Donating Required Traditional IRA Distributions

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

As many of you know, you are required to take taxable distributions from your Traditional IRA once you attain the age of 70½.  Those of you that have experienced this firsthand likely experienced a subsequent uptick in state and federal tax due.  However, as touched on in 2016, donating these required Traditional IRA distributions directly to a charity (otherwise known as a Qualified Charitable Distribution (or QCD) can help mitigate this uptick in taxation. 

Why revisit QCDs now?  

The Tax Cuts and Jobs Act (enacted late last year) made them more attractive.  The fact that taxpayers can take the greater of their itemized deductions or the standard deduction has not changed, but a near doubling of the standard deduction (along with the end of miscellaneous deductions and a new limit for state and local taxes of $10,000), means that more taxpayers will take the standard deduction in the future. 

How will more standard deduction taxpayers make QCDs more attractive?  

Charitable giving has been one of the more popular itemized deductions in the tax code.  Once Standard Deduction taxpayers realize there is no longer a material tax benefit from their itemized giving, they will look for alternatives.  

If you take the standard deduction and also happen to have a required Traditional IRA distribution, donating the required distribution (or any portion of it) directly to a charity (instead of writing a check yourself) effectively makes the contribution deductible again.

How do QCDs work again?  

Required Traditional IRA distributions, up to $100,000, can be given directly to a qualified charity without incurring any tax due.  It’s tax-free money to the charity and a non-taxable distribution for the taxpayer, yet still satisfies the taxpayer’s distribution requirement (or a portion of it). Although it’s not technically reported as a deduction, avoiding taxation on the required distribution is effectively the same thing.  

QCDs have been around since 2006 but they will be much more prevalent now.  For standard deduction taxpayers with required distributions from a Traditional IRA, it’s time to consider switching all charitable giving to direct gifts from a Traditional IRA.  

Dustin J. Smith, CFP®

The above explanation is summarized. It is not all inclusive. Please confirm all specifics with your tax professional. For a more detailed summary of the 2018 Tax Laws alluded to above take a look at this post from January.

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Perspective During "Turmoil"

Pathways Advisory Group, Inc.
      Evon Mendrin, CFP®

Well, that escalated quickly.

If you’ve been anywhere near the news this week, you’ve likely been made aware of the most recent “End of the World As We Know It.” Stocks had a rough day at the office, and globally we saw quite the decline. How bad was it? Well, if you do a quick Google search of “stocks” and “bloodbath”, you can find more articles than you’d like explaining how the sky is falling, such as:

•          “Traders are betting that the global market bloodbath…”
•          “Wall Street Bloodbath Paints Tech and Media Stocks Red”
•          “Australian stock market plummets after bloodbath on Wall Street…” 
•          And of course, to help you get through the chaos – “5 Ultra-Safe Stocks to Survive the Wall Street Bloodbath”

It’s times like these when writers dust off the thesaurus, as you can find a medley of doomsday words thrown about, like “plummeting,” “chaos,” “turmoil,” “turbulence.”

To add to it, the financial news is sure to inform us that the Dow Jones Industrial Average faced the third-worst points decline in history, having dropped about 832 points. It’s enough to convince you the end is here and there’s no going back. But what does that really mean? Are we really seeing such a historically devastating event?

When looked at through the proper historical perspective, we see that the day’s drop in the Dow Jones was hardly a devastating event. It’s easy to view dramatic events through a microscope, looking only through a narrow lens. But what if we change lenses, zooming out with for a wider perspective?

Let’s go one lens wider. 832 points may be the third-highest point drop, but as a percentage, it was only roughly 3.1%. That’s hardly historically devastating. For perspective, the 20^th largest historical percentage drop in the Dow Jones was 7.07% (7/20/1933). The largest ever? 23.52% (12/12/1914). A 3% dip is a drop (no pun intended) in the bucket compared to that.

Data from us.spindices.com (10/11/2018)

Interestingly, that huge drop was only 16.8 points.  Using a points drop isn’t a helpful reference when the value of the Dow Jones is so much higher than the past. In 1980, the Dow as a whole was only worth around 850 points! The index is currently valued at around 25,000. As Dustin wrote about before, “the Dow just ain’t what it used to be.” Long-term, despite the headlines, the stock market continues its march.

What about the performance of stocks for the year? Through this lens, the Dow Jones Industrial Average is actually positive for this year – just over 3%year-to-date. So is the S&P 500, a popular measure of large-cap US stocks, gaining just over 4%. US stocks as a whole are positive for the year, as the Russell 3000 index is up about 3%. Sure takes the sting out of one day’s news. 

With the widest lens of historical perspective, we also see a decline like this is actually typical. Par for the course. Over the last 38 years, the S&P 500 has had positive returns in 29 years (76%). However, we see an average decline within each year of 13.8%. If we go back to 1946, we see similar results. That kind of drop, historically, is typical within any given year, and doesn’t tell us much about how the year will end. 

It’s amazing what perspective can do when faced with one day’s dramatic event. Taking a step back gives us the opportunity to evaluate what’s really going on and not overreact. Where do stocks go from here? Impossible to say. Trying to predict where the stock market goes in the short-term is a fool’s errand. Should we rush to action? Despite the “chaos” you see, nope. Try to tune out the noise, keep a long-term perspective, and continue with the long-term investment plan you’ve had all along.

Note: All returns data are as of writing, 10/11/2018. The data may have changed as of the time you read this

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