If you’re a retiree, you may be preparing to take your Required Minimum Distribution (RMD) this year. Most retirees plan to take theirs by the end of each year, and they may consider making a Qualified Charitable Distribution (QCD) to mitigate the impact of taxes on their RMDs. However, you don’t have to wait until year-end to pursue this option. In fact, recent studies have shown that early planning of QCDs can often have an even bigger tax benefit than waiting.
Qualified Charitable Distribution (QCD)s are exactly what they sound like: a direct transfer of funds from your qualified retirement savings account to charity. QCDs can replace your RMDs for a given year, and save you money on taxes, as the donation is excluded from your total taxable income.
Qualifying accounts for a QCD include only Individual Retirement Accounts (IRAs). As of 2018, you can’t take a QCD from a 401K or other workplace retirement savings account. You can donate a distribution from a Roth IRA to charity if you so choose, but you don’t pay taxes on distributions from Roth IRAs, and there are no annual minimum distribution requirements, so it makes the most sense to take QCDs from your traditional IRA. Remember - for a QCD to be legal, it has to come directly from the IRA. It can’t pass to you first and then get distributed to a charity.
Keep in mind that you can only give so much of your annual RMD to charity as a qualifying charitable distribution. You can give up to $100,000 a year as a QCD, and have that count as a portion of your RMD. It’s also important to remember that you can’t take a QCD until you turn 70½ (which is the age that kicks off the countdown for you to take your first required minimum distribution).
For many people, a Qualified Charitable Distribution is a game changer. QCDs can dramatically reduce the impact of taxes on your RMDs. This is especially true if you have income available from other, tax efficient, accounts that allow for appropriate cash flow. QCDs are also a good method for using your wealth in a way that aligns with your values. Leaving a legacy is something that doesn’t have to wait until after you pass away. Using a portion of your retirement savings now in a tax-efficient way can help you lead a fulfilling retirement while still having a positive impact on your wallet.
Deadlines to take QCDs after you turn 70½ are the same as taking your annual RMD - December 31st. However, taking your QCD earlier in the year can have a positive impact on your taxes. When it comes to your IRA, the IRS follows the “first dollar out” rule.
In other words, the first dollars that come out of your IRA as an RMD in a given year automatically start working toward satisfying your RMD. If you use your “first dollars out” toward a QCD, your RMD amount is included in the charitable contribution, so you don’t have to pay income tax on this portion of your RMD. Keep in mind that this isn’t necessarily the solution for everyone - but it might be a good idea to review this option with your financial advisor.
Reach out to us today! We’re here to help you organize your distributions in a retirement that support your values while reducing your taxable income.
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"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.