Daniel Ruske, CFP®, Author at Peterson Wealth

QCD vs. DAF: What You Need To Know

Posted on August 28, 2025August 29, 2025 by Daniel Ruske, CFP®

QCD vs DAF: What You Need To Know

Two popular strategies to maximize charitable impact and lessen tax burdens are Donor-Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs). Understanding the differences between QCDs and DAFs is important for making the best choice for your financial and philanthropic goals. Each method provides specific advantages and serves distinct purposes.

This article takes an in-depth look at the details of QCDs and DAFs, their benefits, and how they can fit into your charitable giving strategies. It also compares their tax benefits, flexibility, and control. By the end, you will better understand which option may be the most beneficial for your circumstances.

What is a Qualified Charitable Distribution (QCD)?

A QCD enables those aged 70½ or older to donate directly from their IRA to eligible charities. This approach helps fulfill Required Minimum Distributions (RMDs) from retirement accounts while supporting charitable causes.

Since the funds move directly from the IRA to the charity, the donation is excluded from taxable income, effectively reducing the Adjusted Gross Income (AGI). To qualify, the QCD must be sent directly to a recognized charity and can be up to $108,000 per person each year.

Key Benefits of QCDs

QCDs offer several significant advantages for individuals looking to combine charitable giving with tax benefits. Here are the key benefits of QCDs:

Reducing Taxable Income: A significant benefit of QCDs is their ability to reduce taxable income. Directing IRA distributions to a charity excludes the amount from your AGI, which can lower your overall tax liability and potentially reduce the impact of other taxes, such as the Medicare surtax.

Meeting Required Minimum Distributions (RMDs): QCDs help meet RMD requirements. Once you reach the age of 73, the IRS mandates annual withdrawals from your IRA. QCDs count toward these RMDs, allowing you to fulfill this requirement while supporting your chosen charitable organizations.

Direct Impact on Charities: QCDs provide immediate support to charities. Unlike other giving methods involving administrative delays, QCDs ensure that funds reach the charity promptly, allowing them to utilize the donation for their immediate needs.

Please Note: The Required Minimum Distribution (RMD) age was recently raised to 73 from 72 due to the passing of the Secure Act 2.0.

https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=Beginning%20in%202023%2C%20the%20SECURE,1%2C%202025%2C%20for%202024.

What is a Donor-Advised Fund (DAF)?

A DAF is a charitable giving vehicle that allows donors to manage their philanthropic efforts efficiently. By contributing to a DAF, you can secure an immediate tax deduction while maintaining your ability to allocate funds to various charities over time.

Donations to a DAF can include cash or appreciated assets, such as stocks and bonds. These assets can grow tax-free within the fund, potentially increasing the total amount available for future charitable grants.

Key Benefits of DAFs

A DAF has become a popular tool for managing charitable giving. The following are the key benefits of leveraging this strategy:

Immediate Tax Deduction: You get a tax deduction immediately after contributing to a DAF for the full amount in the year the contribution is made, even if the funds are not immediately disbursed to charities. This advantage can be particularly appealing to those looking to itemize deductions and reduce taxable income for that year.

Flexibility in Timing Donations: DAFs offer significant flexibility in how and when donations are made to charities. You can contribute substantially to the fund and then decide over time which charities to support and when to distribute the funds – this flexibility is ideal for most people.

Potential for Investment Growth: Funds in a DAF can be invested, allowing them to appreciate over time. This growth can lead to more sizable grants down the line, enhancing the impact of your donations. However, it’s important to remember that investments come with risks, including the potential for loss of principal.

Comparison: QCD vs DAF

Deciding between QCDs and DAFs requires understanding their distinct features and advantages. Each method offers unique benefits depending on your age, financial goals, and tax considerations.

Tax Benefits

QCDs offer notable tax benefits. Remember, individuals aged 70½ or older can transfer up to $108,000 annually from their IRAs directly to a charity of their choice. While this amount counts toward the Required Minimum Distributions (RMDs), it is not included in the Adjusted Gross Income (AGI), thereby lowering taxable income. This can particularly appeal to those who do not itemize deductions on their tax return.

In contrast, DAFs provide tax deductions immediately when you contribute, even if your funds are granted to charities later on. This flexibility allows you to maximize tax benefits in high-income years by making large donations upfront. Donating appreciated assets to a DAF can also help to avoid capital gains tax, offering a significant tax advantage.

Please Note: DAFs also permit you to “bunch” or “batch” donations. This means you can combine multiple years’ worth of charitable contributions into a single year, allowing you to exceed the standard deduction threshold and receive a more significant tax benefit in that year. This strategy can be particularly advantageous for those who do not regularly itemize deductions.

https://www.kiplinger.com/personal-finance/charity-bunching-tax-strategy-could-save-you-thousands

Flexibility and Control

QCDs are less flexible compared to DAFs. The funds have to move directly from an IRA to a charity, leaving no control over the timing or allocation of the donation. This method is straightforward but limits donor flexibility. QCDs are limited to those over 70½ years old and only apply to IRAs.

DAFs, on the other hand, offer far more control and flexibility. Donors decide when and which charities receive funds. Contributions to a DAF can be invested, allowing them to grow tax-free and potentially increase the funds available for grants. Additionally, DAFs enable anonymous donations if privacy is a concern. DAFs, however, have no age restrictions and accept a wide variety of assets, including cash, stocks, and other investments. This versatility makes DAFs suitable for donors at various financial stages.

QCD vs DAF: What’s The Ideal Scenario For Each?

QCDs and DAFs each have optimal use cases depending on your individual circumstances. Understanding these scenarios can help you choose the best method for your charitable giving strategy.

Ideal QCD Scenarios

QCDs are best suited to people in the following situations:

Those Who Need to Take Required Minimum Distributions (RMDs): QCDs are perfect for individuals who need to take RMDs (starting at age 73) but do not need the extra income. Directing these distributions to charity can significantly lower taxable income.

People With Large IRAs: Individuals with substantial IRA balances can use QCDs to manage their tax burden effectively. In addition, directly donating from their IRA reduces their AGI and potentially lowers their tax bracket.

Donors Wanting Immediate Impact: Those who wish to see immediate effects from their contributions will find QCDs beneficial. Funds reach charities quickly and are used right away.

Ideal DAF Scenarios

DAFs can be a great fit for those with the following circumstances:

Donors Seeking Timing Flexibility: DAFs are ideal for those who want to spread out their charitable giving over several years. This allows for strategic disbursements aligned with personal or financial goals.

Families Engaging in Philanthropy: DAFs can involve multiple generations in giving decisions, fostering a family legacy of philanthropy, and engaging heirs in charitable activities.

Investors Looking for Growth: By investing contributions, donors can increase the funds available for future grants. This makes DAFs suitable for those aiming to amplify their charitable impact and minimize taxes through investment growth.

QCD vs DAF: How to Decide?

Deciding between a QCD and a DAF depends on several key factors. Consider the following:

Age and Retirement Status: DAFs are a more suitable option for younger donors as they have no age limitations.

Financial Goals and Charitable Intent: Determine your financial aims. QCDs are effective for reducing taxable income and meeting RMDs. DAFs provide flexibility and potential growth, ideal for those with long-term giving plans.

Tax Situation and Planning Needs: Evaluate your tax needs—QCDs lower AGI, which is beneficial if you do not itemize deductions. DAFs offer an immediate tax deduction, which is advantageous in high-income years. Consulting a financial advisor is recommended to decide which option provides the most significant tax advantage.

QCD vs DAF FAQs

Can You Make a QCD to a DAF?

No, QCDs cannot be directed to DAFs. The IRS mandates that QCDs must go directly to qualifying charities to allow the immediate use of the donated funds. DAFs, which allow donors to recommend grants over time, do not meet the criteria for direct charitable distribution required for QCDs.

Why is a QCD better than a charitable deduction?

A QCD often provides greater benefits than a standard charitable deduction because it directly lowers taxable income. When a QCD is made, the amount given from your IRA to the charity does not count as part of your gross income.

This can be very appealing to those who do not itemize deductions. Moreover, a lower Adjusted Gross Income (AGI) through a QCD can also reduce the impact of other taxes, such as the Medicare surtax.

What is the difference between a donor-advised fund and a charitable trust?

A charitable trust is a more complex legal entity with higher setup and administrative costs. Charitable trusts provide more control over the distribution of funds but require extensive legal and financial planning. Trusts are often used in estate planning for long-term philanthropic support.

What is the difference between an RMD and a QCD?

An RMD is the minimum amount individuals aged 73 or older must withdraw each year from their retirement accounts, such as traditional IRAs, to avoid tax penalties. A QCD goes straight to a charity after being transferred directly from an IRA, which can be counted toward the RMD requirement.

Let Us Help You With Your Charitable Giving

QCDs and DAFs are both practical ways to support causes close to your heart while offering tax advantages. QCDs are excellent for individuals over 70 ½ who wish to simultaneously lower their taxable income and meet RMD requirements.

However, DAFs offer more flexibility, allowing donors to make contributions at any age, when it suits their financial situation. This makes DAFs particularly useful for those planning their charitable giving strategically and potentially growing their charitable funds through investment. Ultimately, the choice between QCDs and DAFs depends on your age, financial goals, and tax situation.

Our experienced team is dedicated to helping you develop and implement effective giving strategies that support your financial goals and reflect your values. Let us help you maximize your impact while securing your financial well-being. For expert assistance, contact our firm to schedule a consultation.

Is Tithing Tax Deductible? Here’s What You Need To Know

Posted on August 25, 2025August 26, 2025 by Daniel Ruske, CFP®

For many people, tithing isn’t simply a line item in the budget—it’s a reflection of faith, purpose, and commitment. Whether it’s a regular donation to your church, support for a mission, or a quiet gift through online, the act of giving often carries meaning far beyond the dollar amount.

Still, when spiritual generosity intersects with financial planning, it’s worth understanding how those gifts are treated for tax purposes. While tithing can qualify as a charitable deduction, the specifics depend on a few important factors. Having clarity around the rules can help you stay aligned with your values, make informed decisions, and help you make the most of your giving.

Is a Tithe Tax Deductible?

Yes, tithing is generally tax-deductible, as long as you’re giving to a qualified organization. Most churches and religious institutions that meet the IRS definition of a tax-exempt organization fall under this category, meaning your tithe may reduce your taxable income when claimed as part of your charitable donations.

However, not every gift tied to religious activity qualifies. If your donation goes to an individual or a group that isn’t formally recognized as tax-exempt, it likely won’t count. Also, even when your tithe does qualify, you must properly record your deductions on your return to receive any tax benefits.

What Counts as a Qualified Religious Contribution?

Before deducting a tithe, it helps to know which religious gifts meet IRS standards. While many faith-based organizations qualify, not all do. Here’s what to look for when evaluating a religious contribution:

IRS Recognition of Worship Centers

Most churches, synagogues, mosques, and other religious institutions are treated as tax-exempt under section 501(c)(3), even if they have not formally applied.1 To qualify, an organization typically must adhere to certain attributes developed by the IRS. These include, but are not necessarily limited to, having a recognized form of worship, distinct religious history, formal code of doctrine, and regular congregations.2

Common Deductible Recipients

You can generally deduct charitable contributions (including tithes) made to religious schools, churches, faith-based nonprofits, and ministries that also serve a public good, such as shelters, outreach centers, or global relief organizations.

What Isn’t Deductible

Giving directly to an individual missionary, donating through a crowdfunding campaign, or supporting an informal fellowship or ministry without legal status under IRS rules usually won’t qualify. These types of gifts may still be generous, but they don’t meet the standard for charitable donations.

How to Check Eligibility

If you’re unsure whether your church or religious group qualifies, the IRS offers a free Tax Exempt Organization Search Tool online. If the group isn’t listed, consider asking them directly for documentation or a statement about their nonprofit status. Many churches will still seek out official IRS approval of their tax-exempt status. You can also contact an advisor a financial advisor to assist in this research.

Please Note: Donating through digital platforms is perfectly acceptable, as long as the recipient is a recognized tax-exempt organization.

Itemizing vs. Standard Deduction: How It Affects Your Tithe

Your ability to deduct a tithe hinges on one main decision: whether you itemize deductions or take the standard deduction. When you itemize, you list out qualifying expenses, including charitable giving, on your tax return. But if you take the standard deduction, you can’t separately claim your tithes as a write-off.

Given the size of the standard deduction, many people now find it more beneficial to skip itemizing altogether. That means even generous givers might not see a tax benefit unless their total deductions exceed the standard deduction amount for their filing status.

There are situations, though, where itemizing makes sense. For example, if you have significant mortgage interest, high medical expenses, or substantial charitable donations, adding your tithe to the list may push you over the standard threshold. In that case, itemizing can reduce your tax burden.

Some households choose to “bunch” their giving into a single tax year. Instead of giving the same amount annually, they double up one year and skip the next, allowing them to itemize in high-giving years and take the standard deduction in lower ones. It’s a strategy that may offer more flexibility depending on your income and tithing preferences.

How to Document Your Tithing for Tax Purposes

Claiming a deduction for your tithe doesn’t just depend on where you gave—it also depends on what kind of proof you have. The IRS wants clear, accurate records when it comes to charitable giving. That means a good paper trail matters. Here are key documentation points to keep in mind:

Written Acknowledgments: If you donate $250 or more in a single contribution, the IRS requires that you have a written acknowledgment from the organization. This letter or receipt must clearly state the amount given, the date of the donation, and confirm that you didn’t receive any goods or services in return, aside from intangible benefits like religious support or spiritual care.3

Receipts and Records: For smaller donations, such as weekly giving under $250, bank statements, credit card records, or canceled checks are usually enough. Still, it’s a good idea to hold onto receipts or log your giving throughout the year, especially if you intend to itemize.

Church Year-End Statements: Many churches send annual giving summaries to members. These year-end statements are especially helpful during tax season because they consolidate all of your donations in one place, making it easier to report them accurately on your Form 1040.

Electronic Giving Records: If you tithe through a mobile app or church website, those platforms often provide emailed receipts or account dashboards showing your giving history. These are perfectly valid for tax purposes, as long as they clearly list amounts, dates, and the qualifying organization’s name.

What Happens if You Tithe in Cash?

When it comes to tax reporting, not all donations are treated the same. The IRS makes a clear distinction between cash and non-cash contributions, and each category comes with its own set of rules, paperwork, and pitfalls. Whether you drop bills into the plate or donate physical goods to your church, the tax implications depend on how—and how well—you document your gift.

How the IRS Defines Cash vs. Non-Cash Donations

The term “cash contribution” doesn’t only refer to paper money. According to the IRS, cash donations include physical currency, checks, credit/debit payments, and online transfers. Anything that is readily converted into money and given directly to a qualified organization falls under this umbrella.

By contrast, non-cash donations involve property or goods—anything from musical instruments to clothing, sound equipment, or even real estate—given without a financial transaction. This category also includes stock or appreciated assets, though those often involve more complex documentation.

Documentation Differences That Matter

For cash gifts under $250, a bank statement or credit card record typically meets IRS standards. However, once your donation exceeds that threshold, you’ll need a formal written acknowledgment from the church.

Non-cash donations always require a more detailed paper trail, and if the value exceeds $500, you must file Form 8283 with your tax return.4 For gifts valued at more than $5,000, an independent appraisal may be needed to substantiate the deduction.5

If you’re tithing in actual cash—like bills in an envelope—you’ll have the hardest time proving your gift unless your church offers and tracks things like envelope numbers or logs of regular giving. Even then, it’s your responsibility to get that confirmation in writing.

Valuation Rules for Non-Cash Tithes

When giving non-cash items, the IRS expects you to use fair market value—the price a willing buyer would pay a willing seller. This can get tricky with used goods or items without a clear resale market. Churches are not obligated to assign a value to your donation; they’re only required to confirm receipt and describe the item. It’s up to you to determine the proper valuation and back it up with records or an appraisal, if needed.

Also, keep in mind that for tax purposes, your deduction is limited to the item’s value at the time of donation, not what you originally paid. This matters most when donating high-dollar items that may have depreciated over time.

Why Many Donors Prefer Non-Cash Giving Alternatives

While non-cash tithes involve more legwork, they can also offer better tax advantages. For instance, donating appreciated securities may allow you to deduct the full market value while bypassing capital gains taxes. Physical cash, on the other hand, provides no such benefit, and without solid documentation, it may not even qualify for a deduction at all.

That’s why many donors now lean toward giving methods that combine ease of tracking with potential tax perks, such as electronic transfers, donor-advised funds, or asset-based donations. These not only support your faith community but also leave a reliable trail when tax season arrives.

Giving Through a Donor-Advised Fund or Trust

For some individuals and families, giving isn’t limited to the Sunday plate—it becomes part of a long-term financial strategy. That’s where giving tools like donor-advised funds (DAFs) or charitable trusts come in. These vehicles provide added flexibility, especially for those managing wealth, fluctuating income, or larger assets. Here’s how they work:

What is a Donor-Advised Fund (DAF)?

These funds let you make a charitable contribution—whether in cash or other assets—and take a tax deduction right away. From there, you can suggest how and when the funds are distributed to eligible nonprofit organizations at your own pace. It allows you to include tithes as part of a broader giving strategy while keeping administrative tasks streamlined.

Trust-Based Giving

Charitable remainder trusts or charitable lead trusts are more complex but can be valuable in estate or income planning. These trusts provide income to you or your heirs for a period of time, with the remaining assets going to a qualified religious or charitable organization.

Appreciated Asset Contributions

Donating stocks, real estate, or other appreciated assets can offer a tax benefit by avoiding capital gains while still qualifying as a deduction. This strategy can lower your adjusted gross income (AGI), helping you stay under phase-out limits for other tax benefits.

Please Note: High-income earners or people with variable income—such as business owners or those with significant investment gains—may benefit most. These tools offer a way to align generosity with tax efficiency and estate planning. Also, you get the tax deduction in the same tax year you contribute to the fund or trust—even if the money isn’t given to the church until later. The timing of the actual distribution doesn’t affect when the deduction is claimed. That distinction matters when you’re managing year-end giving or trying to meet deduction goals.

Common Misconceptions About Donating and Taxes

When it comes to tithing and tax deductions, a few persistent misunderstandings can lead to overstatements, missed opportunities, or IRS headaches. Below, we clear up some common mistakes that people often make when trying to deduct religious giving:

Assuming Every Donation Is Deductible: A tithe only counts if it goes to a qualified religious organization. Gifts made to individuals—such as missionaries or pastors—or unregistered ministries usually don’t meet IRS standards. Even if your giving feels legitimate, it may not qualify on your tax returns without proper status and documentation.

Expecting an Automatic Tax Refund: A donation doesn’t directly equal a tax refund. Deductions reduce your taxable income, not the amount the IRS sends back. If you don’t owe much to begin with, or if you already had minimal withholding, a deduction for your tithe might not affect your refund at all.

Overlooking the Importance of Paperwork: Some people think a verbal acknowledgment or mental record is enough, but it’s not. If you’re ever audited, you’ll need written proof. Without receipts, year-end summaries, or acknowledgment letters, your deduction can easily be denied.

Believing Volunteer Work is Deductible: Time spent volunteering is meaningful, but the IRS doesn’t allow you to write off your hours. Only actual expenses—like supplies, travel mileage, or meals purchased during service—may qualify under certain guidelines.

Thinking Digital Giving Doesn’t Count: Whether you tithe through a smartphone app, automatic bank draft, or an offering plate, the IRS doesn’t care how the money was sent. What matters is who received it and whether you kept valid records. Online platforms often make it easier to track your giving, which can help when it’s time to itemize.

Misunderstanding Church Reporting Obligations: Religious institutions aren’t required to report your donations to the IRS. It’s up to you to document your contributions accurately and include them when filing. If you skip that step, the IRS has no way of knowing your tithe even happened.

FAQs About Tithing and Tax Deductions

Can I deduct tithes if I take the standard deduction?

Generally, no. Charitable contributions, including tithing, are only deductible if you itemize deductions on your tax return. However, under the One Big Beautiful Bill, there is now a limited above-the-line deduction available for certain charitable donations, even if you take the standard deduction. If your tithes qualify under this provision, you may be able to deduct a portion without itemizing. Otherwise, your tithes will only reduce your taxable income if your total itemized deductions exceed the standard deduction.

Is tithing to an online church deductible?

Yes—if the online church is recognized as a tax-exempt organization and provides proper documentation. The platform or method you use to give doesn’t matter. What matters is that the organization qualifies under IRS rules and that you receive a receipt or written acknowledgment for your gift.

Do I need to keep track of weekly giving or just year-end totals?

You’ll want to have both, if possible. For smaller gifts under $250, a record from your bank or credit card is usually enough. For anything over that threshold, a church year-end statement or written acknowledgment is required. Having weekly records can help back up your total giving if questions arise.

What if my church isn’t a registered nonprofit?

Donations to organizations without recognized tax-exempt status typically don’t qualify. While many churches are automatically treated as tax-exempt, some informal or start-up ministries may not meet IRS criteria. Always confirm the church’s standing by asking directly or searching the IRS database using the Tax Exempt Organization Search Tool.

Is there a limit to how much I can deduct in tithes each year?

Yes, there are limits, and the donation type and your income determine them. For most cash donations to qualified charitable organizations—including churches—you can typically deduct up to 60% of your adjusted gross income (AGI). This cap ensures that high-income individuals can’t zero out their tax liability entirely through charitable giving. That said, non-cash contributions (such as property or stock) often fall under lower percentage thresholds, like 30% or 20%, depending on the asset and organization.6

If your charitable gifts exceed the allowed percentage in one year, you don’t necessarily lose out—you may be able to carry the excess forward and apply it in future tax years, up to five years. This provision helps those who give substantially in one year but want to space out the deduction benefit over time. However, this strategy only works if you continue to itemize and don’t switch to taking the standard deduction.

It’s also important to understand deduction limitations and how they interact with your overall tax strategy. Just because you gave doesn’t automatically mean the amount is fully tax deductible. You’ll need to keep detailed records, obtain acknowledgment letters from the organization, and report the donation properly to have it count as part of your itemized deductions.

How do I deduct non-cash donations to my church?

When donating physical goods—like musical instruments, computers, or furniture—to your church, you’ll first need to estimate their fair market value at the time of donation. This value represents what someone would reasonably pay for the item in its current condition, not what you originally paid. If the total exceeds $500, the IRS requires you to fill out Form 8283 and include it with your itemized deductions.

For donations over $5,000, the IRS typically expects an independent appraisal to back up the valuation, especially for unique or high-value items. And no matter the value, always request a receipt from your church that clearly states what was donated and when. Keeping strong documentation helps support your tax deductibles if you’re ever audited.

We Can Help You With Charitable Giving

Tithing goes beyond routine giving; it expresses your convictions and the principles you live by. But when generosity meets the complexity of taxes, it’s worth taking a closer look. Understanding how charitable giving fits into your overall financial picture can help you stay true to your convictions while also making strategic decisions. When handled carefully, tithing can support both your spiritual goals and your long-term financial well-being.

The rules around tithing tax deductions can be nuanced. Whether it’s tracking donations, navigating the difference between standard and itemized deductions, or planning gifts through donor-advised funds, each decision plays a role. And when you’re also considering other tax elements—like capital gains, business income, or credits such as the child tax credit—it helps to see the full picture. The way you give can impact not just your current return, but your broader financial plan.

That’s where we come in. Our team of financial professionals can help you make giving part of a larger, intentional strategy. From maximizing tax benefits to aligning charitable giving with your estate or retirement plans, we’re here to provide guidance every step of the way. Schedule a complimentary consultation with us today to learn how your generosity can support more than just your values—it can support your future, too.

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Do I Have to Pay Taxes on an Inheritance in Utah?

Posted on October 6, 2023August 21, 2025 by Daniel Ruske, CFP®

Over the course of the relationship with our clients at Peterson Wealth Advisors, it is inevitable that we get to guide the families of our deceased clients through the financial maze of settling an estate. Whether it is the passing of a parent, spouse, or other family member, beneficiaries often question: if, how, and when, the assets they inherit will be taxed. The goal of this blog is to give you a basic understanding of how various types of inheritance are taxed.

Does Utah have an Inheritance Tax?

State inheritance taxes vary widely across the United States. Some states impose an inheritance tax on assets received by heirs, while others do not. The rates and exemptions also differ significantly from one state to another. For instance, Utah is a state that does not impose an inheritance tax. This means that when individuals pass away and leave assets to their heirs, there is no state-level inheritance tax applied in Utah. There are a few states that do have an inheritance tax. It’s essential for individuals to be aware of the inheritance tax laws in their specific state.

Taxes on Inheriting Traditional IRA or 401k Accounts

One category of assets we see is a traditional IRA and 401k accounts. The money in these accounts have been tax-deferred for the life of the original owner, which means income tax has not yet been paid. There are different rules on how a traditional IRA and 401ks are treated at death depending on who is listed as the beneficiary. I will break it down below.

Spousal Beneficiary

If an IRA holder passes away and has his or her spouse listed as the 100% beneficiary on the account, the beneficiary has the choice to:

Own IRA – Transfer the decedent’s IRA to their own IRA. Doing this causes no immediate tax consequence and the survivor can then distribute the assets as their own. Taxes are paid on any distribution from the account in the year they are taken. Penalties apply to these distributions if the survivor is under age 59.5 and not eligible for an IRS exception.
Life Expectancy Beneficiary IRA – Transfer the decedent’s IRA to a Life Expectancy Beneficiary IRA (also called Inherited IRA). This option allows the beneficiary to avoid penalties on withdrawals if they are under the age of 5 but requires an annual distribution or Required Minimum Distribution starting either the year after death or the year the original owner would have turned 73, whichever comes later. Required distributions will be covered in more detail below. There is no tax due on the initial transfer from decedent to beneficiary.
10-Year Beneficiary IRA – Transfer the decedent’s IRA to a 10-year Beneficiary IRA (also called Inherited IRA). This option also allows the beneficiary to avoid penalties on withdrawals if they are under the age of 5 but has requirements to distribute the account before the 10^th year as further described below.
Distribute the Account – With the three options above, there is no immediate taxable event on the transfer of assets. In this option, a spouse listed as a beneficiary of an IRA account liquidates all the money in the IRA and pays taxes on 100% of the account balance in the same year. This is typically only recommended on IRAs with smaller account balances.

When selecting which option is best for you, make sure to be mindful of your tax bracket to avoid a large tax bill in a single year. Consider consulting a financial or tax professional for assistance.

Non-Spousal Beneficiary

If an IRA holder passes away and has a non-spouse listed as the beneficiary on the account, the rules are different than when the spouse is listed. The non-spouse beneficiary cannot transfer the account to their own IRA. The assets must be transferred into a new account called a Beneficiary IRA or also called an Inherited IRA. This is very common when a parent passes away. There is no tax due at the time of inheritance if these funds stay in an IRA. However, the IRS does have Required Minimum Distribution (RMD) rules on beneficiary IRA accounts that are different from the RMDs for the original owner.

If the original owner of the IRA passed away before January 1, 2020, then there will be an annual required distribution that increases each year until the account is fully liquidated. Accounts following this RMD schedule will continue to become less common as 2019 becomes further in the past.
If the original owner passed/passes away on or after January 1, 2020, then the 10-Year Rule applies. The 10-Year Rule states that the owner of the Inherited IRA has no yearly mandatory distribution, but they must withdraw 100% of the account by December 31^st of the 10^th year after the original owner died. Distributions from an Inherited IRA are taxed as ordinary income.

Certain exceptions can apply to eligible designated beneficiaries which may allow additional flexibility to the RMD rules. An eligible designated beneficiary is a minor child, someone who is chronically ill or permanently disabled, and individuals who are more than 10 years younger than the original owner.

Taxes on Inheriting Roth IRA Accounts

Inheriting a Roth IRA account is very similar to a Traditional IRA account. The rules regarding Roth accounts vary depending on the type of beneficiary and required distributions do apply. However, distributions from a Beneficiary Roth IRA (also called Inherited Roth IRA) are tax-free assuming the 5-year rule has been met.

Taxes on Inheriting a Home, Real Estate, and Other Non-IRA Investment Accounts

It is common for decedents to leave non-retirement assets to their beneficiaries. The most common types of non-retirement assets include individual investment brokerage accounts, joint investment brokerage accounts, and real estate.

To understand the taxation of non-IRA assets you must first understand what the term “cost basis” means. Cost basis refers to the portion of an asset you own that has already been taxed. For instance, if John purchased a stock in his individual brokerage account for $100,000 and it grows to $125,000, John’s cost basis is $100,000 and his capital gain is $25,000. If John sold this asset, a capital gain tax would only be owed on the $25,000 gain and not on the original $100,000 basis.

Under current law, at the death of the owner of a non-IRA asset, the value of the account receives what is called a “step-up in basis.” This means that any growth (or losses) that have occurred on the asset reset to the fair market value of the asset at the date of death. For example, if John invested $100,000 into an individual investment and it grew to $125,000, his cost again would be $100,000. However, if John passed away without selling the asset, at John’s death his cost basis is “stepped-up” to $125,000. John’s beneficiaries will not have to pay capital gain tax on the $25,000 gain.

The step-up in basis differs for married couples holding property jointly depending on what state you live in. However, in general, the following rules may apply: There are community property states and non-community property states.

Community Property States:

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

When one spouse dies, the asset typically receives a full step-up in basis to its fair market value at the date of the deceased spouse’s death. This means that the surviving spouse’s share and the deceased spouse’s share both receive a step-up on the basis.

For Example: John and Jane jointly own an asset in a community property state. They bought the asset years ago for $500,000 and it is now worth $1,000,000. If John passes away, the full value of the asset would be stepped-up to the fair market value. Jane’s new basis on the asset is $1,000,000 and she could then sell the asset with little to no tax impact.

Non-Community Property States:

In non-community property states, the step-up in basis rules are different from those in community property states. For instance, if the property is held in joint tenancy, the step-up in basis applies only to the deceased owner’s share. When one owner dies, their share of the property receives a step-up in basis to the fair market value at the date of death while the surviving owner’s share retains its original basis.

For example: John and Jane jointly own an asset in a non-community property state, if John passes away, only his 50% share receives a step-up in basis to its fair market value at the date of his death. Jane’s 50% share retains its original basis. Jane’s new basis on the asset is $750,000. However, it is important to note that Jane now holds the asset individually and will receive a step-up in basis on the full value at her death.

In my experience, in both community and non-community property states, beneficiaries pay little to no tax on the inheritance of real estate because the basis is stepped up to the fair market value at the date of the second spouse’s death.

Step-up in basis rules can change over time and tax laws do vary. Please consult an attorney specializing in estate planning and tax matters to understand the specific implications and requirements in your situation.

When does estate tax apply?

Estate tax, also called inheritance or death tax, is imposed on a deceased person’s estate before assets go to heirs. It is calculated on the total value of their assets, minus deductions, and exemptions. 99+% of estates do not pay federal estate tax. However, if your estate exceeds the applicable estate tax exemption threshold, your estate may be subject to estate tax. The exemption laws and amount of the exemption changes over time.

However, the federal estate tax exemption for 2023 is $12.92 million per person, which means that for a married couple, their exemption is over $25 million. If the total value of the estate, including assets such as property, investments, and cash, exceeds the exemption, the estate may owe estate taxes on the amount exceeding the exemption. It is extremely rare for estates under the threshold to pay estate taxes.

Inheritance Taxes: Conclusion

As you can see, there are many ways that inheritances are treated when being taxed. It is important that the beneficiaries understand all the tax liabilities associated with their inheritances and then formulate a plan to reduce the tax burden in their own situation. We find that clients are usually relieved to hear that in most cases there is no initial tax bill due to receive the inherited assets and that they have several options available to distribute retirement assets at a later date.

If you have any questions or concerns about your specific financial circumstances, do not hesitate to contact Peterson Wealth Advisors. Our team is dedicated to helping you find the best solutions to meet your financial goals. Additionally, if you require additional support with estate or tax planning, we can connect you with qualified professionals who can help you with your needs.

Note: The information applies to individuals listed directly as the beneficiary on decendent’s accounts. If a trust or estate, consult an estate planning attorney for the taxability of those assets. This post is not intended to be tax or legal advice. Please consult a professional for your specific situation.

The Role an Emergency Fund Plays for Retirees

Posted on September 29, 2022August 21, 2025 by Daniel Ruske, CFP®

An emergency fund is a portion of money set aside to be used as a buffer in the event of an emergency or for an unforeseen expense. During the accumulation phase of life, or the years in which a household is reliant on a paycheck and actively saving toward retirement, an emergency fund provides a safety net to balance the budget during events such as loss of work, an expensive medical bill, or a car repair. In every personal finance textbook, you will find details on how to best manage an emergency fund. However, most of these texts focus on the accumulation phase of life. They aren’t focused on applying these beneficial principles to retirees. So, let’s go over the details of an emergency fund for retirees.

How much should I have in an emergency fund?

There is a rule of thumb that is used when determining how much a household should have in an emergency fund. The guidance is to have at least three to six months’ worth of expenses set aside. This can be a good benchmark to measure yourself against. But the problem with a rule of thumb is that everyone’s individual situation is different and may require more customization.

Calculating an emergency fund during retirement is different than during accumulation. For instance, the risk of losing your job when you’re retired is zero percent. However, in most cases, this does not completely eliminate the risk of income loss. You must determine, based on your own cash flow risks, what amount is right. For example, a retiree with multiple rentals and a history of renter turnover will require more cash on hand than a retiree whose only income source is from Social Security and a steady pension.

Where should you invest your emergency fund? How much cash should I have on hand?

The goal of an emergency fund is not to earn the highest return possible. It is to have the funds accessible when needed. A common place for an emergency fund to be kept is in a savings or money market account. You can do this at your preferred bank or credit union. Online banks that pay higher interest rates can also be a good choice. Any of these options will work, as long as your money is easily accessible.

Do not keep your entire emergency fund in hard cash. Having a limited amount on hand in your home is reasonable. However, there are added risks in having large sums of cash in your home.

Investing excess savings

Once you have determined the amount for a comfortable emergency fund, you may need to add or subtract from your current account. If you need to increase your emergency fund, the best way to do this is by adding a portion of your monthly income to the fund until you have the desired balance. Anytime you use your emergency fund, immediately work toward increasing it back to the desired amount.

It can also be common for retirees to accumulate large sums of cash in savings accounts. These are much greater than an adequate emergency fund requires. During the accumulation phase, the guidance is to put 15 – 20% of our income away into savings. In retirement, this mindset changes. Keeping extra savings in the bank, in excess of your emergency fund, can be a missed investment opportunity. This will hamper your ability to keep your investments up with inflation. If you have a balance in your bank account on top of your emergency fund needs and what you might reasonably spend in a short period of time, consider investing these funds for a greater opportunity for growth. You should also consider reducing income from sources such as taxable retirement accounts to avoid paying taxes on this unspent income just to have it accumulate in the bank.

A good question to ask yourself if you are in this situation is “when do I plan on spending this money?” If it is more than five years out, investing the funds in a diversified portfolio will result in greater growth opportunities. Talk to your advisor to determine the right investment allocation.

Conclusion

Though the amount and use of an emergency fund slightly change for individuals moving from the accumulation phase to the retirement phase of life, it is still an important part of a retiree’s financial household. Having too little or too much in savings for a rainy day could cost you thousands of dollars over the course of your retirement. Talk to one of Peterson Wealth Advisors’ Certified Financial Planners with your questions about an emergency fund for retirees and start your retirement income planning with our Perennial Income Model.

How Tax Withholding Affects Your Tax Refund

Posted on February 23, 2022August 21, 2025 by Daniel Ruske, CFP®

Every year, around March and April, we begin to hear people talk about the big plans they have to spend their anticipated tax refund. Some plan vacations to various destinations around the world, others plan to pay off debt, or add to their savings. All too often, this anticipated windfall turns into an unwelcomed tax bill to the IRS.

We have found that many individuals may not know what goes into calculating their yearly income taxes and why they may or may not get a tax refund. This article will serve as a simple reminder of the fundamental components that determine your tax refund.

What Does it Mean When Taxes are Withheld?

Tax refunds are not gifts from the government that you receive for filing your taxes. They are a return of your dollars that you have overpaid in taxes during the year. In most cases, when you receive some form of taxable income whether it be from a pension, Social Security, or a distribution from a retirement account, a portion of your payment goes directly to the IRS, or toward paying your state income taxes. This is known as withholding. So, tax withholding is money that goes directly to the IRS.

What are Tax Refunds?

You, the taxpayer, controls how much of your payment goes towards paying the IRS and the state. Due to tax deductions, tax credits, or a miscalculation, a household may over or under withhold the required yearly income tax they owe. An over payment of taxes will result in a tax refund, and an under payment will result in owing a tax liability. So, you, not the IRS or your state government, decide whether you get a refund each year because you determine how much is withheld from each paycheck.

The amount of your tax refund or liability received at the end of the year is not a good indication of your total yearly income tax liability. For example, a large refund does not mean your taxes are low, and having to write a check to pay state and federal tax does not mean your taxes are high. Receiving a refund or paying a liability is a reconciling of the income tax dollars you are required to pay.

Tax Withholding

Tax withholding can be adjusted on income from Social Security, pensions, distributions from IRAs, and salaries. You can also make an estimated quarterly payment directly from your checking account. So, if a person is looking for a large tax refund, they should increase the amount of taxes that are withheld throughout the year and the IRS will return it to them in the form of a refund.

Does it Matter if I Over-withhold or Under-withhold?

What happens if you withhold too much on taxes?

In most cases, the goal is to withhold taxes in the amount that will result in as small of a refund, or tax liability as possible.

However, incomes, salaries, and laws can all change throughout the year making it difficult to achieve the goal of a net zero tax refund or tax liability.

So, is it better to overpay taxes during the year and get a refund? The answer… it depends. It comes down to preference. Individuals who prefer to receive a tax refund check during tax season should look to over-withhold. Individuals who prefer to have extra cash throughout the year, even if that means paying a tax bill come tax time may prefer to under-withhold.

There are two extremes that help explain the concept of withholding and tax refunds.

Under-withholding: A couple has a taxable income of $81,050 in 2022 and withholds nothing. Their paychecks will be higher throughout the year, but when they file their taxes, assuming no penalty applies, they will owe a federal tax bill of $9,315.
Over-withholding: A couple has the same taxable income of $81,050 in 2022 and withholds $14,315. Their paychecks throughout the year will be lower since a higher portion is going to tax withholding. Instead of owing $9,315 at the end of the year, they will receive a refund of $5,000 because they over withheld.

It is important to understand that, assuming no under-withholding penalty applies, over or under-withholding taxes throughout the year does not result in a larger or smaller total tax liability. The only difference is the timing of when the taxes are paid.

When do Underpayment Penalties Apply?

You may be thinking, “Well if the timing of my tax payments doesn’t impact the amount of total tax I pay, then I won’t withhold anything all year and invest the tax payments in a high yield investment account. I can then pay my full tax bill at the end of the year and keep the interest I earn.” This can be a reasonable strategy assuming two things.

First, you don’t lose money in your investment over the course of the year, and second, you don’t pay more in underpayment penalties than you make in interest. In most cases, you can avoid an under-withholding penalty if you withhold at least 90% of the tax due for the current year, or if you withhold 100% of the previous year’s tax liability.

You Owe What You Owe

Whether you are looking for a tax refund, or you prefer to not give the government an interest free loan and plan on paying your tax liability every April, you can rest assured knowing that as long as you satisfy the minimum withholding requirements, your total tax obligation will be the same.