Charitably minded investors can satisfy RMDs with QCDs

Qualified charitable distributions allow your required IRA distributions to benefit a worthy cause – while you benefit from a reduced tax liability.

Helping others when you’re gone is a noble and rewarding aspiration. But think how much more rewarding it could be, both personally and charitably, to help others while you’re still here.

Giving during your lifetime can take many forms, one of which is using qualified charitable distributions (QCDs). It’s an option that can also reduce your tax liability, as it involves donating pre-tax dollars before they become taxable income as a required minimum distribution (RMD).

Here’s how it works.

Transform RMDs into QCDs
Philanthropy is often reward enough, but charity and tax deductions seemingly go hand in hand. As the standard deduction has risen to $13,850 for individuals in 2023 (double for married filing jointly), you may want to consider giving strategies that don’t require itemizing on your tax return. A QCD is a great way to carry out your charitable intent that doesn’t require itemizing and also reduces your taxable income.

The required start age to begin taking distributions from your IRA has increased over the past few years from 70 1/2 to 73. However, the age that you can begin QCDs is still 70 1/2. These RMDs are generally treated as taxable income. Thankfully, the Protecting American from Tax Hikes (PATH) Act of 2015 permanently allowed an IRA owner to make qualified charitable distributions of up to $100,000 directly from their IRA to a charity without getting taxed on the distribution. Basically, you can satisfy your RMD amount without reporting additional income.

There is, however, another important benefit. When a QCD is used to satisfy an RMD, that amount is also excluded from tax formulas that could impact multiple categories such as Social Security taxation, Medicare Part B and D premiums, and the Medicare tax on investment income.

Rules to follow
You must be eligible. You must be age 70 1/2 or older at the time of the QCD (but remember, RMDs now begin at age 73). QCDs from Ongoing SEPs and SIMPLE IRAs are not permitted.

There is an annual limit. Your QCD cannot exceed $100,000 per tax year, even if your RMD is greater than $100,000. New legislation, the SECURE Act 2.0, indexes this $100,000 limit for inflation now in 2024.

Only qualified organizations count. The IRA trustee or custodian must make the distribution directly to a qualifying charity (private foundations and donor advised funds are not eligible). For instance, you cannot take the distribution yourself then write a check to the charity.

RMDs: A real-time legacy
By donating the RMD to a qualified charity, you can enjoy the satisfaction of knowing you are helping a worthy cause while simultaneously reducing your taxable income. This strategy also helps you live out your values in real time, effectively living your legacy in the here and now.

To learn more, seek guidance from your financial and tax advisors. They’re a good source of information when it comes to living and giving generously.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

From the Desk of Dale Crossley and Evan Shear

We hope that you and your loved ones are doing well. It doesn’t seem that long ago that we were discussing how the markets may possibly be impacted during a presidential election year. It was a concern among investors in 2020 and once again, we’re having conversations with our clients. So, we thought you might find some additional information helpful.

As you know, many things can affect the stock market and, as a result, your financial portfolio. With a long-term plan in place, you may assume that you are ideally positioned to weather any challenges that may come your way. However, in the midst of an election year, many people grow uncertain. They start reevaluating their portfolios and considering how they may perform in the coming year. Will the 2024 presidential election affect your portfolio?

"Presidential Election Cycle Theory"

Presidential election cycle theory notes trends in the stock market based on the presidential election cycle. The cycle lays out the strongest years in the stock market based on the presidential election cycle. Year three of the president's term is often the strongest year on the market. Then, year four is the second strongest.
On the other hand, the first year of a president's term is often the weakest year of his term regarding the stock market. This can have significant implications for investors. Utilizing the presidential election cycle theory, investors might change their entire strategy. They might choose to purchase investments late in the year of the second year of a presidential term and then sell them late in the fourth year.

What History Tells Us

Historically, many things have the potential to impact the stock market. These factors include the current president and his economic and financial policies. There are some historical trends in the stock market based on specific stages of the presidential term cycle. But that theory does not always hold up. Also, worries about the presidential election cycle and its impact on the stock market are often overblown.

Take, for example, the last two presidents and how the stock market has performed during their terms. During Obama's presidency, the first two terms were more profitable than the third year. Trump saw a significant increase in profitability during his third year. But the fourth year, and the pandemic and other serious concerns, caused a highly volatile market that saw a decrease in the value of many investments.

Following the presidential election cycle theory can provide potential insight into investments, including a possible investment strategy and plan. However, based on a historical view, it does not necessarily follow that the upcoming election will substantially impact the stock market—regardless of who might win that election. Historic insights also indicate that the market can change dramatically based on conditions completely unrelated to election cycles. A long-term financial plan is the best way to weather the inevitable ups and downs in the market.

Should You Stay the Course?

As you try to decide what to do about your investments, many investors are considering whether they should sell assets late in 2024, before the new president takes office. However, a long-term investment strategy—one that allows for short-term shifts in the market—can be more effective than selling off investments as a reaction to the changing economic conditions anticipated after a presidential election.

In order to create an effective investment strategy, our advisors at CrossleyShear Wealth Management focus on the long-term value of your investments. You may be planning for a child's college fund, a significant purchase, or your retirement years. You might even want a long-term plan to provide generational wealth.

In all of those cases, the value of your investments will likely withstand the changes in the market. A long-term investment strategy that seeks to maximize value and return over time can be much more effective than pulling out of those investments in anticipation of a potentially difficult year.

By judging the market over time rather than on the basis of short-term economic changes, investors can develop a deeper understanding of options. You can also learn how you can help protect your investments. If you want have questions about your financial plan, please don’t hesitate to reach out. That’s why we’re here.

Any opinions are those of CrossleyShear Wealth Management and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. All opinions are as of this date and are subject to change without notice. Past performance is not a guarantee of future results.

The record breaking rise of ChatGPT

The computer program that talks back is taking over.

Netflix built a subscriber base of 1 million users in a mere 3.5 years following its launch, says statistics portal Statista. Twitter scored its first million tweeters in a snappy two years, Facebook its first million friends in a faster 10 months.

ChatGPT, the chatbot program that debuted near the close of 2021, landed its first million users within five days after its launch. In the two months following its launch, its subscriber base ballooned to more than 100 million users.

The bot’s runaway success is earned, say tech industry watchers. “The hype is warranted,” says Kemal Kvakic, Raymond James IT head of innovation.

What’s a chatbot?

A traditional chatbot is a computer program you can have a conversation with, through text messages or voice interactions. And for more than a decade they’ve filled commercial roles in customer service, mimicking human conversation, most often to answer a question you’ve asked.

Traditional chatbots depend upon “intent recognition.” The bot’s developers try to predict what you’ll ask and then program the bot with appropriate responses. If the bot can’t answer your question from what it’s been taught, it issues the all-purpose reply, “I’m sorry, but I don’t understand.” Congratulations – you’ve been chatbotted.

So, how does ChatGPT differ?

ChatGPT ups the ante.

Unlike traditional chatbots, ChatGPT’s doesn’t make simple matches between questions and preprogrammed answers. It digests vast quantities of data from across the internet, summarizes it, organizes it and taps into it to provide tailored answers just as a person would. And unlike other technologies, you can tell ChatGPT, “I didn’t understand that. Can you explain it another way?” And it will generate an updated response – one reflecting the entirety of your interaction with it so far.

It can even assume different identities. You can ask ChatGPT to explain something to you as if you’re an architect, a teacher or an 8-year-old, and it’ll respond accordingly. It can write computer code, poetry, lyrics and plays. It can generate images, audio and video. It’s so powerful, “The engineers who built ChatGPT don’t always understand why it provides the answers it does,” Kvakic says. And businesses have taken note.

Microsoft’s Bing search portal has already begun using ChatGPT to help enrich its platform. Microsoft’s total investment in OpenAI, the company behind ChatGPT, has reportedly reached $13 billion, and the company is leveraging OpenAI technology in Copilot, an AI-based assistant feature for Microsoft 365 apps.

Competition will surely grow in this space, says Kvakic, with more products integrating personal assistant-like capabilities quickly. Not to be one-upped by the likes of Bing, Google already has released its own advanced-AI chatbot, dubbed Bard.

In countless professions, the variety of generative AI driving ChatGPT could massively streamline associate training, customer service, code debugging and more. Imagine how this technology could create efficiencies – from cancer researchers who need to synthesize mountains of scientific data to legal teams who need to rationalize decades of case history.

With great power comes worry

For all its potential, ChatGPT and its emerging competitors pose risks. Concerns about information reliability and bias rest at the forefront of watchdogs’ worries, along with questions about the potential for deceptive deepfakes, copyright implications, privacy breaches and other uses by bad actors.

Not surprisingly, policy guardrails are pending. Several countries have enacted outright bans on certain types of AI systems, while U.S. policymakers are seeking public comment toward establishing rules to govern advanced AI systems in the states.

“We know AI regulation is coming,” says Kvakic. “The question is, how much?”

Facts and stats

• AI and chatbot technology have been a work in progress for nearly 60 years.
• The “GPT” in ChatGPT stands for “generative pre-trained transformer,” an AI technology developed by OpenAI.
• Early leaders of OpenAI included Sam Altman, Elon Musk, Reid Hoffman and Jessica Livingston.
• Microsoft holds a reported 49% stake in OpenAI.

Limitations and Unknowns

• Cybersecurity. Fraudsters may be able to use the tool to write convincing phishing messages.
• Objectivity. OpenAI's CEO has admitted that ChatGPT has shortcomings around bias.
• Regulation. AI regulation has already started to take shape, particularly in Europe.
• Competition. It’s likely that competing tools will continue to emerge in the months ahead.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

The psychological side of spending your retirement savings

Many investors worry about outliving their savings. As a result, they sometimes underestimate what they can comfortably spend in retirement.

For years, you’ve been saving and investing for retirement.

But what happens when you finally retire and it’s time to switch gears from saving to spending?

It turns out, many people are so focused on accu­mulating assets that they never really think about actually withdrawing the money. In fact, recent studies show that many retirees aren’t drawing down their retirement portfolios, opting instead to live on Social Security and the minimum required distributions (aka RMDs) so their portfolios can continue to grow. This may lead to unnecessary sacrifices in a retiree’s standard of living. After almost two decades in retirement, most cur­rent retirees still have 80% of their pre-retirement savings, according to research from BlackRock.

The problem with uncertainty

So why aren’t these retirees spending their nest eggs? Some may be spending as little as possible to leave behind a larger sum for their loved ones or philanthropic pursuits. But in many cases, it’s because they aren’t sure how to determine a sustainable withdrawal rate that accounts for their total lifespan. They worry about the “what ifs” retirement may throw their way and want to be prepared. You may be able to relate.

This latter group understands that over the course of a long-term retire­ment, inflation can erode sav­ings. Portfolio returns can vary, and healthcare costs can quickly escalate. And they may be con­cerned about outliving their savings – only 25% of baby boomers believe their savings will last throughout retirement, according to the Insured Retirement Institute. By spending less and allowing their savings to potentially grow in the early years of retire­ment, they hope to offset some of the uncertainty.

Collaborating with your financial advisor can help increase your confidence about having enough money to live comfortably in retirement. Just like in your working years, you can estab­lish a just-in-case cash cushion or line of credit that helps put you at ease. And having a sound distribution strategy in place – one that takes into account your income sources, lifestyle, asset locations and tax situation – can help you enjoy the retirement lifestyle you envisioned.

Withdrawing your money

When it comes to withdrawing your retirement savings, here are a few things to consider:

Organize your expenses: Three typical categories include essential expenses (think food, housing and insurance), lifestyle expenses (vacations, hobbies) and unexpected expenses (healthcare costs, auto repairs). Consider paying for your essential expenses with guaranteed income sources such as Social Security or annuities. Use growth or income investments to pay for lifestyle expenses, and maintain a cash reserve for any unexpected costs that might occur.

Be flexible. For instance, a downturn in the market is a good time to tighten the reins on your spending. But if you experience some unexpected invest­ment gains, the timing might be right for that dream vacation.

There’s little doubt your income needs will fluctuate during retirement. The early years may be filled with travel and other big-ticket items that require more sub­stantial withdrawals. As time goes on, you’ll likely travel less, but your healthcare expenses may increase. Studies show that spending tends to decline in the later years of retirement, most likely the result of less travel and similar pursuits. People ages 55 to 64 spend on average $60,076 per year, while people ages 65 and over spend $45,221, according to the Bureau of Labor Statistics.

Building in flexibility allows you to go with the flow. Just be sure to regularly touch base with your advisor so your budget can stay on track.

Review your plan. Work with your advisor to develop and review your retirement income and distribution strategies. You can run hypo­thetical simulations based on different withdrawal rates, how many years you will live in retirement or any other contingencies, which will allow you to develop a better idea of how much you can comfortably and confidently spend in retirement to help achieve your goals.

Everyone’s retire­ment situation is different. You may have encountered some unexpected circumstances, such as a layoff or forced retirement that occurred ear­lier than you planned, and you weren’t able to save as much as you hoped. On the other hand, leaving a legacy may be your primary goal. Whatever the case may be, establishing a withdrawal strategy that’s right for you – while also keeping your emotions in check – is often a good plan of action.

Sources: kitces.com; forbes.com; cnbc.com; ournextlife.com; smartaboutmoney.org; thestreet.com; kiplinger.com; myirionline.org

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

The ins and outs of nonqualified deferred compensation

A versatile tool that can help enhance the benefits package you offer your employees.

What is an NQDC plan?

While nonqualified deferred compensation (NQDC) plans can vary slightly from one another, they generally act as an agreement between employers and employees to defer a portion of the employees’ annual income to a future date – that could be one year later or once the employee retires. Deferred compensation isn't counted as earned income, so it's not subject to taxes.

Who does an NQDC plan serve best?

NQDC plans are utilized by companies with a need to recruit, retain and reward key employees. They were created as a counteraction to the cap that high-earning employees face when it comes to government-sponsored retirement plans.

Highly compensated employees are often limited in retirement savings due to federal legislative limits. Participating in an NQDC plan can allow high earners to accrue additional pre-tax savings and tax-deferred growth. Employers can harness the tax deferring benefits of NQDC plans as an incentive to entice and retain top talent.

Nonqualified plans also offer more flexibility than qualified retirement plans in that savings can be accessed before an employee reaches retirement. While NQDCs are a popular component of a retirement planning strategy, deferred compensation can also be used in a variety of other situations: toward education expenses, to cover a home remodel, or even to supplement income during an extended period off from work. That said, nonqualified plans don’t simply function like a savings account. They require the employee to pick the distribution date they will receive their funds in advance. The main benefit here for employers is that it affords the freedom to offer plans to a more specific subset of employees, such as higher earners.

SECURE 2.0 Act changes

The SECURE 2.0 Act is a recent regulatory update designed to encourage more employers to offer retirement plan benefits through practices such as automatically enrolling eligible employees and allowing catch-up contributions, among other measures.

Most highly compensated employees take advantage of catch-up contributions in their qualified retirement plans, but things are about to change.

Starting in 2024, if the employee has income of at least $145,000 for the year, the catch-up contributions under 401(k), 403(b) or governmental 457(b) plans must be treated as a Roth contribution, which is a change to the current pre-tax contribution. That means these funds will be saved as after-tax dollars, no longer reducing taxable income but allowing for tax-free withdrawals in the future. Note that the $145,000 income threshold will also be indexed for inflation in future years.

An NQDC plan gives highly compensated employees the option to defer an unlimited amount of their income on both a pre-tax and tax deferred basis – providing greater flexibility with distributions.

For people with access to a nonqualified deferred compensation plan there’s a bigger question: Is it more beneficial to contribute the catch-up amount to the NQDC plan for the pre-tax deferral or a Roth contribution to the qualified retirement plan? Everyone’s circumstances are different, but a financial advisor can offer guidance.

What can business leaders do to prepare?

Recent legislative changes mean that, for companies and business leaders, now is a great time to review your benefit packages. If an NQDC plan is the right fit for your needs, it’s worth considering implementing one to help highly compensated employees effectively prepare for retirement.

Before you begin to leverage the flexibility NQDC plans offer, it’s important to weigh your options. NQDC plans can be a useful tax deferral tool, but there’s a strong likelihood that employees who qualify have maxed out their employer-sponsored retirement plan contributions. Therefore, offering different investment options from those typically found in a standard retirement plan can diversify employee retirement holdings and differentiate your NQDC plan as an enticing benefit.

Talk to your financial advisor to determine whether the addition of NQDC plan types could be beneficial for your business.

Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.