QCDs: A Charitably-Minded, Tax-Efficient Strategy

By Kevin T. Smith, CFP®, CTFA, CDFA™

In the Financial Services field we love to use acronyms. RMD (Required Minimum Distribution), YTM (Yield to Maturity), and AGI (Adjusted Gross Income) are common ones that you may have heard. However, if you are older than age 70 ½, have a Traditional IRA, and make charitable gifts annually, a QCD (Qualified Charitable Distribution) is a good acronym to know.


QCDs – A Brief Background
Individuals with monies in a Traditional IRA, who are older than 70 ½, draw their Required Minimum Distribution each year. These distributions are treated as taxable income and included in your AGI. However, since 2006, individuals have had the ability to direct these required distributions (up to $100,000) to a qualified charity of their choice and exclude the amount from their taxable income each year. This strategy is referred to as a Qualified Charitable Distribution.

However, even though you are making a charitable gift, you may not include this amount in your itemized deductions. In other words, you cannot “double dip.”

Why the Popularity Now?
With Congress passing the Tax Cuts and Jobs Act in late 2017, it doubled the standard deduction for individuals and joint filers ($12,000 in 2018 for individuals and $24,000 for married filing jointly). This significantly reduces the number of individuals who will be itemizing their deductions. For those taxpayers who were itemizing their charitable gifts and are now taking the standard deduction, the tax benefit of the charitable gift is lost.

This has created more popularity for the QCD from IRAs and may provide the following benefits:

  1. Satisfy some, or all, of your Required Minimum Distribution
  2. Reduce your taxable income which can potentially:
    • Reduce the amount of tax on your Social Security benefits
    • Reduce the costs of Medicare Part B and Part D premiums
    • Help you avoid exposure to the 3.8% net investment income tax
    • Allow you to qualify for certain tax credits that have income caps

Please note these additional QCD strategy items:

  1. The charity must be a qualified charity per IRS standards (it cannot be a private foundation or donor advised fund)
  2. The distribution must be made directly from your IRA trustee to the charity (check payable to the charity)
  3. The QCD can be accomplished with Inherited IRAs where the beneficiary receiving the distribution is older than 70 ½

If you have already satisfied your RMD for 2018, you can look to the 2019 tax year and beyond as Congress has made the ability to do a QCD permanent. If you have questions on whether the QCD from your IRA is a strategy that may benefit you, we recommend that you speak with your tax professional.

 

Short-Termism – Investors’ Returns

By Drew P. Wilson, CFA

This is the third in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

There are any number of reasons investors may find it difficult to achieve their financial goals. In some cases, unexpected and uncontrollable events can wreak havoc on a financial plan. But it is often an investor’s own actions that lead to the failure of meeting their objectives. There is a branch of science called Behavioral Finance dedicated to exploring how an individual’s propensities and predilections can short circuit rational investment decisions.

Unfortunately, in my opinion, there is a powerful gravitational pull that has fostered a short-term mindset with many investors. This force comes from academicians, practitioners, pundits, and the financial press who promote – wittingly or unwittingly – return-diminishing behaviors such as market-timing and performance-chasing.

How well does a short-term investment approach work? In my next post I’ll highlight a compelling research study that compares performance-chasing versus buy-and-hold behaviors. At FAM, we have a long-term approach; however, despite consistent results for buy-and-hold strategies, this research study exposes a challenge the investment industry faces. Stay tuned.

Please see Fenimore disclosure.

FAM Funds’ Annual Shareholder Informational Meeting Webcast

The event was held on October 9, 2018. 

  • Look at the past 10 years and discover how time in the market, not market timing, can make a big difference
  • See how our funds performed
  • Watch an insightful Q&A session with our Investment Research Team

 

Please see Fenimore disclosure.

HSAs: A Triple-Tax Advantage

Kevin T. Smith, CFP®, CTFA, CDFA

Each year, employees are spending more and more from their paychecks on health insurance premiums. With these cost increases, we have seen many employers offer a High-Deductible Health Plan (HDHP) as a health insurance option for employees. This has grown the popularity of Health Savings Accounts (HSAs). However, an HSA can offer much more than just an interest-bearing account to help cover out-of-pocket medical costs. It should be considered as a very good long-term vehicle to cover future medical expenses.

The Rundown
First of all, an HSA is only offered in conjunction with an HDHP. Typically, you are eligible to enroll in one if you have opted for an HDHP as your plan-type during open enrollment for health insurance with your employer.

Automatic payroll deductions present an excellent way of forced savings into these accounts and offer a triple-tax advantage:

  1. Tax deduction
  2. Tax-deferred growth
  3. Tax-free withdrawal if used for medical expenses

For 2018, a person enrolled in individual coverage may contribute up to $3,450 whereas a person with family coverage may contribute up to $6,900. Additionally, if you are older than age 55, you may make an additional $1,000 catch-up contribution per spouse.

Some Additional Benefits

  • Participants in an HSA are typically provided with a card linked to the account which allows you to pay for qualified medical expenses with ease
  • HSAs may serve as a good option for higher income earners that max out their qualified retirement plans through work and are still looking for a tax deduction
  • Funds not used in the account remain there and are continuously rolled over each year until they are used (unlike Flexible Spending Accounts)
  • Check with your plan’s trustee, but investment options may include stocks, bonds, and mutual funds as opposed to simply an interest-bearing account

The Forest Through The Trees
Too often we are short-term thinkers, but the long-term advantages of HSAs should not be overlooked. Consider the fact that many of us will live roughly a third of our lives in retirement so it is important to consider potential healthcare costs during those golden years. For example, estimates of average medical expenses for a healthy 65-year-old couple range from $225,000 to $275,000.

If an individual or family is able to contribute significantly each year into their plan and build up a considerable savings in their account, this can be a great option to help cover some of the following costs both tax- and penalty-free:

  • Long-Term Care Insurance Premiums: probably one of the most overlooked advantages (policy needs to be qualified per IRS standards)
  • Medicare Parts B, C (Medicare Advantage Plans), and Part D (Prescription Drug Coverage)
  • Orthodontics: any parent who has paid for a child’s braces knows that they are not cheap and not covered by traditional dental coverage
  • Some over-the-counter medical items such as insulin, reading glasses, contact lenses, and wheelchairs (items that the IRS considers qualified medical expenses)

Be Mindful
Any withdrawals from an HSA that are not used specifically for qualified medical expenses may be hit with a 20% penalty and subject to income tax. Once you turn 65 and begin receiving Medicare, you are no longer eligible to contribute to an HSA; however, there are no required minimum distributions and funds will remain in the plan until spent down.

Additionally, it is good to check with the trustee of your HSA to review your investment options. Remember, with our life expectancies lengthening, our medical expenses will follow suit. HSAs can provide an excellent way to alleviate some of these future medical costs in a tax-efficient manner. As always, I recommend including your accountant or tax preparer in the decision.

In summary, an HSA should be on your radar as much as your 401(k) and other employer-sponsored plans because it can be a terrific savings account to cover both current and future medical expenses.

For more information and “light reading” on HSAs, the IRS offers Publication 969.

Please see Fenimore disclosure.