Q: We are thinking about tax planning before the end of the year. For the past couple of years, our tax preparer mentioned making “Qualified Charitable Donations” from our IRA, but we feel too uninformed. Please explain.
A: Your tax preparer is giving you good advice. Making qualified charitable donations (QCDs, for short) directly out of your IRA will both lower your tax bill and help your favorite charities. It’s a win-win for everyone but Uncle Sam. Actually, I suppose that makes it a win-win-win!
To explain why donations from your IRA are smart, we have to go back to the Trump-era tax cuts. Starting in 2018, the standard deduction essentially doubled in size. Suddenly about 9 out of 10 taxpayers no longer itemize their tax deductions. Given this, the vast majority of people also no longer enjoy a tax break when making charitable donations.
The doubling of the standard deduction really left only one other avenue to enjoy a tax deduction for your charitable giving. For some, I should say. For those over the oddball age of 70.5, you are allowed to donate directly from your IRA and it won’t be counted as taxable income as it normally would be coming out of a (never been taxed) IRA.
Better yet, once you reach the age of 73, your IRA donations will count as part of your required minimum distribution (RMD.) Theoretically, you could give away all of your RMD to charity (up to a current annual limit of $100,000) and not have to pay a dime of taxes on any of it.
Q: I am hearing mixed signals about bonds. On one hand, bonds have been a drag in my portfolio over the last two years. On the other hand, now their current yield is looking really nice. Which side of the coin should I focus on?
A: Bonds keep coming back up, no pun intended. Normally, bonds should be one of the most boring things in your portfolio. Lately, bonds have been anything but boring.
As I wrote a couple months ago, bonds that were originally issued during the super low interest rate environment are now selling at depressed prices. For long-term bonds, I’d say they are selling at highly-depressed levels. Naturally, those old bonds are less desirable since they only pay paltry levels of interest until they mature. So, price is the great equalizer that puts those old bonds on a level playing field with newly issued bonds that come with much higher rates.
My advice is to fight against your tendency to look backward. With the 10-year US Treasury selling at yields near 5%, a level not seen in about 16 years or so, bonds appear quite attractive and should be a healthy segment of any balanced portfolio.
