Avoid taxes on Required Minimum Distributions from IRAs

Avoid taxes on Required Minimum Distributions from IRAs

Have you accumulated large IRA retirement account balances that now you are age 70 ½ or older you are being forced to withdrawal funds from the account?  Do you want to learn how to satisfy the requirement to take funds out while not being taxed on some of that withdrawal?

A little background, taxpayers are encouraged to save for retirement through their working years and under current rules, once you obtain age 70 ½, there is a Required Minimum Distribution (RMD) from those retirement accounts which gets added to your income for the amounts withdrawn from those accounts.

Under the Tax Cuts and Jobs Act passed in late 2017, tax reform reduced the benefit of charitable donations (and other itemized deductions) due to increasing the standard deduction for taxpayers.  As an alternative to increasing your income for the RMD, tax rules allow funds to be sent directly from an IRA to a qualifying charitable organization (such as a church, qualifying 501(c)3 organizations) and not be added to the income of the taxpayer.  This direct distribution to charity strategy is called a Qualified Charitable Distribution (QCD).  There is an annual limit of up to $100,000 from IRAs to charities under the QCD rules per taxpayer, while that may not apply in your circumstance, it is helpful to know this limit.

The QCD strategy has a few benefits such as:

1) Satisfying the annual RMD – the penalty for not taking your RMD is 50% of the amount required to be distributed, so it is crucial to meet the RMD each year.

2) Supporting your designated Qualifying Charitable Organization, like Shoebox, from resources you required to withdrawal.

3) Avoiding tax on the QCD amount, tax savings! – (points 2 & 3 remind me of the old saying – “It is better to give than to receive”)

4) By avoiding adding to income the distribution, your Adjusted Gross Income is lower for other tax calculations such as Medicare Premium calculations (IRMA), taxable calculation of Social Security income, are 2 examples.

The QCD is helpful to those taxpayers that are no longer eligible to itemize deductions on their tax returns and were going to use the funds to support a charity.  Utilization of this strategy allows taxpayers to support their favorite charity in a tax efficient manner.