At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com.

Hey Hill, I want to make a significant gift to charity. Is there anything I should think about?

So you’ve decided to make a significant gift to charity. Your generosity should be rewarded with smart planning! When we think of donating to charity, we usually think about writing a check from our bank accounts. But that is not always the most efficient strategy.

Here are a few different ways to give to charity to make sure you’re taking advantage of all the tax benefits available to you:

1.   Donate shares of existing stocks, ETFs, or mutual funds.

If you purchased a stock, ETF, or mutual fund that has significantly increased in value, and if you ever sold the position, you’d have a potentially large capital gains tax to pay. Alternatively, a great way to eliminate the tax liability is to donate the position to an official 501(c)(3) registered charity. The full current market value of the position on the day you donate the position is allowable as a charitable deduction if you itemize your deductions on your tax return.

Example: Historically, John and Jane give $10,000 to their local food bank annually. John bought shares of an S&P 500 ETF in 2002 for $1,000. The ETF is now worth $10,000. If John and Jane sell the ETF to make their current year gift, they would pay capital gains tax on the $9,000 gain. Instead, it would be more tax-efficient and require less out-of-pocket dollars to donate the ETF directly to the food bank. By doing so, they have accomplished their charitable goal of donating a full $10,000 and eliminated $9,000 in taxable capital gains. They would report a $10,000 charitable donation as an itemized deduction on their next tax return on Schedule A. Assuming John and Jane still wanted to own the S&P 500 ETF, once the donation is complete, they could use the cash they would have otherwise donated to repurchase new shares of the S&P 500 ETF.

2.   Donate a portion of your IRA (if you are old enough)

IRAs are great tax-deferral tools, but if you’ve ever taken any money out of your IRA, then you’ve felt the pain of reporting that distribution as ordinary income on your tax return. Beginning at age 70.5, the IRS allows qualifying individuals to send funds directly from their Traditional IRA to any registered 501(c)(3) charity of their choice without having to report the distribution as income on their tax return. 

Once an investor begins taking their required minimum distributions (RMDs) (which begin at age 73 or 75 for most), this strategy becomes even more effective and is referred to as a qualified charitable distribution, or QCD. The maximum QCD a taxpayer can donate from their IRA in 2024 is $105,000 (or $210,000 per couple).

Example: John just turned 73 this year and must take a minimum distribution of $50,000 from his IRA account. John also gives $15,000 to his alma mater each year to support their basketball program. Without any planning, John will be required to report $50,000 of additional income on his next tax return…his RMD. Instead, John donates $15,000 of his RMD directly to his alma mater. John will now only be required to report $35,000 ($50,000 – $15,000) of income on his tax return. Although John will not be allowed to report the donation as an itemized deduction, the donation will reduce his ordinary income dollar for dollar.

Q. What if I’m between 70.5 and 73 (and have not started taking my RMDs yet) – does a QCD still make sense for me?

It might! Take the following example:

Let’s revisit John and Jane from our first example. They give $10,000 to their food bank each year. John and Jane also have a fully paid-off home and, therefore, have no deductible mortgage interest. They also live in a state with low property taxes and only pay $5,000 in property taxes each year. In 2024, the standard deduction is $29,200 for a married couple. If John and Jane used cash or ETFs to satisfy their charitable goals, they wouldn’t receive any tax benefit because their total itemized deductions would only add up to $15,000, so they would receive the standard deduction of $29,200, regardless of their charitable donation. In this specific case, we might recommend making the donation from John or Jane’s IRA account. Why? Doing this would reduce the overall balance of their IRA, making the future required minimum distributions slightly lower. The benefit is admittedly very minor, but it is better than receiving no tax benefit at all!

3.   Open and fund a Donor Advised Fund at Hill

A donor-advised fund (or DAF) is a designated charitable investment account that is also considered a qualified 501(c)(3) charity. The account can receive donations of cash, stock, ETFs, or mutual funds. The donations can be pooled together and invested in the account until you recommend sending funds to any other qualified charity.

Example: John and Jane open a donor-advised fund and name it the “John and Jane Smith Charitable Fund”. They fund the DAF with $100,000 of highly appreciated Apple stock. They receive a $100,000 charitable deduction on the current year’s tax return. The Apple stock is sold within the DAF account and no taxes are realized (as the DAF is considered a qualified charity). The proceeds are reinvested in a diversified, balanced 60% stock / 40% bond portfolio.

John and Jane are unsure exactly which charities they want the funds to go to, so the account remains untouched for a year. A year later, John and Jane decide to send $5,000 from their DAF to the Salvation Army. While they will not receive a tax deduction for this $5,000 donation since they already received the tax deduction benefit for the original $100,000 donation. Further, John and Jane can name their two children as successor advisors to the DAF. In the event of their passing, John and Jane’s children would then decide which charities to disburse funds to.

A great way to utilize a donor-advised fund is to “bunch” deductions together in one year. If you give $10,000 to charity each year, there’s a good chance you aren’t surpassing your standard deduction. An alternative would be to bunch five years of donations together ($50,000) and make one large contribution to your DAF. This way, you’ll get a meaningful charitable deduction in the first year and still disburse $10,000 to your favorite charity for the next five years.

As you can see, when you’re trying to do a good deed, there are many options and considerations when making a charitable donation. If you’re considering a donation of any size, contact your Hill advisor to discuss the optimal strategy for your unique situation.

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training.  This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Consult with a qualified financial adviser before implementing any investment or financial planning strategy.

At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com

Hey Hill, what should I do about 401k accounts with previous employers?

Congratulations! You just started a new job that provides fulfillment, purpose, and great rewards. In your initial weeks, your new employer offers you a new retirement plan with wonderful investment options and a generous company match. 

What can you do to maximize the value of your current retirement plan as a part of your overall portfolio? What about the employer retirement plan you left behind with your previous job? 

For your current plan:

• We can incorporate your retirement plan assets into your overall plan and portfolio. This helps us stay in line with your goals and can help with after-tax returns. You can find more details here.

For the plan you left behind with your previous job: 

You have four basic options:

1. Leave the money in your old employer’s plan. (Usually not a great idea.)
2. Transfer the funds into your new employer’s plan.
3. Transfer the funds into your existing IRA (traditional and/or Roth).
4. Cash-out the plan and pay the taxes and penalties, if applicable.

Here are some key factors that may influence your decision: 

• Employer plans have a set menu of investment options and associated fees. While you may be satisfied with those options, a rollover IRA will not limit investment options and generally allows you to invest at a lower cost. 
• Many who hold on to old employer plans tend to lose track of them; therefore, they are rarely rebalanced as the market changes nor managed as part of their household portfolio.
• Many plans have pre-tax and Roth components, which may or may not align with a new employer’s plan offerings, but they can be easily rolled over to your traditional and Roth IRAs.
• Cashing out of the plan may involve unnecessary penalties and taxes.
• A unique feature of a 401k is that you can borrow money against it but not from an IRA.
• If you utilize a Backdoor Roth strategy, you may prefer to keep your retirement funds in a 401k to avoid the complications of a non-zero balance IRA account.

In the end, the combination of the above factors leads many to roll over their old plan to their individual IRA. This IRA becomes a hub as they move in and out of employers’ plans throughout their careers. On balance, the ability to choose your low-cost investment options in harmony with your other assets makes the option to roll over into an IRA a sound decision. 

Anytime you change jobs, we encourage you to discuss your situation with your Hill advisor. One size doesn’t fit all, and your advisor can help you work through your situation. Book a call with us if you have questions!

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training. This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Investments involve risk, and past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in managing a client’s account. Consult with a qualified financial adviser before implementing any investment or financial planning strategy.

Want to know what else we’re reading? Check out this piece on quiet compounding by Morgan Housel, which has a simple view on taking the long view and consider this thought-provoking take on retirement from The New York Times.