000 limit and then use the MEGA QCD to make gifts in excess of that amount.
  • A MEGA QCD can be used for employer-sponsored retirement plans (i.e., 401(k)) as well as your IRA. Notably, you must be distribution eligible.
  • You can take any withdrawal from your IRA or company retirement plan during 2021 and subsequently donate that same amount to charity. The distribution will be taxable to you, but due to the temporary elimination of the 60% charitable contribution limit, your AGI will be reduced as a charitable deduction.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, recommending to another party any transaction, arrangement, or other matter.

These materials do not purport to provide any legal, tax, or accounting advice.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

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