For Retirees with Pension, Profit Sharing, 401(k) or IRA Accounts
Download the PowerPointClint Halftime Slides
Need to talk about your specific situation? Contact Bob Fry directly at 949.504.4895 or email him using the form below.
For the definitive guide on tax-smart giving strategies in 2020, download the PDF below. Discuss this with your financial advisor and start planning now. These strategies are limited to the 2020 tax year only.NCF-California-CARES-Act-Bryan
Bryan: Hey everybody, Bryan and Bob here with NCF California. The CARES Act was passed by Congress to help mitigate some of the coronavirus impact on the economy and part of that was this charitable provision that allows you to write off 100% of your income this year. Now at surface value, you think, “Well, wow, who’s going to do that?” But there are some really fantastic cases we want to look at and one in particular is retirement assets. Up to this point, we typically talk to people who are over 70 and a half years old. We talk about helping them give their minimum distributions. But this year, because of this 100% tax deduction, you can take out huge amounts at a younger age and give the whole thing tax-free, which is unlike anything that we’ve ever seen before in the tax code. Bob, do I have that right?
Bob: That’s exactly right because of the 100% deduction, anybody over age 59.5 can make a penalty-free withdrawal from their 401(k), pension plans, IRA accounts typically. And that withdrawal, that distribution is still ordinary income. So we have some opportunities to match the voluntary creation of income by taking money out of a retirement account, to a charitable distribution and ending up with a tax free withdrawal from those accounts.
Bryan: Wow. And we’ve got an illustration here from our friend, Clint Halftime.
Bob: Yeah. Let’s take a look at Clint Halftime.
What a lot of folks don’t know is that Clint is tough on the outside, but he’s gentle on the inside. He loves giving to ministries, and he would give more if he could, but his past giving has been limited by his modest income as a policeman. He does, however, have a very substantial 401(k) account and he’s over age 59.5. So let’s see what he can do this year.
He wants to give at the .44 Magnum Level and his normal adjusted gross income, which means income from all sources, is $100,000. He’d like to pull $200,000 out of his 401(k) plan, which will make his total income for the year $300,000. But if he does that, he has a tax problem.
That extra $200,000 withdrawal will increase his state and federal taxes by more than $90,000. That’s a big, unpalatable number, unless we show him a better way. Here’s his better way through generosity:
He withdraws that $200,000 from his 401(k) and then he gives it directly to his church. So he increases his income by $200,000; He takes a total charitable deduction of $200,000; His incremental income from having made that withdrawal is $0.00. Nothing. He’s back at the same $100,000 that he was when he started. His tax solution results in no federal income tax on the distribution – $5,000 of California income tax. Because in California, there’s only a 50% deduction against California income for charitable contributions. But even so, that’s overall, a two and a half percent tax on that $200,000 withdrawal. That’s a pretty good result.
Bob: Yeah. Now, there’s one challenge, which is that Clint isn’t sure he wants to give all $200,000 to his church, or at least not all at once. That’s a pretty common concern. People think, “Oh, if I did that they’ll buy everybody a car and put in a swimming pool.” And so there’s some control issues here. We’re going to show him, he can make a big gift, but control the timing of the grants to the ministry he’s supporting.
So we can set up a so-called single charity fund and he could put the $200,000 in that, and that charity fund gets the same deduction – $200,000 – but it allows Clint to control the timing of when the money goes to his church. And the legitimate valuable use of those things in the normal world is that if the church is going to run a capital campaign next year, Clint can be in a position where he says to the elder board, “Look, here’s $200,000. I’ve got it in this fund. You can advertise a matching grant and solicit extra contributions from that.”
It’s very, very powerful. Or he can bank the gift by putting a portion of it – up to 60% of his adjusted gross income, which 60% of $300 is the $180 – he can put that amount into a regular donor advised fund that he can direct to any ministry. Then send the $20,000 directly to his church. Again, you end up with a $200,000 deduction back at the same $100,000 of regular income that you started with.
Bryan: So just to clarify, according to the CARES Act he needs to give at least 40% of that directly to a ministry and not to a Donor Advised Fund.
Bob: Yes. The added benefit that was created, the 100% deduction, one of the provisions is that it can only go directly to a church or public charity, not to a donor advised fund or a support organization.
So since the other charitable deduction rules still exist, you can give 60% of your income in cash to a donor advised fund and then use the CARES Act provision to give 40% more directly to a ministry or to a single charity fund.
Bryan: Got it. What if he’s got some carryovers? What happens?
Bob: The limitation is 100% of his adjusted gross income after taking account of whatever other giving he’s already done. So if he’s already done giving this year, that would reduce his remaining adjusted gross income. If he has charitable carryovers from the previous year, that would reduce his adjustable gross income. So it’s 100% after taking account of all other charitable giving.
Bryan: Okay. And then, can he carry over to next year?
Bob: Yes. If he happens to give more than 100%, it would carry over to future years and would be deductible in future years under the normal rules.
Bryan: Gotcha. Okay. Nice.
Bob: Yeah. Works well.
Bryan: Very good.
Bob: Next steps?
Bryan: Yeah. Next steps.
Bob: First, a caution. Being able to give out of the retirement asset funds might feel like a kid getting his hand in a cookie jar, and you may need those assets more than you know, so you want to be careful about making those gifts. Our ministry is here to help you with your giving and we don’t need to make a sale. So give us a call with your questions and we’re happy to look at those numbers with you and help you figure out what you actually want to do.
Also, keep an eye on our webpage because for the rest of this year, we’re going to post information on the CARES Act with other examples. That’s it.
Bryan: All right. Yeah, and if you know advisors or folks that this might apply to, by all means forward this video, because it could really help them out this year in a way that probably isn’t going to happen again. We’ll leave you with one for today.
Bob: All right, Bryan. Take care.