As we journey through life, many of us look for ways to give back to the community and support the causes we care about. For those who have reached the age of 70½, there’s a powerful tool available: the Qualified Charitable Distribution (QCD). Not only does this strategy allow you to contribute to charitable organizations, but it also offers a unique financial benefit—minimizing your taxable income.

Understanding Qualified Charitable Distributions

A QCD is a direct transfer of funds from your Individual Retirement Account (IRA) to a qualified charitable organization. This isn’t just a generous act; it’s a savvy financial move. When you reach a certain age, you must start taking Required Minimum Distributions (RMDs) from your IRA, which are typically subject to income tax. However, by opting for a QCD, the amount donated is excluded from your taxable income. This can significantly reduce your tax burden, especially if you’re already receiving Social Security benefits or paying Medicare premiums.

Who Can Benefit from QCDs?

To qualify for a QCD, you need to be at least 70½ years old. This isn’t just a random age—it marks a point in life where individuals often reassess their financial plans and charitable giving. You can make QCDs from various types of IRAs, including Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only) IRAs. While Roth IRAs aren’t typically used for QCDs because they aren’t subject to RMDs, under specific circumstances, they can be considered.

The beauty of QCDs lies in their simplicity and generosity. You can donate up to $105,000 per year (adjusted for inflation), and if you’re married and file jointly, your spouse can also make a QCD of up to the same amount. This means a couple could potentially exclude up to $210,000 from their taxable income annually.

The Tax Perks of QCDs

One of the most appealing aspects of QCDs is the tax advantage. Unlike other charitable contributions, QCDs do not require you to itemize deductions, making them accessible even if you take the standard deduction. This is particularly useful given the recent tax law changes, which increased the standard deduction and made itemizing less common.

Moreover, by reducing your taxable income, QCDs can help lower the amount of Social Security benefits subject to tax and even reduce Medicare premiums. This dual benefit of giving back while keeping more of your income can be a compelling reason to explore this option.

Navigating the Rules and Requirements

To ensure your QCD qualifies for the tax benefits, the funds must be transferred directly from your IRA to the charity. This means you can’t withdraw the money and then donate it—it has to go straight to the organization. The receiving charity must be a 501(c)(3) organization eligible to receive tax-deductible contributions. Unfortunately, not all organizations qualify, so it’s essential to verify that the charity you’re supporting meets the criteria.

When you make a QCD, it will be reported as a normal distribution on IRS Form 1099-R, but remember, the amount isn’t taxed. However, since the donated amount is excluded from income, you can’t claim it as a charitable deduction. Proper documentation and acknowledgment from the charity are crucial for compliance and peace of mind.

Strategic Charitable Giving

For those who don’t need their full RMDs for living expenses, QCDs offer a way to fulfill their RMD obligations while supporting worthy causes. This is especially beneficial for individuals who prefer not to see their income tax bill rise due to mandatory distributions.

Recent legislative changes have also expanded the possibilities for QCDs. Starting in 2023, you can use QCDs to fund certain types of charitable trusts and annuities, up to a one-time maximum of $50,000. This addition provides more flexibility in how you can structure your charitable giving.

Getting Started with QCDs

If you’re considering a QCD, the first step is to contact your IRA custodian. They will guide you through the process, including any specific forms or procedures required. Each financial institution might have slightly different requirements, so it’s important to follow their instructions carefully to ensure everything is set up correctly.

Consulting with a tax advisor is also highly recommended. The rules around QCDs can be complex, and a professional can help you navigate the specifics, ensuring that both your IRA and the charity meet all the necessary qualifications. They can also assist in optimizing your giving strategy to align with your financial and philanthropic goals.

A Legacy of Giving

Qualified Charitable Distributions offer a unique opportunity to make a difference in the world while managing your financial future. By understanding the benefits and rules, you can use this strategy to reduce your taxable income, support causes close to your heart, and leave a legacy of generosity. Whether you’re looking to minimize your tax liability or simply wish to give back in a meaningful way, QCDs are a valuable tool in your charitable giving arsenal.

Contact Us

As you consider the benefits of Qualified Charitable Distributions and how they can enhance your charitable giving strategy, remember that thoughtful planning can make a significant impact. If you’re curious about how QCDs can fit into your financial and philanthropic goals, or if you have any other questions, don’t hesitate to reach out. Let’s connect and explore the best ways to maximize your giving potential while securing your financial future. Feel free to contact us  for a personalized consultation or to share your thoughts and experiences with charitable giving. Together, we can make a difference and save on tax.

About Matt

Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals.

Matt’s Corner

The post Making a Difference with Your IRA: The Power of Qualified Charitable Distributions appeared first on New Century Investments.

If you are fortunate enough to have a job that offers a retirement plan, you might be wondering how you can set aside money for your own future.

One of the most common questions I get is: Should I contribute to my Traditional or Roth IRA for my future?

Thankfully, there are a variety of different ways you can save for retirement. Depending on your specific situation and goals as they relate to your financial future, you may be able to take advantage of both accounts. But should you?

While both Traditional and Roth IRAs have their pros and cons, understanding which is right for you — along with understanding the differences between the two — can go a long way in helping you make an informed decision about which will serve your needs best. We’ll explore the details about these two IRA types below so that you can make the best decision possible on which is right for your personal circumstances.

What is a Traditional IRA?

Traditional IRAs are one of the most common types of retirement accounts. Traditional IRAs allow you to set aside a set amount of money each year — up to $6,000 per year (2022), plus an additional $1,000 (2022) if you are over 50 — in a tax-advantaged account. That means you won’t have to pay taxes on the money you put into your IRA until you withdraw it after retirement. Traditional IRAs are especially beneficial to those who are in a higher tax bracket now than they expect to be in the future.

With Traditional IRAs, you receive a tax deduction on the contributions now and defer paying taxes on the withdrawals until a future date. If you expect to be in a lower tax bracket when you retire than you are now, a Traditional IRA might be a better choice for you. If you expect to be in a higher tax bracket when you retire, a Roth IRA might be a better choice for you.

What is a Roth IRA?

Roth IRAs are another type of retirement account that allows you to set aside money for your future. Roth IRAs differ from Traditional IRAs in that you don’t get a tax deduction on contributions now — they are made with after-tax dollars — but all of the growth is completely tax-free. This differs from the Traditional IRA where the contributions are deductible today — but then you pay tax in the future.

Roth IRAs have some big benefits in the long run. Roth IRAs are especially beneficial to those who are in a lower tax bracket now than they expect to be in the future. Additionally, Roth IRAs are a valuable estate planning tool. They have unique rules when it comes time to pass along, and when it comes to tax and estate planning, there are several benefits. And again, the money grows tax-free.

Which One Is Right for You?

When deciding which type of IRA is right for you, you’ll want to take a look at your unique financial situation and goals. However, one thing to keep in mind is that you have until the April tax filing deadline to make your IRA contribution for the year — so you have plenty of time to make your decision. Once you decide which type of IRA is best for you, you’ll want to be sure to start making contributions as soon as possible. Why? Because the sooner you start saving, the more time your money has to grow. The earlier you start saving for retirement, the less you have to worry about what will happen after you retire.

How to Decide Which Type of IRA is Best for You?

There are a few factors you’ll want to consider when making your decision. Some of these factors may weigh more heavily in your decision than others, but they are all important to consider. Here are some of the factors you’ll want to keep in mind when deciding which type of IRA is right for you:

• Current tax situation – If you are in a lower tax bracket now than you expect to be when you retire, a Roth IRA might be a great way to save for retirement. If you expect to be in a lower tax bracket when you retire, a Traditional IRA might be a better choice for you.

• Future tax situation – If you expect to be in a higher tax bracket in the future, a Roth IRA would be a good choice for you. If you expect to be in a lower tax bracket in the future, a Traditional IRA would be a good fit for you.

Conclusion

Deciding if you should invest in a Traditional or Roth IRA is an involved and important decision. There are many factors such as your income, your tax bracket, your future goals, and your risk tolerance. Contact us today for more information.

Take the Next Step

Are you ready to start taking control of your financial future? New Century Investments is here to help. We are a holistic, tax-focused financial planning firm that can provide you with the peace of mind and confidence you need throughout your life. We have experienced CPA and CFP^® professionals on staff who can provide you with comprehensive services, including tax preparation, investment management, tax planning, financial planning, retirement planning estate planning, and wealth building for entrepreneurs. Schedule your free consultation today to learn more about how we can help you reach your financial goals.

Matt Ward, CFP^®

817-238-6300

Matt.Ward@newcenturyinvestments.com

Schedule a meeting!

The post Should You Contribute to a Traditional or a Roth IRA for your future? appeared first on New Century Investments.

By Matt Ward, CFP^®

Are you charitably inclined?  The Tax Cuts and Jobs Act of 2017 increased the Standard Deduction for Taxpayers making it much more difficult to itemize now.  This means for those of us who give to charity, we might not be receiving a tax deduction anymore.

Did you know, once we turn 70 ½, we can donate Qualified Charitable Distributions (QCD) from our Traditional IRAs?  QCDs can be used to satisfy our Required Minimum Distributions from the IRAs, and we can donate above our RMD amount as well, if we would like.

Rather than donating from checking accounts, or donating our belongings, which require us to itemize to receive the tax deduction, if we instead donate from our IRAs, the distributions are tax-free.  You must be over 70 ½ and the IRAs must be Traditional to receive the tax break.  If you donate $6,000 and are in the 20% tax bracket, normally you would pay tax of $1,200. But when taking a Qualified Charitable Distribution from your IRA, you would receive the $1,200 tax-free, thus paying $0 in tax, and all $6,000 goes to charity.  You would not be entitled to receive this deduction if you donate from a checking account and if you do not itemize.

Therefore, if you are over 70 ½, charitably inclined, do not itemize deductions, and want to receive a tax break, then donating from IRAs is a very effective tool.

Are you claiming every tax break you can?  We help clients stretch the most of their tax dollars possible.

Contact us today to discuss the various tax savings strategies that exist for your situation.
817-238-6300

Schedule a calll

*The maximum amount one can contribute as a QCD is $100,000 per year, per taxpayer. *In 2021, due to the response to COVID-19, taxpayers claiming the standard deduction can contribute up to $300 from non-IRAs and get a deduction ($600 married filing jointly) and receive a deduction. Beginning in tax year 2024, the $100,000 cap on the QCD amount is indexed for inflation, under the SECURE Act 2.0.

The post ​How to Make your Charitable Dollars Work Again appeared first on New Century Investments.

Have you left a company that offered 401(k) benefits? Read this article for some key considerations after you leave a job. And make sure to read at the end as there are reasons not to roll out your 401(k) into a self-directed IRA.

Reasons To Roll Over Your Money:

Rolling over your 401(k) into an IRA after leaving a job can have several benefits. Here are some reasons why you might want to consider this:

• Greater Investment Options: One of the most significant advantages of IRAs over 401(k)s is that they often offer a broader range of investment options. While a 401(k) typically restricts you to a select list of funds, an IRA can give you access to individual stocks, bonds, mutual funds, ETFs, and even certain types of real estate. See The Balance’s article – Benefits of Rolling Your Old 401(k) into a Rollover IRA
• Potentially Lower Fees: Some 401(k) plans charge high administrative and management fees. By rolling over to an IRA, especially one you manage yourself, you might be able to lower these costs.
• Simplicity and Consolidation: If you have multiple old 401(k)s, it can sometimes be easier to keep track of your retirement savings if you consolidate them into one account. However, if you’re happy with your old plan’s features and investment options, you might choose to leave your money where it is. See The Street’s article – Why Rolling Over Your Old 401(k) is a Good Move For Your Retirement
• Flexible Withdrawal Options: Once you reach retirement age, IRAs can offer more flexibility in terms of withdrawal options compared to 401(k)s, which may only allow lump-sum withdrawals or specific installment payments.
• Easier Estate Planning: IRAs often offer more options and flexibility for designating beneficiaries and managing your account if you pass away.
• Roth Conversion: If you have a traditional 401(k), rolling it over to a Roth IRA might make sense if you expect to be in a higher tax bracket in retirement or a tax conversion strategy you are implementing. You’ll pay taxes on the conversion now, but withdrawals in retirement will be tax-free.

Reasons Not to Roll Over Your Money:

While it’s often beneficial to roll over your money from a 401(k) into an Individual Retirement Account (IRA) after leaving a job, there are some circumstances where this may not be the best course of action. Here are a few reasons why:

• Access to funds: If you think you might need to access your retirement funds before age 59½, you might want to leave your money in a 401(k). While both 401(k)s and IRAs impose a 10% early withdrawal penalty, many 401(k)s allow for penalty-free withdrawals if you leave your job during or after the year you turn 55, while IRAs don’t offer this exception.
• Protection from creditors: Federal law provides unlimited protection to 401(k) assets from creditors. While IRAs are also protected, the protection is limited to a certain amount per person in the case of bankruptcy.
• Required Minimum Distributions (RMDs): If you continue to work past the age of 73 (2023) and don’t own more than 5% of the company you work for, you can delay taking required minimum distributions from your current employer’s 401(k) until you retire. This rule doesn’t apply to IRAs or 401(k)s from previous employers.
• Loans: Some 401(k) plans allow you to borrow from your account, which isn’t typically an option with IRAs.
• Investment Options: While it’s true that IRAs often offer more investment options, some 401(k)s offer access to institutional-class funds that might have lower fees than similar investment options in an IRA.
• IRAs converted to Roth during the year: In this case, it is advisable to consult with a qualified financial advisor, as you may incur additional taxes beyond what is expected.
• Net Unrealized Appreciation (NUA): If you hold company stock in your 401(k), you might benefit from the NUA tax rule by not rolling over the assets into an IRA. This is a complex strategy and you should consult with a tax advisor if you’re in this situation.

Remember, everyone’s financial situation and retirement goals are unique, so what works for one person might not work for another. Be sure to consult with a financial advisor or retirement planning specialist before making any major decisions about your retirement savings.

The post Why Rolling Over Your 401(K) After Leaving The Job Is A Good Move appeared first on New Century Investments.