First of a four-part series
Some retirees must withdraw money from their retirement accounts even though they have enough income to pay their bills. For those already giving to charity, wealth educator John Nersesian said the account they use and the timing of their gifts deserve attention before year-end.
In an interview with me, Nersesian discussed required minimum distributions, qualified charitable distributions from IRAs and the case for grouping charitable gifts into a single year. His aim was to help people give more deliberately, with a better understanding of the tax consequences.
Below is a transcript of the interview with Nersesian, edited for brevity and clarity.
Why review charitable giving alongside required IRA withdrawals?
Bob Powell: So often I hear from retirees who are taking RMDs saying, “I don’t need it. I don’t need the money to live on. I have more than enough to pay for my standard of living. What do I do with my RMD?” And we say, “If you’re charitably inclined, a QCD (qualified charitable donation) might be your opportunity.”
John Nersesian: I like your verbiage there, Bob, because it’s not about convincing people to give away more money. They are already giving in some form or fashion. What you and I are introducing are ways in which they can give the same amount but derive a greater benefit from the giving they’ve already committed to.
If I am already charitably inclined, I’m going to give from my IRA. The maximum amount that you can give in this capacity is $111,000. You can give a lesser amount, of course.
Calling your financial planner, your bank, or your brokerage firm at 6:30 p.m. on Dec. 31, they’re probably already at the New Year’s Eve party. And you’ve missed that RMD opportunity.”<br>— <strong>John Nersesian</strong>
Why arrange required minimum distributions before late December?
Powell: Custodians are inundated with RMD requests at the end of the year. You want to make sure you do it early enough so that your RMD doesn’t arrive after Dec. 31, right?
Nersesian: Calling your financial planner, your bank or your brokerage firm at 6:30 p.m. on Dec. 31, they’re probably already at the New Year’s Eve party. And you’ve missed that RMD opportunity.
Powell: Some custodians will afford you the opportunity to set up an automatic distribution of your RMD. But it’s not guaranteed that it’s correct. The onus is still on you to make sure the amount is accurate.
Nersesian: You’re calculating that amount based on the Dec. 31 balance from the year prior. Maybe, as part of the monthly budgeting process, I take it out on a monthly basis to add to that monthly cash flow.
How can grouping charitable gifts change the tax benefit?
Nersesian: I would make the argument that giving intentionally, giving more in a single calendar year as opposed to spreading our gifts out and making them continuously over multiple years, often provides a greater tax benefit.
I went to Lehigh. Let’s assume I want to make a gift of $100,000 to my alma mater, and I’ve made the decision to give them $25,000 a year.
I’m going to give the same $25,000 a year, or $100,000 in total, to the same nonprofit organization. But what I’m going to do is either make the gift in a lump sum or fund my donor-advised fund and then distribute from there over the four years.
Over the next three years, since I’m no longer contributing, I already did that in the first year, I now take the larger standard deduction because it provides a greater benefit.
Why does the charitable deduction floor matter?
Nersesian: Something else that changed this year is this 0.5% AGI floor. Your charitable deduction is limited to the extent that it exceeds 0.5% of your adjusted gross income.
If I bunch my deduction and make a larger contribution to my donor-advised fund in one year, I only have to exceed that threshold once, as opposed to having it eat into my available deduction each and every year.
A lot of us give reactively. I get a solicitation from the Armenian Diocese, and they ask me to make a donation, and I’m glad to do it. We give reactively because we want to support our friends or support causes that we’re close to.
I would argue that we would derive a greater benefit if we gave with intentionality by doing some planning.
Related: J.P. Morgan sees Fed rate hikes going out with a bang this year