Melissa A. Seamon, CFP®
Senior Financial Advisor
A key issue facing many retirees is having to take required minimum distributions (RMDs) starting at age 72, regardless of whether they need the income. RMDs must be taken from most qualified defined contribution plans such as 401(k)’s, 403(b)’s, and 457’s. They also apply to all types of IRAs except Roth IRAs. For retirees trying to defer taxes on their retirement funds for as long as possible, this creates an unwanted tax liability.
Fortunately, retirees have an option that can offset their RMD tax liability while fulfilling their philanthropic desires. That option is called a Qualified Charitable Distribution (QCD).
How a QCD Works
A QCD is a direct, tax-free transfer of funds from your IRA to a qualified charitable organization. To be eligible, you must be at least 70 ½ years old. To qualify as a QCD, the following rules apply:
- It’s a direct transfer, so the check must be made payable to the charitable organization.
- Your donation is maxed out at $100,000. (Cheapskates!)
- If you are married, you and your spouse can each take a QCD of $100,000 each year.
- The money must be received by the charity by December 31st to qualify.
When you complete a QCD, the amount applies to your RMD. For example, if your RMD for the year is $7,000, you can instead take a QCD for $7,000, which will satisfy your RMD. If the QCD was only $5,000, you would still need to take an RMD of $2,000.
It is important to note that if you take an RMD earlier in the year, you can’t reverse it if you later decide to make a QCD. You can still use a QCD to transfer funds tax-free to a charity, but it won’t satisfy your RMD because you already took it.
Lower Your Taxes with a QCD
When you take an RMD, it is taxed as ordinary income. The portion of your RMD that is a QCD is not taxable. In the example above, the person who takes $5,000 as a QCD will only pay tax on the $2,000 RMD.
Your adjusted gross income (AGI) determines your tax rate. If your IRA distributions are large and boost your income to more than $91,000 as a single filer or $182,000 as a joint filer, it can trigger the Medicare high-income surcharge, which increases your Part B and D premiums. If your income is high enough (>$250,000), it will trigger the dastardly 3.8 percent Medicare tax.
For taxpayers who no longer itemize deductions under the new tax law (because the standard deductions are now higher), the QCD is a significant advantage. If you take a QCD, it is not added to your AGI, so it won’t trigger any additional tax. It can also reduce the taxability of your Social Security benefits. Keep in mind, when you use a QCD to donate to a charity, you don’t deduct it as a charitable expense (you don’t need to because you have already removed the RMD from your AGI).
What You Need to Know about QCDs
There are a few caveats. First, the QCD is not available for 401(k) plans, SEPs or SIMPLE IRAs. However, if you roll any of those plans into an IRA, it becomes QCD eligible. Second, although owners of a Roth IRA can make a QCD, it is really a moot point. There are no RMDs for Roth IRAs, and withdrawals are already tax-free. Third (this bears repeating), if you take an RMD, you cannot later make a QCD. Once a check or a transfer is made in your own name, it cannot be changed.
The QCD is an excellent planning opportunity for people who struggle with having to take RMDs they don’t need and losing a portion of them to taxes. And, for the charitably inclined, it is a win-win. If you would like to explore the use of QCDs for your situation, we encourage you to take a look around our website and see if we could be a good match. We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets.
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