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Posted on November 28, 2017

A Win-Win-Win-Win-Lose Using Your Required Minimum Distribution to Benefit Your Favorite Charity

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Published by Kate Moss, Equanimity Wealth Management, Relationship Manager & Registered Representative

If you, a friend, or a family member are older than age 70 ½ or getting close to that age, are charitably inclined, and you don’t want to pay any more in taxes than you have to, then this information is for you! (If you are wondering about the ‘lose’ in the title of the article, that is Uncle Sam as this strategy reduces your tax liability and could let your charity ‘win’ as a result).

At the magic age of 70 ½ the IRS requires you to distribute a portion of your pre-tax retirement accounts and pay taxes on these monies as they become income to you. This is called a Required Minimum Distribution (RMD). If you have been or would like to donate to a charity or charities then you can AVOID paying some or all of those taxes with a commonly overlooked strategy called a Qualified Charitable Distribution (QCD).

The rule allowing for Qualified Charitable Distributions (QCD) has been allowed on a year-by-year basis since 2006, and in December 2015 Congress passed a law (Path Act of 2015) allowing this action to be permanent which allows for better planning opportunities and less uncertainty each year. Even after 10+ years we’re surprised by how few people know of this great strategy.

How it Works:

Win:  Do you plan to donate to your church, local homeless shelter, college or other 501(c)(3) recognized charity?  If so, you can direct the custodian of your IRA(s) to send your distribution directly from your account to the charity as a contribution(s).

Win:  Making this ‘tax-free transfer’ reduces your adjusted gross income (AGI), and will be of greater benefit to you from a tax perspective than using the donation as a ‘charitable deduction’.  Additionally, in retirement you may not even benefit from Itemized Deductions, especially if you don’t have a mortgage anymore.

Win:  Another advantage of reducing your AGI is that it could help you avoid paying the ‘Medicare high-income surcharge’.  In 2017, if your AGI is more than $85,000 if single or $170,000 if married filing jointly you could be subject to this surcharge, so reducing your AGI with a Qualified Charitable Distribution could save you money in this aspect of your life as well.

Win:  Finally, reducing your AGI could also make your Social Security benefits less taxable.

There are a few things to keep in mind if you are going to consider making a Qualified Charitable Distribution:

  • It can be done at any time of the year or at any age provided you are age 70 ½ or older
  • Through a QDC, annually you can give up to a maximum of $100,000 for each owner/tax payer of an IRA(s)
  • A QDC is not limited to the amount of your RMD, which means for example a taxpayer with an RMD of $25,000 could do a QDC for an amount above $25,000 up to $100,000
  • The QDC is limited to the amounts of the distribution that would be taxed as ordinary income
  • The donation can be given to any qualified 501(c)(3) organization
  • Can ONLY be done through an IRA, not from an old 401(k) or 403(b) or other qualified retirement plan from a previous employer
  • The check:
    • Must be made payable directly to the charity
    • May be mailed to you, or directly to the charity
      • If directly to the charity, please be sure to notify the charity that it is on its way so they will document that it came from you
    • Ask the custodian if a note can be added to the check’s memo line
    • If you have check writing privileges on the IRA you can write a check to the charity
    • Make sure you receive an acknowledgement letter from the charity at year end to save it in your tax information file
  • The distribution will still be reported on Form 1099-R and will be mailed by January 31st of the following year
  • If you are doing a distribution from a Nondeductible IRA or Roth IRA there are further requirements as you need to consider the earnings in your accountAs always, consult your CPA or tax advisor and financial advisor to pre-plan this process.You will also find this article helpful for additional ideas of how to have your favorite charity(ies) benefit from your retirement assets: http://www.eq-wealth.com/insights/monthly-newsletters/june-monthly-newsletter-supercharged-charitable-giving-retirement-assets/If you would like help in executing this strategy for the benefit of the organizations you hold near and dear please contact us at www.EQ-Wealth.com.

**The information in this material is not intended as tax advice. Please consult a tax professional for specific information regarding your individual situation.

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