Webinar In Review: Post Election Update & Year End Planning Opportunities

Contributed by: Center for Financial Planning, Inc.®

The Center's most popular webinar of 2016 was the Post-Election Update and Year End Planning Opportunity presentation. Melissa Joy, CFP®, and Nick Defenthaler, CFP®, break down what President Trump's win may mean for financial markets. They also review areas of financial planning including retirement, taxes, and investments for year-end financial planning opportunities.

Catch a replay of the webinar below. Also, we have a companion year-end planning guide available along with a year-end planning worksheet.

Center for Financial Planning, Inc. is a Registered Investment Advisor and independent of Raymond James Financial Services. Securities offered through Raymond James Fianncial Services, Inc., Member FINRA/SIPC.

Why You Should Have a Roadmap for Your Aging Years

Contributed by: Sandra Adams, CFP®, CeFT™

I was asked to speak on a panel of professionals recently on the topic of “11th Hour Planning,” which is essentially planning steps that should be taken when a person nears the end-of-life. Much of the discussion revolved around the vast differences in the resulting situations when a client has planned ahead for their aging years versus when they have not. It was certainly the consensus of the professionals on the panel that those clients who plan in advance have a much more pleasant experience overall, their families are generally less stressed and panicked, and, more often, there are better financial results.

What, might you ask, is involved in “planning for your aging years?” I am referring to planning that goes beyond traditional retirement planning, where we are talking about cash flow projections and making sure your money will last as long (or longer) than you will. The financial aspect is an important piece, and as we discuss what I call the Roadmap for your Aging Years, the financial piece will focus largely on how to pay for funding during the later years of your retirement. We hope that those later years continue to be filled with travel, hobbies, and fun, but they could involve expenses focused on healthcare and long term care.

The Roadmap for your Aging Years covers the following topics:

• Housing

• Care (Where will you receive Care/Whowill Care for you)

• Family

• Legacy

• Financials

Within the context of the above topics, you design your plan by exploring the Challenges you see yourself facing as you age, the Alternatives (i.e. solutions) you have for facing those challenges, the Resources you may have at your disposal for facing those challenges, and ultimately envisioning the Experience you would like to have as you age. We call this the C.A.R.E. planning method that was developed by Dan Taylor, author of The Parent Care Conversation. Ideally, you design your Roadmap with the guidance of a professional (your financial planner can help) and in collaboration with your family, so that everyone is on board and part of the plan from the beginning.

The 11th hour can come for any of us at any time, but for most of us comes later in life. Planning ahead can make end-of-life a less stressful experience if there is a plan in place.  If you do not yet have a Roadmap for Your Aging Years, contact your financial planner today to start the conversation.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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The opinions expressed are those of Sandra Adams and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional. Raymond James is not affiliated with nor does it endorse Dan Taylor.

Four Considerations for Year End Tax Planning

Contributed by: Nick Defenthaler, CFP®

With the end of the year fast approaching, end of year tax planning is top of mind for many clients. At The Center, we are proactive throughout the entire year when it comes to evaluating a client’s current and projected tax situation but now is typically the time most people really start thinking about it. Let’s be honest, how many of us feel like we don’t pay ENOUGH tax? Most clients want to lower their tax bill and be as efficient with their dollars as possible.

Here is a brief list of items we bring up with clients that could ultimately lead to lowering one’s tax bill for the year:

1. Are you currently maximizing your company retirement account (401k, 403b, Simple IRA, SEP-IRA, etc.)?

   • These plans allow for the largest contributions and are deductible against income.

     • In our eyes, this is often times the most favorable way to help reduce taxes because it also goes towards funding your retirement goals! 

2. How are you making charitable donations? 

   • Consider gifting appreciated securities to charity instead of cash if you have an after-tax investment account with appreciated positions. By doing so, you receive a full tax-deduction on the value of the security gifted to the charity and you also avoid paying capital gains tax – a pretty good deal if you ask me! 

     • Donor Advised Funds are a great way to facilitate this transfer and are becoming increasingly popular lately because of the ease of use and flexibility they provided for those who are charitably inclined.

   • If you’re over the age of 70 ½ and own a Traditional IRA, taking advantage of the now permanent Qualified Charitable Distribution (QCD) could be a great option as well. 

3. Should I be contributing to an IRA? If so, should I put money in a Traditional or Roth?

   • As I always say, in financial planning, there is never a “one size fits all” answer – it really depends on your income and your current and projected tax bracket

     • Keep in mind, not all IRA contributions are deductible, your income and availability to contribute to a company sponsored retirement plan plays a major role.

     • If your current tax bracket is lower than your projected tax bracket in the future, it more than likely makes sense to invest within a Roth IRA, however, as mentioned, everyone’s situation is different and you should consult with your advisor before making a contribution. 

4. Do you have access to a Health Savings Account (HSA) or Flex Spending Account (FSA) at work?

   • These are fantastic tools to help fund medical and dependent care costs in a tax-efficient manner.

     • HSAs can only be used, however, if you are covered under a high-deductible health plan and FSAs are “use it or lose it” plans, meaning money contributed into the account is lost if it’s not used throughout the year. 

This is a busy time of year for everyone. Between holiday shopping, traveling, spending time with family, completing year-end tasks at work, taxes are often times lost in the shuffle.  We encourage you to keep your eyes open for our year-end planning letter you will be receiving within the next few weeks which will be a helpful guide on the items mentioned in this blog as well as other items we feel you should be keeping on your radar.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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Please include the following to all of the above: Please include: The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Social Security Changes You Need to Know

Contributed by: Kali Hassinger, CFP®

The Social Security Administration announced on October 18th that the Cost of Living Adjustment for 2017 will be 0.3 percent. This announcement comes after 2016, when Social Security provided no COLA benefit. For many Social Security recipients, however, this minimal increase will be negated by the expected rise in Medicare Part B premiums, which are usually deducted directly from Social Security payments. For those subject to the “hold harmless” provision, the Medicare Part B premiums cannot increase by more than the COLA. Those not covered by that provision, however, could be subject to a larger premium increase. The specific Medicare changes will be announced later this year.

The Social Security Administration will also increase the wage ceiling subject to payroll taxes to $127,200 in 2017 (previously capped at $118,500). This means that the first $127,200 earned by any taxpayer will be taxed at 12.4% (6.2% is paid by the Employee and 6.2% is paid by the Employer). Any earnings above $127,200 won’t be subject to the OASDI (Old Age, Survivor and Disability Insurance) tax. The Retirement Earnings Test (concerning any wages earned while collecting Social Security prior to Full Retirement Age), also received a slight boost. Those receiving benefits prior to Full Retirement Age can now earn up to $16,920/year before Social Security will start to withhold benefits. If you have any questions about how these changes affect you and your family, please feel free to give us a call!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

Will Social Security be Around When I Retire?

Contributed by: Matt Trujillo, CFP®

If you're retired or close to retiring, then you've probably got nothing to worry about—your Social Security benefits will likely be paid to you in the amount you've planned on (at least that's what most of the politicians say). But what about the rest of us?

Watching the news, listening to the radio, or reading the newspaper, you've probably come across story after story on the health of Social Security. Depending on the actuarial assumptions used and the political slant, Social Security has been described as everything from a program in need of some adjustments to one in crisis requiring immediate and drastic reform.

Obviously, the underlying assumptions used can affect one's perception of the solvency of Social Security, but it's clear some action needs to be taken. Even experts disagree, however, on the best remedy. So let's take a look at what we do know.

According to the Social Security Administration (SSA), over 64 million Americans currently collect some sort of Social Security retirement, disability, or death benefit. Social Security is a pay-as-you-go system, with today's workers paying the benefits for today's retirees.

How much do today's workers’ pay? Well, the first $118,500 (in 2016) of an individual's annual wages is subject to a Social Security payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay all of it). Payroll taxes collected are put into the Social Security trust funds and invested in securities guaranteed by the federal government. The funds are then used to pay out current benefits.

The amount of your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.

Your age at the time you start receiving benefits also affects your benefit amount. Currently, the full retirement age is in the process of rising to 67 in two-month increments, as shown in the following chart:

What Is Your Full Retirement Age?

You can begin receiving Social Security benefits before your full retirement age, as early as age 62. If you retire early, however, your Social Security benefit will be less than if you had waited until your full retirement age to begin receiving benefits. For example, if your full retirement age is 67, you'll receive about 30% less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent—you won't be eligible for a benefit increase once you reach full retirement age.

Even those on opposite sides of the political spectrum can agree that demographic factors are exacerbating Social Security's problems—namely, life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees.

According to the SSA, Social Security is already paying out more money than it takes in. By drawing on the Social Security trust fund, however, the SSA estimates that Social Security should be able to pay 100% of scheduled benefits until fund reserves are depleted in 2034. Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits. This means that in 2034, if no changes are made, beneficiaries may receive a benefit that is about 21% less than expected.

So the question still remains, with trouble looming on the horizon, how do we fix the system?  While no one can say for sure what will happen (and the political process is sure to be contentious), here are some solutions that have been proposed to help keep Social Security solvent for many years to come:

• Allow individuals to invest some of their current Social Security taxes in "personal retirement accounts"

• Raise the current payroll tax

• Raise the current ceiling on wages currently subject to the payroll tax

• Raise the full retirement age beyond age 67

• Reduce future benefits, especially for wealthy retirees

• Change the benefit formula that is used to calculate benefits

• Change how the annual cost-of-living adjustment for benefits is calculated

The financial outlook for Social Security depends on a number of demographic and economic assumptions that can change over time, so any action that might be taken and who might be affected are still unclear. No matter what the future holds for Social Security, your financial future is still in your hands. Focus on saving as much for retirement as possible, and consider various income scenarios when planning for retirement.

It's also important to understand your benefits, and what you can expect to receive from Social Security based on current law. You can find this information on your Social Security Statement, which you can access online at the Social Security website, socialsecurity.gov by signing up for a “my Social Security” account. Your statement contains a detailed record of your earnings and includes retirement, disability, and survivor's benefit estimates that are based on your actual earnings and projections of future earnings. For more details on how to sign up for an online account see our previous blog post for step by step instructions.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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(Source: Fast Facts & Figures about Social Security, 2015)

(Source: 2015 OASDI Trustees Report)

This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor the third party website listed 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.

Simplifying Your Retirement Plans

Co-Contributed by: Matthew E. Chope, CFP® and Gerri Harmer

If you’re like most, you have multiple retirement plans from previous employers. These may be hard to track and lead to piles of paper statements. Recent rulings make it easier to consolidate accounts and potentially save on fees.

Recent changes in rulings now allow most retirement plans to be “rolled over” to other qualified plans that previously were not allowed including Simple IRAs and 401ks. One exception is you must hold your Simple IRA for two years before funds can be moved in or out of the account without paying tax penalties.  Pictured is a chart showing permissible roll over types.

Things to consider before acting:

• Compare investment offerings and fees for each account to find the best choice to roll into. These are usually located on your statement or in the prospectus. You can also call the phone number on your statement to inquire.

• Consider consulting a financial advisor to get the best overall financial picture.

• Funds must be withdrawn and redeposited within 60 days to avoid paying tax penalties.

If you have questions on how to get started, or want to talk with a professional on what your rollover options our, please reach out to your CERTIFIED FINANCIAL PLANNER™ here at The Center.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

Gerri Harmer is a Client Service Manager at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Tax matters should be discussed with an appropriate tax professional.

Non-Qualified Deferred Compensation (NQDC) Plans

Contributed by: Kali Hassinger

A Non-Qualified Deferred Compensation plan (NQDC) is a benefit plan offered by some employers to their higher earning and/or ranking employees. Some of you may have heard of these plans referred to as “Golden Handcuffs” because they often require that an employee stay with their current employer, or at least not move to a competing firm, in order to receive the compensation. This nickname provides both a negative and positive connotation, but, when appropriate, NQDC plans can offer employees greater control over their income, taxes, and financial future.

NQDC plans, unlike your typical 401(k), are not subject to limitations or non-discrimination rules. That means that the employer can offer this benefit to specific employees and there is no restriction on the dollar amount deferred. This is advantageous to an employee who is expecting to be in a high tax bracket, is already fully funding their retirement savings plan(s), has a surplus in cash flow, and may foresee a time when their taxable income will be reduced. With this strategy, the employee and employer agree upon a date in the future to pay the employee his/her earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until it is actually received by the employee.

In most cases, these plans are considered “unfunded” by the employer, which means that the money isn’t explicitly set aside for the employee. This scenario creates a certain level of risk for the employee because the funds would be subject to any future bankruptcy or creditor claims. There are some strategies that the employer can utilize to mitigate the risk (involving trusts and insurance), but they need to uphold the NQDC status. Otherwise, the deferred compensation amount will become fully taxable to the employee along with a 20% penalty. Funded NQDC plans exist as well, and these plans set the deferred compensation assets aside exclusively for the benefit for the employee. Funded plans, however, open themselves back up to ERISA requirements, making them far less popular.  

When an employer and employee enter in a NQDC agreement, it can be a win for both parties.  Employers are securing that valued employees will remain loyal, while employees are able to reduce their taxable income now. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Kali Hassinger and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Webinar in Review: Employee Benefit Open Enrollment

Contributed by: Clare Lilek

Each September, as school is back in session and fall is right around the corner, the last thing on your mind is “How can I make the most of my employee benefit enrollment that’s happening soon?!” It may not be the most exciting topic, but enrollment for your employer’s benefit package happens once a year, usually in late September and early October, and can affect the benefits and coverage you receive for the following twelve months. So it is very much worth your time to look at what your company offers and weigh the pros and cons of all your options. Luckily for you, Nick Defenthaler, CFP®, recently hosted a webinar that outlines the various benefits your company could offer and how you may go about electing certain packages. Below are a few highlights from the 30-minute webinar. For a more detailed explanation, watch the full webinar recording below!

Retirement Savings Plans

• Choosing a Traditional (pre-tax) or a Roth (post-tax) plan depends on your current tax bracket versus your projected tax bracket when you retire.

• Make sure you are always maxing out your employer match at the very least. In order to make sure you are continually growing your retirement account, consider add 1-2% each year to your contributions.

• Choose a mix of investment options that are aligned with your risk tolerance.

• Ride out the changes in the market. It’s important not to make constant portfolio changes.

Executive Compensation Plans

These types of compensation plans are typically used as incentive compensation. They can vary from company to company but some of the options include: stock options, non-qualified deferred compensation plans, and employee stock purchase plans. We are currently doing a blog series on Stock Options (NSOs, ISOs, and RSUs); make sure to look out for these for a more detailed overview.

Health Insurance

Nick did a high-level overview of the different types of plans and options you may encounter when it comes to company health insurance. When choosing between a PPO or HMO, you could be choosing between the flexibility of additional benefits (PPO) or the lower cost for potentially more restrictive benefits (HMO). He also highlights the importance of reading the fine print when adding a spouse to your benefits. Lately, many companies have a spousal surcharge that makes it more expensive for a spouse to be insured on your plan if they have access to insurance through their own employer. Nick also noted that some companies are making the move to high-deductible plans, which lower their premiums but put the “buying power” back in the hands of the insured.

Flex Spending Accounts

Nick continued to describe the potential benefit of using a Flex Spending Accounts, whether it’s for medical or dependent care deductibles.  When pretax contributions are used for qualified medical expenses, within the year of contribution, they continue to go untaxed. To learn how you could potentially save some tax money, make sure to tune in to this part of the webinar!

Other Insurances

To wrap up, Nick went through disability insurance and life insurance options. He weighed the pros and cons for group vs individual coverage, and how some employees might want to consider long-term and short-term disability coverage.

If you have any questions about this webinar or your specific benefits, don’t hesitate to reach out to Nick.

401(k) for Solo Business Owners

Contributed by: Matt Trujillo, CFP®

If you're self-employed or own a small business, you've probably considered establishing a retirement plan. If you've done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they're relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan (which is also known by other names such as a solo 401(k) plan, an employer-only 401(k) plan, or a single participant 401(k) plan) may offer a better combination of benefits.

What is an individual 401(k) plan?

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. Unlike a regular 401(k) plan, however, an individual 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option.

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401(k) plan an attractive retirement savings vehicle is that in most cases your allowable contribution to an individual 401(k) plan will be as large as or larger than you could make under most other types of retirement plans. With an individual 401(k) plan you can elect to defer up to $18,000 of your compensation to the plan for 2016 (plus catch-up contributions of up to $6,000 if you're age 50 or older), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25% of your compensation (up to $265,000 in 2016).  Since your 401(k) elective deferrals don't count toward the 25% limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25% of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2016 cannot, however, exceed the lesser of $53,000 (plus any catch-up contributions) or 100% of your compensation.

For example, Dan is 35 years old and the sole owner of an incorporated business. His compensation in 2016 is $100,000. Dan sets up an individual 401(k) plan for his retirement. Under current tax law, Dan's plan account can accept a tax-deductible business contribution of $25,000 (25% of $100,000), plus a 401(k) elective deferral of $18,000. As a result, total plan contributions on Dan's behalf can reach $43,000, which falls within Dan's contribution limit of $53,000 (the lesser of $53,000 or 100% of his compensation). These contribution possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401(k) plans are simpler to administer than other types of retirement plans. Since they cover only a self-employed individual or business owner and his or her spouse, individual 401(k) plans aren't subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

Other Advantages of an Individual 401(k) Plan

Large potential annual contributions and straightforward administrative requirements are appealing, but individual 401(k) plans also have advantages that are shared by many other types of retirement plans:

An individual 401(k) is a tax-deferred retirement plan, so you pay no income tax on plan contributions or earnings (if any) until you withdraw money from the plan. And, your business's contribution to the plan is tax deductible.

• You can, if your plan document permits, designate all or part of your elective deferrals as after-tax Roth 401(k) contributions. While Roth contributions don't provide an immediate tax savings, qualified distributions from your Roth account are entirely free from federal income tax.
• Contributions to an individual 401(k) plan are completely discretionary. You should always try to contribute as much as possible, but you have the option of reducing or even suspending plan contributions if necessary.
• An individual 401(k) plan can allow loans and may allow hardship withdrawals if necessary.
• An individual 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP plan, or a previous employer's 401(k) plan.

Disadvantages

Despite its attractive features, an individual 401(k) plan is not the right option for everyone. Here are a few potential drawbacks:

• An individual 401(k) plan, like a regular 401(k) plan, must follow certain requirements under the Internal Revenue Code. Although these requirements are much simpler than they would be for a regular 401(k) plan with multiple participants, there is still a cost associated with establishing and administering an individual 401(k) plan.
• Your individual 401(k) plan assets are fully protected from your creditors under federal law if you declare bankruptcy. However, since an individual 401(k) plan generally isn't subject to ERISA, whether your plan's assets will be protected from your creditors outside of bankruptcy will be determined by the laws of your particular state.
• Self-employed individuals and small business owners with significant compensation can already contribute a maximum $53,000 by using a traditional profit-sharing plan or SEP plan. An individual 401(k) plan will not allow contributions to be made above this limit (an exception exists for catch-up contributions that can be made by individuals age 50 or older).

If you think an Individual 401(k) might be the right vehicle for you, we encourage you to contact your financial planner to work through your individual situation to make the right choice for you.  Feel free to reach out to us if you think we can be of help!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of Raymond James. Prior to making a retirement plan decision, please consult with your financial advisor about your individual situation. Roth account owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

How to Make Grants from Donor-Advised Funds

Contributed by: Matthew E. Chope, CFP®

I talk to a lot of clients who have set up Donor-Advised Funds or family foundations and are confused. They’ve figured out how to put money in, but how to make grants isn’t always as clear. The IRS prohibits using these funds to satisfy a pledge. That doesn’t prohibit you from supporting organizations like churches, but it does mean you need to follow certain steps.

The first step is to talk to your attorney and your CPA. They can give you tax and legal advice about making a grant. Carla Hargett, the Vice President of Raymond James Trust, told me if you’re planning on giving to your church, for example, she believes the best way to handle the Donor-Advised Fund Grants is to start by discharging any pledge made in the past. Donor-Advised Funds cannot be used to satisfy a pledge. You can let your church know you intend to provide General Support for a certain amount of money and year(s) going forward. The amount can be close to an amount you’ve given in the past – that’s up to you. But any legally enforceable pledges must be cancelled first. This should stop the audit trail if the IRS ever decides to get into the particulars with a grantor. So make sure the grant requests from your Donor-Advised Fund should say something like "2016 General Support.”  

When pledge time comes around, I recommend that you write on the pledge card something like, "I intend to request a distribution of $XXXX.XX from my Donor-Advised Fund during the 20XX fiscal year." Your church or charitable organization will be familiar with this language and can use it for budget planning similar to a pledge.

We just want to make sure that Grantors of donor-advised funds are doing things as accurately as possible and if an IRS auditor someday digs into your grants, you’ll have nothing to worry about.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matt Chope and not necessarily those of Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.