Episode: 12-14-2021 | RMDs, Gifting & Charitable Giving

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

Year-End Financial Planning

Allison Dubreuil, Wealthway Financial Advisors: So speaking of holidays, year-end, I thought it’d be fitting to talk about some year-end planning aspects. Things you might want to make sure you have already taken care of or things you might consider doing. So we’ll talk about some required minimum distributions (RMDs) that have to be done by the end of the year.

Hopefully get into some information about gifting. If you want to gift to family, friends and charitable donations. This is a time of year where in a lot of people do a lot of charitable giving. So we can talk about some strategies for that as well, right? Not exactly year-end planning strategies per se, but a lot of activities that tend to happen now.

Kevin Zywna, Wealthway Financial Advisors: End of the calendar year, that you might be thinking about now, and we’ll give you some food for thought, but before we do that, we’re going to go to one of our callers and speak to Jay out in Norfolk. Good evening, Jay you’re on Dollars & Common Sense. Thanks for the call.

HOW TO MAXIMIZE A PAY RAISE

Jay, Caller: I was calling because I’ve received a promotion recently at work. That’s going to net approximately $550 more per month for my family budget. We were budgeting at a balanced budget before this promotion. So we have a surplus now of $550 a month. I’m trying to make decisions about the wisest way to spend that extra monthly amount.

Allison Dubreuil, Wealthway Financial Advisors: All right. I’m glad you’re thinking about that. tell me, Jay, are you, saving into a company sponsored retirement plan or any long-term savings right now?

Jay, Caller: Yes. It comes out of a company match through our payroll deductions, but it’s not a huge amount.

Kevin Zywna, Wealthway Financial Advisors: , Okay. And how is your debt level? Got any, credit cards, car loans, personal loans, anything like that?

Jay, Caller: We don’t carry credit card debt, but we do have a car loan and a mortgage.

Kevin Zywna, Wealthway Financial Advisors: Okay. And interest rate on that car loan?

Jay, Caller: A 1.75%.

Allison Dubreuil, Wealthway Financial Advisors: Okay. What about the bank? How much do you have in set aside in the bank for like emergency rainy fund day?

Jay, Caller: 60-some thousand dollars now.

Allison Dubreuil, Wealthway Financial Advisors: Okay. Sounds pretty good. Are you comfortable with that?

Jay, Caller: I mean, I’d always liked to have more.

Allison Dubreuil, Wealthway Financial Advisors: Okay. and do you know, I guess back to the savings question, do you know about how much you’re saving in relation to your income? Like, are you saving a percentage of your income or is it just a dollar amount?

Jay, Caller: Before it was about $500 a month. So, you know, the, the general math it’s, whatever that is times 12 months. Yeah, that’s what we were in the plus every year. So really not saving a lot. That’s why I’m wondering how to sort of best manage this new found $550 a month.

Kevin Zywna, Wealthway Financial Advisors: And I think you said we, do you have a spouse that works outside the home?

Jay, Caller: No. She’s a homemaker for our two small children.

Allison Dubreuil, Wealthway Financial Advisors: Okay, Jay. Well, it sounds like, you know, from our brief conversation that you’ve got a lot of your ducks in a row.The first priority, making sure you have an emergency fund so that you don’t have to use debt. And it sounds like you don’t have any bad debt that you have a really low interest rate, car loan and a mortgage. It’s not necessarily bad debt. So then I think the first area of opportunity would be to ramp up your long-term savings. So we typically recommend trying to save 10 to 15% of total gross household income towards long-term savings or retirement.

How do you feel about putting it all towards savings? Are you there yet?

Jay, Caller: I am not at 10 to 15% of gross family income as far as savings annually. I mean, I don’t even know if putting the $550 towards it would end up reaching that number. So maybe that is the right place – building up that nest egg.

Allison Dubreuil, Wealthway Financial Advisors: Yeah, and you don’t have to get there overnight. That can be a gradual thing where you take opportunities just like this, when you get a raise, to put some or all of it towards your, your future self – your retirement planning. You know, it’s okay to also give yourself a raise, a spending raise from time to time. Once you reach that savings, benchmark of 10 to 15%.

Jay, Caller: Well, you definitely have been very helpful.

Kevin Zywna, Wealthway Financial Advisors: Alright, well, Jay, you definitely want to get it into, probably your company sponsored retirement plan and make sure you get it invested. Invested in long-term growth assets. That typically means stocks, which typically means mutual funds in your 401k plan. You’ve got a really good healthy bank account.

Don’t feel the need, unless you have some other large impending expense out there, to build that bank account any higher. Cause you’re not going to make the returns on the bank account that you’re going to make on those investments long-term. Okay?

Jay, Caller: Okay.

Kevin Zywna, Wealthway Financial Advisors: All right, Jay. Well, thanks for the call. We appreciate it.

Allison Dubreuil, Wealthway Financial Advisors: Maybe not the exciting answer he was hoping for like, just spend it all, but you know, doing the. Early on or when you have these types of opportunities, makes it a lot less painful because you’re not cutting back on your spending and you will reap the benefits after years of doing

Kevin Zywna, Wealthway Financial Advisors: This is exactly the time to take advantage of this opportunity, capture it and harness it and use it wisely. And you will continue to build on that solid financial foundation. And then you will get to the point where you can spend it and you can spend freely and lavishly (appropriately) on yourself to enjoy the finer things that life after you build a good solid financial foundation.

Okay. We’ve got a, another caller coming online or going to go up to Yorktown this time and speak with Michael. Good evening, Michael. You’re on dollars in common sense. Thanks for the call.

REGULAR BROKERAGE ACCOUNT VS RETIREMENT ACCOUNT

Kevin Zywna, Wealthway Financial Advisors: Next we are out to Virginia Beach now to speak with Marshall. Good evening, Marshall you’re on Dollars & Common Sense.

Marshall, Caller: Thank you for taking my call and sorry for kind of piggybacking on the first caller again, but my situation is similar. Not quite as healthy of a bank account necessarily as he had. But, would there be any advantage instead of doing, if you already had long-term kind of stuff set up, to do one, even just a taxable account, with investments to have more return for that purpose?

Allison Dubreuil, Wealthway Financial Advisors: Well, certainly there could be a good reason to do a taxable, just a regular brokerage account. We typically like the idea of maximizing retirement accounts first because you get the tax benefit, depending on which type of retirement account. So if you’re doing your employer sponsored retirement plan, If you’re doing pre-tax, you’d get a tax deduction for the money going in.

Or if you’re doing after tax, then you get tax-free growth over the life of the account. So we like the tax benefits of retirement accounts and typically recommend maxing those out first, if you’re able. But there can be good reasons to diversify into a regular brokerage account for people who have shorter medium term goals, like a home purchase or something, and, or want flexibility for an early retirement plan – things like that.

Kevin Zywna, Wealthway Financial Advisors: Yeah. Because one of the characteristics of putting money into a 401k plan or an IRA account is that you can’t get it out until age 59 and a half without some sort of penalty. So you want to think about that money as long-term money and that you don’t want to have to touch that unless, it’s a real dire emergency.

So by having some money outside of that, investing in a regular brokerage account does give you that flexibility that you can reach into it whenever you want. Sell-off some investments and use the cash as needed.

Marshall, Caller: Yeah. And I guess the other thought I had on that was. Obviously, you know, no one wants to die, but when you die, when your heirs, I guess, have a better benefit to get that step up versus from a 401k where there could be issues with them having to pay tax and taking the draws there?

Allison Dubreuil, Wealthway Financial Advisors: True. Yes. If you inherit a brokerage account, you’ll get a step up in bases. Whereas if you inherit a retirement account, then, you do have to take withdrawals from the account. The rules got more complicated with the last update on, you know, how quickly you would have to take it out of the tax protected rapper. But, we don’t like to let the tax tail wag the dog in the case of, of that type of planning.

Marshall, Caller: Yeah. Okay. I had the question and thought, you know, from that call and that spurred my brain, I appreciate your time.

Kevin Zywna, Wealthway Financial Advisors: All right, Marshall, thanks for the call. We appreciate it. Yeah, it is. Okay. It’s one of the buckets we’d like to fill up, but it’s a little bit further down the list.

Then your company sponsored retirement plan, make sure you have your emergency fund, a health savings account. We really like if you have access to one of those, but then eventually you’ll get to that traditional type of a taxable brokerage account. And that does have its benefits as well.

REQUIRED MINIMUM DISTRIBUTIONS (RMDs)

Kevin Zywna, Wealthway Financial Advisors: All right. Staying, in Virginia Beach now and going to speak with John. Good evening, John. You’re on Dollars & Common Sense.

John, Caller: Thank you very much. I appreciate it. So I understand how to find the percentage of my required minimum distribution (RMD), and I understand that, at age 72, you’re able to, donate money to a charitable organization. And that amount that you donate through your retirement account is not going to be counted as taxable income to me when I do that, is that correct?

Allison Dubreuil, Wealthway Financial Advisors: Yes, John. I’m so glad you brought that up. I wanted to talk about that today because I think that’s really timely and people should be aware of this.

Yes. Perfect. so you’re right. Once you turn age 72, you have to begin taking required minimum distributions (RMDs). And like you already mentioned, it’s a percentage of the account balance depending on how old you are. So the money has to come out of the account, but you have options as to what you do.

You can just put it in your bank account and spend it. You could reinvest it in a regular brokerage account, or like you mentioned, you can send it directly to a charity. So it has to go directly from your retirement account and it has to be an IRA. It can’t be a 401k.. So it has to go directly from an IRA to the charity without you receiving it. And if it’s done properly, it is completely excluded from taxable income.

John, Caller: Okay. Now, can I take additional funds out of my IRA, over and above that minimum distribution, which I send to a charity and it still be part of what I gave to the charitable organization and can that still be considered not income?

Allison Dubreuil, Wealthway Financial Advisors: Yes. So you’re not limited to the required minimum distribution. You can donate up to a hundred thousand dollars a year from your IRA to a charity and it would be excluded from taxable income.

John, Caller: But if I don’t want to use that additional money for a charitable donation, I need to use it for say family, needs.

Allison Dubreuil, Wealthway Financial Advisors: Right. If you take receipt of it, it’s taxable income.

John, Caller: Right. Okay. But, what I’m saying, so I could take out more than the required minimum in a calendar year.  I could take the portion that was required, the distribution –  send that to a charity, but the additional amount that I took out would not jeopardize the non taxable aspect of what I did with, with the amount of I gave to the charity.

Kevin Zywna, Wealthway Financial Advisors: Yeah. I think, I think you frame it up pretty well there, John.

Allison Dubreuil, Wealthway Financial Advisors: Yeah. We’ll just go back to John’s question about donating from IRA accounts to charity. So he was just trying to figure out, what counts as taxable, what counts as non taxable. Any amount that comes out of an IRA that goes directly to charity is non-taxable. And you can still take additional amounts out directly to yourself that will be considered taxable. And the two don’t impact one another. While the amount that goes to charity can satisfy your required minimum distribution. The destination is what determines the taxability of that withdrawal. And a little tidbit, because we were talking about age 72 to do these. These are called qualified charitable donations, but you actually qualify to do qualified charitable donations once you turn 70 and a half. So once you turn 70 and a half, you can make donations from your IRA to a charity tax-free. And then once you turn 72, that’s when required minimum distributions kick in just to make things complicated.

Kevin Zywna, Wealthway Financial Advisors: There is a little bit of administration involved. we set up our clients with a special checkbook that is attached to their IRA and they write checks directly to the charity from the IRA for this specific purpose. So it is properly recorded for tax purposes.

Allison Dubreuil, Wealthway Financial Advisors: Yeah. And that I think is custodian specific. That’s what our custodian does. Other custodians may have different procedure. But, I will say this, this is not like an automatic thing that’s indicated on your tax forms. And we see a lot of tax preparers missing this. So this essentially gives you an above the line charitable deduction versus below the line itemized because most people don’t itemize anymore. So just make sure, if you’re doing this, that your tax preparer knows about this so that you get the deduction because they have to know and they have to do a notation on your 1040.

PAYING TAXES ON 401Ks OR IRAs

Kevin Zywna, Wealthway Financial Advisors: Yeah. It’s all fun and games until you fill out the tax form on all this stuff. And that’s where the rubber meets the road. All right. Now we’re going to go up to Cape Charles and speak with Larry. Good evening, Larry. Thanks for your patience. You’re on Dollars & Common Sense.

Larry, Caller: Yeah. I just wondered about the portion of the 401k that I paid in was after tax. Could I claim that like a capital gains instead of having to pay the full tax rate.

Allison Dubreuil, Wealthway Financial Advisors: Larry, is it Roth contributions or actual after tax?

Larry, Caller: After tax.

Allison Dubreuil, Wealthway Financial Advisors: Okay. And is all the money still in your 401k? Are you still contributing?

Larry, Caller: No.

Allison Dubreuil, Wealthway Financial Advisors: No, you’re retired.

Okay. Well that’s a really good question. So. Your, after tax contributions, how they are treated tax-wise is dependent on whether you leave it in the 401k or roll it into the Roth. So, typically if you leave it all mixed up in the 401k bucket and you take a withdrawal from the 401k, I believe is going to come out pro-rata so some of the money will be your pre-tax dollars, pre-tax and matching, and some will be after tax dollars. If you actually separated out and you roll your after-tax money into a Roth IRA, then your earnings and growth going forward would be tax-free. So that’s how you really get the benefit of, of that tax treatment.

Larry, Caller: Okay. I was just wondering, I mean, I didn’t know about the figures, it’s a large amount from what, what I put in.

Allison Dubreuil, Wealthway Financial Advisors: So you’re more after tax than pre-tax.

Larry, Caller: Yeah. Well, I put in, I put in the, act tax. What I put in has grown to a larger amount over the years. So I was wondering if I could just claim that as capital gains, but I guess you can.

Kevin Zywna, Wealthway Financial Advisors: No. Yeah, it’s not, no, unfortunately you can’t do that, Larry. It’s not that simple. But you do separate if you can, there’s some administration involved here too. If you separate the two types of contributions, get that after tax into a Roth and then it can continue to grow, tax-free in that Roth to do that.

But you want to make sure that you do this carefully. And if you’re not experienced with it, get the help of an advisor, who will get these accounts set up properly. Sometimes the 401k provider is experienced in this, except they’re usually order-takers, not advisors. So you’re going to watch out there, right?

Larry, Caller: Yeah. Okay. Well, thank you a lot.

REFINANCING TO PAY DOWN MORTGAGES

Kevin Zywna, Wealthway Financial Advisors: All right, Larry. Thanks for the call. We appreciate it. All right. Now we’re going to go over to Portsmouth and speak with Aaron. Good evening, Aaron. You’re on Dollars & Common Sense.

Aaron, Caller: Hey, how’s it going? Allison, Kevin, thanks for taking my call.

Kevin Zywna, Wealthway Financial Advisors: You’re welcome. Thanks for the call.

Aaron, Caller: All right. My question is I have two mortgages, obviously with real estate appreciating, significantly or lately. My question is thoughts on doing a cash out refinance on one to pay off one. Just want to make sure I’m paying attention to any fine print or tax implications or devil in the details moment here before I proceed with this.

Kevin Zywna, Wealthway Financial Advisors: Aaron, what are the properties? Are they both, rental properties?

Aaron, Caller: One is primary and the second is, just a vacation home.

Allison Dubreuil, Wealthway Financial Advisors: Do you rent it out at all?

Aaron, Caller: I have, it’s not listed as a rental, but if people want to rent it, I have, but it’s, I don’t view it as a rental. I’m not sure what the legal description of that would be.

Allison Dubreuil, Wealthway Financial Advisors: But so you don’t claim it as a rental property on your tax return at all?

Aaron, Caller: No. Okay. I do not no. Okay.

Allison Dubreuil, Wealthway Financial Advisors: What do you have in interest rates right now, Aaron?

Aaron, Caller: 3 – 3.5. Yeah. In the threes. One is three point five, and the other, I got a check raised like a three.

Allison Dubreuil, Wealthway Financial Advisors: Okay. And what, what’s the idea behind this strategy? What are you hoping to accomplish?

Kevin Zywna, Wealthway Financial Advisors:  Yeah. What are you trying to do? from a strategy standpoint, Aaron, what would be the advantage?

Aaron:, Caller: I guess just minimizing some exposure and risk to have one of these properties fully paid off. I think it would feel good. I don’t know if there’s a financial term for that. But also the monthly payment for it appears that it’d be less combined all into one mortgage.

Kevin Zywna, Wealthway Financial Advisors: Yeah, that might be the primary objective, is to simply refinance both mortgages, lock in a great low 30 year fixed rate mortgage. Pay it back over an extended period of time, you almost certainly would lower your payment between the two, without even doing some of the math. And that would free up some additional cashflow.

But beyond that, it doesn’t seem like there’s really a lot of financial advantage to doing it this way. You did mention some psychological vantages, they would just make you feel better. That’s okay. But other than lowering the payment and locking in, you know, you want to make sure that the, the rate you lock in, if you did do this cash out, refinance is the same as, or lower than what you’re paying right now on, on, you know, either one of those mortgages.

Allison Dubreuil, Wealthway Financial Advisors: Yeah. Really general rule of thumb is we like to see you be able to get a whole percentage point lower for it to make sense. And it depends on how far you in you are to these mortgages. I mean, how old are these mortgages?

Aaron, Caller: One is 12 years. One is five years.

Allison Dubreuil, Wealthway Financial Advisors: And are they both 30 year loans?

Aaron, Caller: They are.

Allison Dubreuil, Wealthway Financial Advisors: Yeah. Okay. So, I mean, you’re not too far into the five-year loan, obviously, but you’re almost halfway through the, the other loan. So you’d have to look at that trade-off.

Kevin Zywna, Wealthway Financial Advisors: Let me make this general comment, Aaron. A lot of people have a burning desire to pay off their real estate, their primary residence. And there’s really no compelling financial reason to do so when interest rates are as low as they are now. There are worse things to do than paying off your house. So I don’t want to overstate it, but there’s also a lot of better things you can do with that cash flow than paying down low cost debt, which is what the mortgage. Redirecting that cashflow into a company retirement plan or regular brokerage account that can earn you seven, eight, 9%, on average, long run, is actually a better use of those funds than committing it to trying to pay down 3% mortgage debt faster. Does that make sense?

Aaron, Caller: It does. That’s a great point. I appreciate that. Yes, last question I have and then I’ll hang up and listen to you, explain it. But are there any tax loopholes or would I be blindsided if I were to do this, like a capital gains penalty or some something I’m not considering if I were to do this.

Allison Dubreuil, Wealthway Financial Advisors: No penalties. The only tax implication you would want to look into is whether this would affect the deductibility of your mortgage. Because, typically you can only deduct mortgage interest for loans that were used to buy a property. So when you do a cash out refinance, if that’s not used in certain ways, it’s not deductible, this is a really detailed point that you’d want to look into before pulling the trigger.

Aaron, Caller: I see. Okay. All right, guys. Thanks for your advice.

Kevin Zywna, Wealthway Financial Advisors: All right, Aaron. Thanks for the call. We appreciate it.

REQUIRED MINIMUM DISTRIBUTION (RMDs) END OF YEAR CHARITABLE DONATIONS

Allison Dubreuil, Wealthway Financial Advisors: So we started the show off talking to a couple of callers and, and John had a good question about required minimum distributions. I just thought we would circle back to that because the deadline is fast approaching.

If you are age 72 or older this year, then you are subject to required minimum distributions. That means there’s a certain amount that has to come out of your 401ks IRAs, SEPs, simples, retirement plans. Pretty much any retirement plan except Roth IRAs are not subject to RMDs.

Know that it is, something that has to come out of the account by December 31st and most custodians will do the math for you. They’ll tell you the amount that has to come out. It’s a percentage of the account based on how old you are. And they comes out as taxable ordinary income unless you donate it directly to a charity like we were talking about with, John.

So any amount that goes directly to a charity can satisfy your required minimum distribution and is excluded from taxable income and the rest that comes out, though, if it goes to you, or if you reinvest it in a brokerage account it’s taxed as ordinary.

Kevin Zywna, Wealthway Financial Advisors: And the reason why that’s important to make the charitable contribution directly from the IRA is it’s more tax efficient. You always have the option to take money, take with your requirement distribution out of the IRA, and then donate what you want to charity. but then what comes out of the IRA is going to be taxed, ordinary income, and then you may, or may not, depending on your tax situation, get a charitable deduction for the contribution this way. If you do it directly from the IRA, it never shows up as income in the first place and it’s more tax efficient.

Allison Dubreuil, Wealthway Financial Advisors: So either way, whatever you decide to do, make sure your required minimum distribution is satisfied by December 31st. That means charities have to cash those checks.

 I know we don’t have a lot of time left, but I did want to talk a little bit about gifting because we get a lot of questions around gifting really year round. Especially during this time of year, people often want to know, well, if I give a gift to children or grandchildren or family members, you know, what are the tax implications? Or what are the rules around that?

Whether it’s cash or your bank account money from a retirement account or an investment account, that’s all considered cash. You are allowed to gift up to $15,000 per year, per person to any person without any tax implications and without any tracking or reporting.

Kevin Zywna, Wealthway Financial Advisors: So it is not taxable income to the recipient. there’s no tax implications to the giver. You don’t have to record it, on your tax form. $15,000. It’s all sort of under the radar.

Allison Dubreuil, Wealthway Financial Advisors: And you can, combine efforts if you’re married. So if you’re married, you can give someone $15,000 and your spouse can give that same person $15,000, not taxable, not trackable.

It’s a really simple, but know that if you’re in the position where you want to give more to a family member or a friend or anyone other than a charity, okay. You can give more and it doesn’t mean that there’s a tax implication. That’s oftentimes a misunderstanding. It’s just that we are limited in how much each of us are allowed to gift during our lifetime and, and at death when we pass away.

But the limit is pretty hefty right now. Now this changes, often. Congress likes to play with this limit. But right now, any one person can give a $11.7 million away during their life and at death without any tax implications. So I think that covers most of our listening audience. So if you’re under, if you’re giving under $11.7 million or your net worth is not anywhere near that, you don’t really have to worry about tax implications of gifting.

Allison Dubreuil, Wealthway Financial Advisors: If you want to give more than $15,000 a year, it just means that there’s an extra tax filing that you have to do to keep track of it so that they know how much you’ve given. against that lifetime limit of $11.7 million.

Kevin Zywna, Wealthway Financial Advisors: Yeah. Cause if for some reason you did give over that $11.7 or your estate was greater than $11 .7 then a federal tax does come into play at that point in time. And so you either give it away while you’re alive or you give it away at death up to $11.7, though, is sheltered from any income tax implications. There just can be some recording that needs to be done if it’s more than $15,000 per year per person.

Allison Dubreuil, Wealthway Financial Advisors: There’s another caveat to that. So if you are interested in making a gift, maybe to a child or grandchild for, tuition, or maybe loved one has medical expenses. If you pay tuition directly to the school or directly to the medical institution, that’s not even considered a gift. You can do unlimited tuition, payments, or medical payments on behalf of someone else. And it doesn’t count against any of those limits. So just if, if there’s a need to do that, you just make sure you make it direct and you have no tracking or tax implications.

Kevin Zywna, Wealthway Financial Advisors: This is per giving to people, but if you give to charities, none of this really applies. Right. So, you know, gifting to qualified 501C3 properly organized charities is unlimited. On an annual basis or at your death, you can give it all away and your estate avoids taxation, because if you do have an, estate greater than $11.7 million, then the estate tax can become fairly onerous pretty quickly. But with proper planning that can easily be avoided by most people, either during lifetime or at death.