Winning the Battle of Required Minimum Distributions

Anyone 70 ½ years old or older with an IRA has discovered the pesky government requirement that forces you to take money out of your IRA whether you want to or not. The annual required minimum distribution is the government’s way of saying, “You haven’t paid taxes on your IRA and we’re going to make sure we get our cut before you die.” The distribution is considered ordinary income and you pay taxes on that amount at your tax rate. If you don’t, you’ll end up paying a tax equal to 50% of what was supposed to a be withdrawn plus income tax on the 50% tax.

But there’s a well-kept secret available to the RMD crowd that’s especially beneficial if you give to charity. It has two names—IRA Charitable Rollover or a Qualified Charitable Distribution. In 2006, the Pension Protection Act (PPA) included a provision allowing taxpayers 70 ½ or older to transfer money from their IRA accounts directly to charity without paying taxes on the distribution.

As long as you are 70 ½ or older you can make Qualified Charitable Distributions of up to 100 thousand dollars every year to 501(c)(3) tax-exempt organizations. If you’re married, your spouse can also give up to 100 thousand dollars.

QCDs cannot be made from 401(k)s, 403(b)s, SEPs, or SIMPLE IRAs. But, you can do a direct rollover from those types of retirement accounts into your IRA and then make QCDs from the IRA.

QCDs must be sent directly to the qualified charity by the custodian or trustee of your IRA. The distributions cannot be made to donor-advised funds, supporting organizations, or private foundations. They may not be used to fund life-income gifts such as charitable gift annuities, charitable remainder trusts, or pooled income funds.

How does that benefit you? You get to meet your required minimum distribution, up to $100,000 and you don’t pay taxes on the distribution. Your gift is not included in gross income and therefore becomes a non-taxable distribution. However, since it’s not included as income, the IRS does not allow you to claim the gift as a charitable deduction.

If you make Qualified Charitable Distributions of more than 100 thousand dollars each year, anything above that amount does become taxable. Still, meeting your RMD without paying taxes on it, and making a gift to a worthy charity can be an effective planning tool.

Previous articleQualified Charitable Distributions
Next articleRetirement Planning is About More Than Money