A Remedy for Your Taxable RMD

Required minimum distributions (RMDs) are withdrawals the IRS requires you take from your IRA, SEP IRA, SIMPLE IRA, or retirement plan when you reach age 72. Roth IRAs are not included until after the death of the owner. At any time, you can withdraw more than the minimum requirement amount, but any portion of your required minimum distribution not withdrawn is subject to a 50 percent tax penalty. Yes, a 50 percent penalty! Your RMD is certainly on your financial to-do list that you do not want to overlook.

Your required minimum distribution is taxable to you at ordinary income rates, with the exception of any portion that was taxed before (your basis). This increased income can cause a pivot into a higher tax bracket, increase your Medicare premiums and even increase the taxable amount of your Social Security income benefits. But because the distribution is mandated, there is an option to plan for this increased income.

In December 2015, Congress passed a law that allows individuals over age 70 ½ to contribute up to $100,000 from a retirement account directly to a charity, and this amount is not counted as taxable income. This type of distribution is called a qualified charitable distribution (QCD).

QDCs can be a great tool to utilize in making philanthropic bequeaths during retirement and can help reduce your overall tax liability. In addition, because QCDs don’t require that you itemize, many taxpayers can utilize this strategy while still taking advantage of the higher standard deduction. Therefore, a QCD provides the benefit of gifting to charity while also providing a reduction in taxable income dollar for dollar up to $100,000.

As with many tax laws, there are specific requirements you must follow to ensure the distribution qualifies as a QCD:

  • The distribution can be made only by participants age of 70 ½ or older.
  • The charity must be a 501(c)(3) organization and cannot be a private foundation, donor-advised fund or supporting organization.
  • For the QCD to be applied toward the current year’s required minimum distribution, the funds must come from the IRA before the deadline, typically December 31st.
  • The distribution must be made payable directly to the organization from the IRA trustee.
  • Upon completion of a QCD, we recommend obtaining confirmation or acknowledgment from the receiving institution of your donation. The documentation of your donation will be necessary when tax filing to ensure your QCD is excluded from your taxable income on your Form 1040 tax return.

A qualified charitable distribution can be a great tool to utilize in the right situation, but it may not be the best strategy for everyone. If you are considering a charitable donation, Social Impact Financial can help. Our advisors view charitable gifting strategies as an important part of the financial planning process and have extensive experience helping clients realize their giving objectives.

Social Impact Financial is a specialty practice of Creative Planning. Each of our dedicated teams specializes in socially responsible investing and includes an attorney, a CPA and a CERTIFIED FINANCIAL PLANNER™ practitioner. If you’d like assistance with your charitable gifting strategy, or for any other financial matter, please schedule a call.

Carolyn serves as a Wealth Manager, working directly with clients to develop and implement comprehensive financial plans to help meet each individual client’s specified goals and objectives. Carolyn practices in investment management, estate planning, tax planning, risk management, employee benefits, education planning, and retirement planning.