Paul Winkler: And welcome to “The Investor Coaching Show.” Paul Winkler, talking about that financial thing, that money thing.
Big part of our lives, isn’t it? It’s a big deal.
I want to know who the first person was that came up with the idea of going, “You know what? I don’t think it’s a good idea that we exchange chickens for bread anymore, or for shoeing a horse.”
“Let’s take a bunch of pieces of paper, and basically, let’s say they have value, and let’s use that and exchange it for stuff.”
I mean, I don’t know. Maybe I’m just strange, thinking that way.
But the financial world is always fascinating to me, so that’s where I’m going to go here.
One of the things that you can do on this show—and I welcome it if you would do such a thing—is ask questions, and the way you do that is you go to paulwinkler.com/question, is how you ask a question for the show here. Paulwinkler.com/question.
QCDs and RMDs
I got one—Jerry—start off this segment with, anyway. He’s asking a question:
“I’ll be 70 1/2 in December of this year.”
He gave his parents a tax deduction at the last minute, didn’t he?
“Do I have to wait until December, when I’m actually 70 1/2—”
Oh, wait a minute. He said he was 70 1/2 in December.
That means that he was born in June.
Forget it. Forget the joke.
Seventy-and-a-half in December, because that matters. I mean, you think about, who on earth came up with the idea of making the age 70 1/2 for required minimum distributions?
Now, thankfully, they made it into around 72, but 70 1/2 for QCDs. And that’s what his question is about, QCDs.
I don’t know. It just seems like a very odd thing.
Does he have to wait till he’s 70 1/2 to make a qualified charitable distribution from his IRA, or is a QCD similar to an RMD—required minimum distribution—where it can occur at any time during the calendar year?
It’s actually funny because RMDs can’t even just take place anytime in the year on the first year. You actually have to have your required minimum distribution out by April 1 of the year following the year that you turn 72.
Then, if you wait until the year after you turn 72, then you’ve got to take a second distribution by the end of the year. So it’s not quite even that simple.
But anyway—but this is a QCD.
So what is a QCD? Well, I’ll get to that in a second.
Let me just answer the question really quick, and then I’ll get to what a QCD is.
Technically, yeah, you got to wait till you’re 70 1/2 to do this thing.
So in your particular case, waiting till December, it technically—the odds are in your favor of waiting as long as you can to do any kind of required minimum distribution because, historically, markets go up more than they go down.
This is something that bears repeating from time to time, but this is something we actually did a study on.
$100 Each Month or $1200 at the End of the Year?
We were looking at all the way back to the year 1970, and say, “Well, what if I wait till the end of the year versus taking a little bit out every month and meeting my required minimum distribution that way?”
Let’s say that your required minimum distribution was exactly $1,200.
Do I wait till the end of the year, take out $1,200 out of my IRA—this assuming that I’m invested in stocks and bonds and I’m really diversified and all that stuff that I talk about here on the show.
Do I wait to take $1,200 out all the way at the end of the year, or do I take $100 per month out and do it that way?
And you think about it, if I take it out all the way at the end of the year, if the money was in there for the whole year and the market’s up, I was better off waiting because the account value grew. And then that money that was taken out for the required distribution was in there for the whole year to benefit from that.
So you’re taking out the same amount of money, but because the entire account grew, the growth that occurred between January and December stays in your account. So if you think about it, you’re better off that way.
Or do I take it out 100 bucks a month?
Well, the study is actually fascinating because even in down years, many of the down years, we actually had a better result taking it out at the very, very end of the year.
Now, there are years where it’s just, it would’ve been better.
You look at it and go in hindsight, “Man, if I had known this was going to be such a bad year, I would’ve taken it all out in January, and that would’ve been a better thing.” But most of the time that’s not the case.
So yeah, in your particular case, waiting to do the QCD at the end of the year would be better anyway, technically. Technically, yeah, you have to wait to 70 1/2.
Now, we’ve known people that have done it, and nothing’s happened. But technically, letter of the law is what I’m more concerned about here.
Itemizing vs. Standard Deductions
Now, what is a QCD?
A QCD is where I—if you take a look at your, for example, charitable deductions, it’s going to be part of your itemized deductions.
So you have some of your deductions that are itemized. Like, let’s say when you’re working when you’re younger, you might itemize on your taxes.
So you take your mortgage interest deduction, your property taxes, maybe healthcare expenses, your charitable contributions—are going to be that thing.
So we have all of these pieces, and then what happens is we compare that to a standard deduction, which is just what you get for fogging a mirror. And we go, “Oh, well, my standard deduction—”
Especially when you get to retirement, a lot of times this happens. “My standard deduction is a higher number.”
So I look at that and go, “Well, okay. It doesn’t make any sense for me to sit here and itemize my taxes and go through all that pain. I’ll just take the standard deduction.”
Well, what was part of the itemized deductions was the charitable deduction. So a lot of people giving money that are doing itemization, and what they’re finding is that they don’t technically actually get a deduction for the charitable contribution.
Donating Your Distribution to Charity
Now, that can get fixed when you’re in retirement and you’re taking the distribution from your IRA to pay the charity.
You can do this post-70 1/2, so you can actually engage in this.
And it’s like getting your charitable deduction back, is really what ends up happening, because it’s not a taxable distribution. Charities don’t pay taxes on it, so it’s not—
And actually, after age 72, it can help satisfy your required minimum distribution, the amount of money that you’ve got to take out of your IRA.
And some people are like, “I don’t want to take money out of my IRA. I don’t need it right now.
“I may need it later. I want to leave it in there.”
And they go, “Well, no, you got to. Yeah. You’ve never paid taxes on this money.
“You got to take it out. You can’t just put us off here at the IRS forever.”
So you take that money out, and let’s say that your required distribution is $5,000. And you go, “I got to take $5,000. I got to pay taxes on all that $5,000.”
Well, if you give money to a charity, you may say, “Well, I give $1,000 to a charity, so that’s what I like to do.”
Well, take it from your required distribution, and you take the other $4,000 for yourself.
Now, that money that you took and you did it as a QCD, that $1,000, now is basically going—and the check gets made straight to the charity.
And you’ve met the $5,000 required distribution amount that you had to have, and the $1,000 came out pre-tax, and no taxes on it obviously because it was donated to charity.
But it’s kind of like getting your charitable deduction back is the way I like to explain it to people. It’s a good deal if you do that, and I’m just glad to see that’s part of the tax law now.
I’ve had people that I’ve explained this to, and they go, “Whoa, wait a minute. I didn’t realize I wasn’t getting a deduction.”
Well, if you don’t do your own taxes, sometimes you just don’t pay attention to those things.
But yeah, you basically lose that when you’re using your standard deduction because that’s what it is. It’s a deduction you get against income for just fogging a mirror.
So for the person that’s in retirement post-70 1/2, it is a good deal to do that. And I highly recommend that you engage in that because any kind of breaks you can get, the better.
Because you could have savings on Social Security. When you have taxation, you could have, actually, your Social Security ends up getting taxed.
You could have Medicare premium increases as a result of too much income. There are a lot of things.
You can push yourself into a higher tax bracket. So you want to pay attention to all these things that you possibly can.
But that’s the one thing you realize, that when you do this, you go to your custodian, who’s physically holding the assets, and you go, “I want you to make the check payable to the church.” To the food pantry or whatever, whoever you give to.
And then you can have it sent to your home address, and then you can hand-deliver the check. It’ll be pre-made out to the charity.
So it ends up being a good idea to do something like that.
Okay, so QCDs.
And if you had a question, questions, or you can go to paulwinkler.com/question, that’s how you do that.
Bitcoin and Retirement Accounts
Somebody sent me—and I’d actually seen the article already, but it bears talking about, is “Fidelity to Allow Retirement Savers to Put Bitcoin in 401(k) Accounts.”
Why bitcoin? Why not the other 2,000–3,000 or however many cryptocurrencies we’re up to?
Number one, it is amazing to me. Mutual fund companies, whatever you’ll buy, hey, they will give you whatever you will buy.
And if you want something, we’ll give it to you.
Buyer beware, mutual fund companies are not necessarily out there trying to help you get that great—and no matter how great their commercials are and how warm they are and how fuzzy, they will let you do just about anything.
Now, so cryptocurrencies are just basically what people have been getting enamored with over the past couple of years.
And the mutual fund companies are going, “Ah, you know what? If you want this, we’ll give it to you.”
And you look at the volatility of currencies in general, and look at bitcoin in particular, the volatility is off the charts.
Why Bitcoin Is Not a True Investment
If we look at the ups and downs and how much it just fluctuates in value on a day-to-day basis—but the expected return, I mean, there’s really no expected return because there is nobody using your money, and they’re not paying you to use your money.
That’s what an investment, by definition, should be. It should be that people pay you to use your money.
And you take the payment that they’re giving to you, if it’s interest or if it’s earnings. Put that in the numerator of a fraction.
So numerator, being the top number in a fraction, that top number. Put that number in there, what they’re going to pay you.
Three dollars for how much money that you put in: $100. Okay, so three over 100 is 3%.
So that’s the payment for the use of my capital.
And that’s the way a bond works. You think about it.
Just simply, I give them 1,000 bucks. Let’s say they pay 3%.
They’re going to pay me $30 every year, and then at the end of the bond’s life, the maturity date, if it’s five years in the future, they’re going to give me my $1,000 back.
But I gave them $1,000. They’re going to give me $1,000 back.
They’re going to give me the $30. Think of that as a rental on your money.
Now, if you’re looking at stocks, the rental of your money or the use of your money is paid back in terms of earnings, which are a whole lot more volatile.
It may be, historically, that you pay $16 and get $1 of earnings, but you could have five years later, those earnings are five bucks, instead of still being $1. So that fluctuates and hence, the reason the stock market fluctuates so much more.
The goal of anybody that’s running the company—the CEO, the CFO, the board of directors, and even employees—their job, if they don’t keep the company going and make it profitable, they’re not going to have a job for long.
So everybody is in alignment helping you make sure that you make money on your investment, and it’s what I love about the stock market.
But bitcoin, I’m just not so enamored with that. I’m not so enamored with the fact that a fund company is coming out and putting this in the choices.
Will Companies Offer the Bitcoin Option to Employees?
And you look at the choices, and they’re basically saying, “Here, employees won’t be able to start adding cryptocurrencies and nest eggs right away.”
Thank God. Hopefully, never.
Oh, but later this year. Oh.
Oh, well. They’re going to be able to shoot themselves in the foot later this year.
“The 23,000 companies that use Fidelity to administer retirement plans”—bless their hearts—”will have the option to put bitcoin on the menu.” Yeah, junk food on the menu.
“The endorsement of the nation’s largest retirement plan provider suggests crypto investing is moving further into the mainstream”—God forbid—”but it remains to be seen whether employers will embrace it for their workers.”
If they’re an employer that listens to this radio show, hopefully that is not something that they add anytime soon. I think it’s just a terrible idea that companies do this kind of thing, if you can’t tell.
So anyway, that’s my two cents. But yeah, thanks for the article.
Matt fired that off my way.
Beware of Nonsensical Wall Street Trends
There was another one. What was it?
I can’t remember. There was another program that they were actually instituting, and I was just shaking my head and going, “How many different, crazy, dumb programs—”
I remember when they actually added the commodities to the portfolio. And that was another thing, commodities going up and down based on supply and demand.
But what happens is, what gets people is—and this is something that happens in mutual funds. This blows my mind.
Mutual fund companies will have this practice where they’ll go, “Hey, we’re going to open a new fund.” And they’ll open up 10 new funds, and they’ll seed them with money.
And then they’ll go, “Okay, which one has the highest return? Ah, will fund A, B, C, D?
“And oh, fund D knocked it out of the park! Phenomenal return.
“And fund A, B, and C, not so good. Pretty rotten.
“E, eh, not so great. F, oh, yeah, they had a pretty good run.”
And then what they do is D and F, the two winners, they become real mutual funds. And you go, “Well, okay, great.”
But they’re starting off anew, so no.
They actually get to use the track record, that—when the fund wasn’t public, they get to use the track record.
And what are they going to use that for? Guess what? Marketing.
And you’ll see this great performance, and it’s like, look at this thing.
Okay, so bitcoin.
Bitcoin is the one out of all these thousands of—I don’t even know how many there are out there—cryptocurrencies, and it was the one that was kind of the winner.
That’s why everybody talks about it. It’s because everybody hears about it because it’s the one that was the winner.
And then what happens is you get this put in a 401(k) plan.
And I don’t know what they’re going to do for marketing, but can you imagine that they show the past performance of this thing, and they go, “Oh, look at this thing, a stratospheric performance. You need to have some of your 401(k) money in this thing.”
I can imagine that people are going to do that.
I’ve known some of the biggest investment managers out there. They go and throw this thing, and they say, “Yeah, you know, you ought to put some of your money in this stuff.”
And I just shake my head and go, “Why?”
“Well, it diversifies you.”
No, diversification is owning lots of rational asset classes that all have cost of capital. That’s diversification.
I can diversify into shoes, I suppose, but it doesn’t make a whole lot of sense as an investor for me to do that.
But far be it from me to fight against the nonsensical advice that comes out of Wall Street and that so many people are subject to. Go figure.
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