Charitable IRA rollover eases tax pain of RMDs

One downside of contributing to a traditional IRA is that, once you reach age 70½, you must begin taking required minimum distributions (RMDs) — and pay taxes on those distributions — whether you need the money or not. But if you’re charitably inclined, you can use a qualified charitable distribution (QCD) to avoid taxes on up to $100,000 in RMDs per year. 

Also known as a “charitable IRA rollover,” a QCD is a direct transfer from your IRA to an eligible charity. It counts as a distribution for RMD purposes, but it’s excluded from your income. And it has certain tax advantages over traditional charitable contributions. 

Advantage of QCDs over ordinary donations

When you receive an RMD, it’s taxable to the extent it’s attributable to deductible contributions and earnings on those contributions. (Amounts attributable to nondeductible contributions are tax-free.) 

One strategy for reducing these taxes is to donate the taxable portion (or an equivalent amount) to charity. If the donation is fully deductible, it will offset the taxable income that’s generated by the distribution. Depending on your tax situation, however, this strategy may be less effective than a QCD:

  • A charitable deduction will benefit you only if you itemize. And that’s less likely now that the Tax Cuts and Jobs Act (TCJA) has nearly doubled the standard deduction.
  • Even if you itemize, adjusted gross income (AGI) limits may reduce your charitable deductions. For instance, deductions for cash gifts to public charities are currently limited to 60% of AGI. 
  • By boosting your income, IRA distributions may trigger AGI-based rules that punch up certain taxes or deflate the benefits of certain tax breaks.

A QCD avoids these issues because it bypasses your income altogether. It allows you to take the equivalent of a charitable deduction — regardless of your income level or whether you itemize — and it won’t increase your AGI. Another advantage of QCDs is that they’re deemed to come from the taxable portion of your IRA first, increasing the portion of the remaining balance that’s nontaxable.

QCD requirements

If you’re considering a QCD, you must meet several requirements:

  • You must be at least 70½ at the time of the distribution. (Reaching that age during the tax year isn’t enough.)
  • The IRA must distribute the funds directly to an eligible charity — generally, a public charity, private operating foundation or “conduit” private foundation.
  • The donation must be “otherwise deductible.” In other words, it would have been fully deductible (disregarding AGI limits) had you funded it with non-IRA assets. If you receive something of value in exchange for your gift (tickets to an event, for example), it’s not a QCD.
  • The distribution must be “otherwise taxable.” It’s not a QCD to the extent it would be tax-free if distributed to you directly.

In addition, QCDs are subject to the same substantiation requirements as other charitable donations.

A tax-efficient strategy

If you don’t need your IRA funds for living expenses and you plan to donate to charity anyway, a QCD offers a tax-efficient strategy for satisfying your RMD requirements. The TCJA may enhance the advantages of QCDs because it increased standard deduction amounts, but keep in mind that these amounts are scheduled to return to their previous levels in 2026. Contact us for help determining the best RMD and charitable giving strategies for you.

Recent Changes Spark New Social Security Strategies

by: Vicki S. Bernardi, CPA

The Bipartisan Budget Act of 2015, signed into law in November, contains provisions that will cost some retirees thousands of dollars in Social Security benefit payments. The act eliminates the ability to “File and Suspend” as well as the “Restricted Application” strategy. In addition, individuals older than 66 who filed for benefits and then suspended them in order to get a higher benefit later, will no longer have the option to receive a retroactive lump sum payment if they change their mind and lift the suspension at a later date.

People who have been planning on using either of these claiming strategies may need to consider addressing these changes in their retirement planning.

Here is a look at the two eliminated strategies:

File and Suspend

This strategy allowed a married individual to file for benefits at his or her full retirement age (generally 66 for the current group of baby-boomers) and immediately suspend them. The individual could then begin collecting at a later time when the benefits reached their highest value (maximum value at age 70). This allowed the spouse/dependents to collect a spousal/dependent benefit based on the earner’s wage record.  A working spouse would file and suspend, enabling the stay-at-home spouse to collect spousal benefits while the earner’s check continued to grow.

Those with suspended benefits could elect at any time to un-suspend benefits and request a lump sum payment of the total amount suspended back to their original filing date.  Individuals at full retirement age could defer their monthly benefit amount and let it grow, knowing they could receive a lump sum payment if needed.  This potential to build a cash reserve has been a very valuable strategy for those who had a change in health or financial status.

Under new rules: If your spouse suspends his or her benefits, you cannot collect spousal benefits based on his or her work record. In addition, Social Security beneficiaries can no longer retroactively un-suspend benefits and receive a lump sum payment. If the individual needs to start receiving benefits, he can un-suspend his filing, and he will begin receiving monthly payments at a higher rate based on his age at that date.

Note: A spouse or children currently receiving benefits due to the wage earner filing and suspending will continue to receive these benefits.

Transitional rules: The spouse who wants to file and suspend must turn 66 before May 2016. That spouse also needs to file and suspend before April 30, 2016. The individual collecting spousal benefits must be at least 62 to do so. The beneficiary must be age 66 to receive a full spousal benefit (otherwise, it will be reduced for taking it early). There is no transitional rule for requesting lump sum payments.

Restricted Application

This strategy has been available to married individuals who have both reached their full retirement age.  Under this strategy, as long as one spouse has already claimed a retirement benefit (even if suspended), the other spouse could file a “restricted application” to collect only a spousal benefit, while their own benefits continued to increase.

Under new rules: Filing an application for spousal benefits will now also trigger your own Social Security retirement benefit.  You will receive an amount approximately equal to whichever is higher:  your personal retirement benefit or your spousal benefit.

Note: This change is not applicable to surviving spouse benefits as deemed filing does not apply to widows or widowers.

Transitional rules: Individuals who want to file a restricted application for only spousal benefits must be 62 or older by Jan. 1, 2016 — or those born Jan. 1, 1954, or earlier. Those retirees are grandfathered in; they can collect those benefits once they reach their full retirement age, even if that is several years from now. (Those who turn 62 after Jan. 1 next year are no longer eligible.)


The Bi-Partisan Budget Act phases out two very beneficial Social Security benefit filing strategies called “File and Suspend” and “Restricted Application.”  However, these strategies are transitionally still available for certain individuals.  For individuals at least age 62 by the end of 2015 the Restricted Application is still available upon reaching Full Retirement Age.  

Additionally, those reaching Full Retirement Age by May 1, 2016 can still File and Suspend by April 30, 2016.  For all others, these valuable strategies will no longer be available.  However, other Social Security benefit filing strategies still remain.  There is still a need to review the coordination of benefits between a husband and wife to determine the best time to take worker benefits and spousal benefits.

Still have questions on your situation?  Let us know how we can help!

Are You Subject to a Retirement Plan Audit?

by: Brian Davis, CPA

Recently, the U.S. Department of Labor has increased its efforts to monitor employee plans, resulting in an audit process that is increasingly complex and lengthy. Organizations are under intense scrutiny as more regulations and reporting requirements must be stringently followed for employee benefit plan audits.

Are you sure you need one?

First, let’s review the requirement for having an Employee Retirement Income Security Act (ERISA)-mandated audit. All retirement plans that have 100 or more eligible employees (participants) at the beginning of the year are considered to be “large” retirement plans. Large plans are required to be audited each year and have audited financial statements sent with the Form 5500 filed with the U.S. Department of Labor.

Are there any exceptions?

There is an exception called the 80-120 rule. This ruling allows plans with between 80 and 120 participants, as of the 1st day of the plan year, to file the Form 5500 in the same category (Large or small plan) as indicated on the prior year Form 5500 filing. Therefore, if you filed as a small plan in the prior year, you may continue to do so until you have over 120 participants at the beginning of the year.

What is exactly done during an audit of a retirement plan?

Auditing a retirement plan involves testing contributions, distributions, investment earnings, ending investment values and various compliance requirements such as the timeliness of transmitting employee deferrals to the plan’s trust.

What should I look for in choosing the right CPA firm?

When choosing a firm, obtain multiple quotes and ask what value they bring to the audit process in addition to completing a basic audit.  When selecting one, you should avoid CPA firms who provide an extremely low quote (Remember, you get what you pay for!) and should look for a firm that belongs to the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC), which Hobe & Lucas is a participant.    Finally, if you have a prior audit done by another firm and looking to switch firms, the predecessor firm is required by auditing standards to respond to inquiries by the successor firm.

This can be a daunting process, but you need to make sure you feel comfortable with the expertise of the firm.  At Hobe & Lucas, our team will review your plan documents and operations in addition to just performing “the audit” and try to point out areas where we see room for improvement.  Our goal is to provide value beyond expectations and be your full service provider for all your accounting and auditing needs.   

Still have questions or want to talk about your situation?  Contact us at 216.524.8900 or visit our Contact Us page.

Maximize Your Social Security Benefits

Did you know that more than 90% of Social Security recipients do not maximize their benefits because they do not understand their options?

Do you have a plan in place to maximize Social Security benefits over your lifetime and the lifetime of your spouse?

Social Security remains one of the most complicated and complex topics in the financial world.  People are constantly asking various questions, including how should they sign up for benefits, at what point should they start taking them, how much is their benefits and in what ways could they increase it.  For many, social security could be  their only form of income  upon retirement, so it’s important to get the facts.

Know the Four Social Security Benefit TypesWe provide a full slate of accounting and business consulting services to clients.

  1. Retirement – workers who have worked for a sufficient number of years are eligible at age 62 (partial benefits), 66-67 (full benefits), and 66-70 (full benefits plus delayed retirement credits-8% per year).
  2. Survivor -a surviving spouse or minor child of a qualified worker may be eligible for benefits
  3. Disability- an eligible worker  younger than the retirement age and considered disabled under SSA guidelines.
  4. Family – a current or divorced spouse and minor children of an eligible worker may be entitled to receive benefits.

How to Qualify and Apply

In order to qualify for Social Security benefits, a worker must have 40 credits (generally 10 years of work) earned through Social Security covered employment or as a self-employed individual.  This is an important planning consideration because in addition to qualifying for retirement benefits, the worker will also be eligible for disability benefits as well as survivors benefits if the worker becomes disabled or dies at a young age.

You will not receive any benefits unless you apply for them. The easiest way to apply is online at the Social Security Administration website ( This website will answer many of your questions regarding Social Security programs and procedures. You can view your Social Security statement, estimate your benefits, and apply online to receive benefits.  There are calculators, forms, and publications to assist you and answer many of your questions.

You can also get automated assistance or speak to a representative by phone or visit your local Social Security offices (call first to make an appointment). Most representatives will not take you through all of the various options, and therefore it may be prudent to obtain the services of a professional advisor.

Ways to Increase Your Benefits

There are several ways to boost your annual benefits.

  1. Delay receipt of benefits past full retirement age.  Your retirement benefits increase 8% per year starting at age 62 to age 70.
  2. File to receive spousal benefits, even if divorced.
  3. Suspend benefits immediately after filing to earn more credit.
  4. If eligible for two benefits (worker and spouse), take one early and wait on the other.  For instance, this allows the worker to file only for spousal benefits (at full retirement age) and wait until a later date (max age 70) to draw his own benefits and delayed retirement credits.
  5. Contact a professional

There are innumerable options available to individuals and their families based on factors including age, earnings, life expectancy, and taxability of benefits, to name a few. Make sure you assess all of your options and develop your optimum plan to maximize benefits prior to filing.

As always, we are here to answer your Social Security questions.  Feel free to contact us at 216.524.8900 or email your Hobe & Lucas representative.