Advisors have a unique window of opportunity to significantly reduce clients’ retirement and estate taxes, said Ed Slott, founder of Slott & Co., and barring a sudden change from policy makers, that window will close permanently in several weeks.
In a strategy Slott has named the “mega-qualified charitable distribution,” advisors can take advantage of guidelines for taxing IRAs and short-term changes to rules for deducting charitable giving that were included in Covid-19 pandemic stimulus legislation to lower client taxes over the long term.
“I had to make up that name because I had to call it something, and it’s a result of a few different tax laws,” Slott said on a Financial Advisor webcast on Wednesday. “Clients might like to give some of their assets in large IRAs because that money is the best money to give, but they don’t qualify.”
As a reminder, a qualified charitable distribution (QCD) creates a tax-free withdrawal from a traditional IRA that is routed directly to a charitable organization, thus removing some IRA assets that would otherwise be taxed as ordinary income if withdrawn in a normal or required minimum distribution.
These normal QCDs are limited to $100,000 per year, but over time can be used to lower the income clients would have to take as part of their required minimum distributions starting at age 72. Under current rules, QCDs can be taken at age 70.5.
A mega-QCD, on the other hand, is open to clients under age 72, and thanks to Covid-19 stimulus rules that will terminate at the end of this year, they can significantly exceed $100,000 in some cases.
“You can still take an itemized deduction for cash donations up to 100% of their adjusted gross income (AGI),” said Slott. “So let’s say you have a client with millions in an IRA who wants to give to charity—they can take $1 million out of the IRA or 401(k) that’s taxable income that would increase their AGI, but it simultaneously increases the amount they can deduct—if they give that to charity, it offsets the income. So that takes $1 million they were going to give to charity anyway and gets it out of their IRA at almost zero tax cost.”
Anyone with a retirement account can access the mega-QCD strategy, Slott said.
The strategy would be especially effective if some of the IRA changes under consideration before Congress become law. Currently, in its Build Back Better legislation, Congress is proposing restrictions on so-called “mega IRAs” with balances over $10 million. The legislation would mandate required distributions of 50% of the amount exceeding $10 million, and require distributions of 100% of the IRA balance exceeding $20 million—potentially creating major tax events for some clients in the coming years.
Slott warned that the mega-QCD strategy, which will be unavailable after December 31, isn’t for everyone.