Carolyn Stewart

With the passage of the Tax Cuts and Jobs Act of 2017, the use of Qualified Charitable Distributions (QCD) from your Individual Retirement Account (IRA) remains a tax-savvy option for making charitable gifts and, for many people, is now an even more appealing choice. Making QCDs can lower your taxable income and reduce the tax due on withdrawals from your IRA, all while benefiting your favorite charity.

A QCD is a direct gift from your IRA to a qualified charity. Once you reach the age of 70.5, you can use QCDs for your charitable planning. A gift made through a QCD counts toward your annual Required Minimum Distribution (RMD). (Your RMD is taxed as ordinary income.) Reducing your RMD total by the QCD amount lowers your adjusted gross income and taxable income and, therefore, your income tax due. A QCD also provides an opportunity to leverage your charitable gift: you deposited the money into the IRA without paying taxes, the money grew tax-deferred for the time it was in the account, and the money is received by the charity as a tax-free gift.

Qualified charitable distribution rules include:

• You must be 70.5 years old or older to be eligible to make a QCD. (Note: Under the new SECURE Act, you are not required to take your RMDs until age 72. Thus, a QCD before age 72 would only reduce the tax due on elective withdrawals from your IRA.)
• You are limited to $100,000 of QCDs each year.
  Your spouse can also make a $100,000 QCD, but the funds must come from his/her IRA.
• You can make a QCD from many types of IRAs: Traditional, Rollover, Inherited, SEP (inactive plans), and SIMPLE (inactive plans). You cannot make a QCD from your 401[k], SEP (active plans), SIMPLE (active plans).
• To be eligible for QCD benefits, the funds must go to a 501(c)(3) organization. (Private foundation and donor advised funds are not eligible.)
• You cannot receive any benefit from your QCD, e.g., playing a golf tournament, seating at a table. The distribution check from the IRA must be payable to the charity in order to qualify as a QCD.
• If you make tax-deductible contribution to an IRA after age 70.5, then any QCD you make is reduced by that amount until the amount of your QCDs given equals the amount of your IRA contributions post 70.5. Then going forward, you are allowed to count the full QCD amount against your RMD. Non-deductible IRA contributions after age 70.5 do not impact QCDs.

Since a QCD from your retirement account is not included in your taxable income, you are not able to deduct the gift as a charitable contribution in your itemized deductions. Under new tax laws, the standard deduction for singles increased to $12,400 and for those married filing jointly to $24,800. Given this change, itemizing deductions will no longer be the optimal tax solution for many filers, and in turn, those who elect the standard deduction will not receive a tax benefit from charitable contributions. Individuals in this scenario will receive the maximum benefit from QCDs.

Depending upon your level of income, using a QCD to lower your taxable income can have far-reaching effects by reducing the amount of your Social Security payments subject to taxation, increasing your eligible medical expense deduction on Schedule A, or lowering your Medicare premiums.

Does a qualified charitable distribution make sense for me?

• If you claim the standard deduction, you can still fully benefit from the charitable gift, even though you do not itemize deductions.
• If your charitable contributions exceed the 60% of adjusted gross income (AGI) limitations on charitable contributions, you can still fully benefit from the charitable gift.
• If you don’t have appreciated securities in a taxable account to give, using a QCD will offer the most “bang for your tax buck.”

Mapping out your goals for charitable giving and creating a plan for making those donations creates the opportunity to maximize the impact of your charitable gifts for the charity and for yourself!

Stephen E. Maggard

1. Contributions are tax free

Contributions to your account may be made with pre-tax dollars. An HSA can fund medical expenses tax free at any age, unlike a 401(k) or IRA which could incur income taxes and a penalty. Paying your medical expenses and deductibles from your HSA with pre-tax dollars which acts as a 10-40% discount depending upon your tax bracket.

2. Withdrawals for healthcare expenses are tax free

Medical expenses may be paid for with tax-free distributions from your HSA. Remember to keep your receipts for medical expenses if paid out of pocket, and use these receipts to reimburse yourself from your HSA without tax penalties.

3. Earnings are tax free

Any earnings on the funds within your HSA are tax-free, compared to other savings accounts that result in taxes on earnings.

4. You own the account

Your HSA account belongs to you, rather than to your employer or your insurance company. The funds do not “vest” in the way other retirement accounts do—the HSA immediately belongs to you and remains with you even if you lose your health insurance or change employers.

5. Benefits cannot be lost

There is no “use it or lose it” clause associated with your HSA account. Unlike a Flexible Spending Account, the funds within your HSA account do not have to be spent within the same year they are contributed. Dollars remain in the HSA until you are ready to withdraw them.

6. Your HSA can be a tool for retirement planning

The funds within an HSA accumulate over time and can even be factored into your retirement planning. After the age of 65, you can withdraw funds from your HSA account penalty-free for any purpose. You will owe income taxes on these withdrawals if you use the dollars for non-medical expenses. Funds within an HSA used for medical expenses (such as long-term care costs) will continue to be distributed tax-free.

7. Higher contribution limits

An HSA has a higher contribution limit than a traditional IRA. The maximum contribution for an HSA is $7,200 for a family ($3,600 for an individual), compared to an IRA which is capped at $6,000. HSA owners age 55 and older are entitled to contribute an extra $1,000 per year.

8. HSAs may help save on health insurance premiums

HSA plans typically have a higher deductible than other health insurance plans and charge lower premiums, which can be significant to individuals with low medical costs. Based on premium savings alone, HSA owners can save up to 40% on the cost of maintaining health insurance coverage each year.

9. Broad range of medical expenses covered

Certain “medical expenses” are not covered by health insurance carriers but can be paid for from an HSA, such as dental, vision, and prescription drugs. Better yet, your HSA uses pre-tax dollars to pay for these expenses!

Note: As of January 1, 2011, over-the-counter drugs are no longer considered eligible medical expenses for an HSA. However, a prescription from your doctor for these over-the-counter drugs will allow you to fund these expenses from your HSA without taxes or penalties.

10. Use as an emergency fund or for future expenses—plan accordingly!

The funds within your HSA account do not have to be used for medical expenses after retirement. If you choose to pay your medical expenses out of pocket and allow your HSA account to grow tax-deferred until retirement, this account could potentially grow to $360,000 over 40 years (assuming a 2.5% rate of return) or to a whopping $1.1 million (assuming a 7.5% rate of return) according to a study by the Employee Benefit Research Institute (EBRI).

An HSA can be designated as an emergency fund or to supply future expenses such as an extravagant vacation. The benefits of an HSA can be both immediate and long term. Like a traditional IRA, your HSA account can be distributed to your beneficiaries if not used during your lifetime.

As you sort through your mail, you may notice that some mail has arrived that is addressed to your child. For example, your ten-year-old child may have received a couple of pre-approved credit offers. This may seem a bit odd, but you shrug it off and think it must be due to the over-zealous efforts of credit card companies.

Unfortunately, this type of mail can be red flag, indicating that your child could be a potential victim of fraud. As a parent, you have the ability to protect your children against fraudsters who are seeking to use your child’s information to obtain credit for themselves. It may be time to request a credit freeze to ensure your child’s financial security. Knowing what to do will make it easier to protect your child’s future financial security.

As a parent or legal guardian, you can protect your child’s credit by placing a credit freeze. A credit freeze allows you to restrict access to your child’s credit report, which makes it more difficult for thieves to open new accounts in your child’s name.

Why should I request a credit freeze for my child?

Most children under the age of eighteen do not have credit reports. This blank slate presents an enticing opportunity for those hoping to commit fraud. Once a fraudster obtains a child’s identifying information, the thief can then use the information to apply for credit and take out loans in the child’s name. Unfortunately, the identity theft often goes unnoticed for years.

How do I request a credit freeze for my child?

Abacus frequently assists clients with requesting their own credit freeze and their children’s credit freeze. An overview of the process is included below:

1. Gather information to prove your identity and your child’s identity.

To request a credit freeze on your child’s credit, you’ll need to contact each of the three major credit bureaus: Experian, Equifax, and TransUnion. Each credit bureau will require that you send documentation verifying your identity, your child’s identity, and your relationship to your child. You will need to make three copies of each of the following documents:

• Your government-issued ID, such as a driver’s license
• Your birth certificate
• Your child’s birth certificate
• Your Social Security card
• Your child’s Social Security card
• A utility bill, bank statement, or insurance statement with your name and address on it

2. Complete the credit freeze request forms.

In addition to the documents listed above, each credit bureau requires a form (or signed statement) requesting a freeze. Both Equifax and Experian have forms available on their websites. TransUnion does not have a form; they require a signed letter requesting a freeze.

3. Mail the documents to each credit bureau.

Once you’ve gathered all the required documents, you will send a set of documents to each of the credit bureaus. Although sending by regular mail is acceptable, it is recommended that you use certified mail because of the sensitive nature of the documents.

4. Wait for confirmation and PIN.

After receiving the credit freeze requests, each of the credit bureaus will mail confirmation of the freeze and will include a PIN. The PIN will be necessary for unfreezing your child’s credit, so you will need to keep it in a safe place. The freeze will remain in place until you take action to lift the freeze (or when the child is over age sixteen and takes action to lift the freeze).

Most parents will do everything within their means to protect their children. By staying vigilant and requesting a credit freeze for your child, you are working to protect your child’s financial health.

Brittany M. Midgette