You should do a QCD with your RMD. More financial acronyms. For those who are at least 70½ years old, you are painfully aware of the required minimum distribution (RMD) rules affecting your retirement accounts. The government-imposed minimum withdrawal forces you to include the withdrawn funds in your taxable income. The purpose is for the government to collect some taxes on your individual retirement account (IRA) before you pass away.

With some care, you could make a charitable contribution with your RMD and erase that income from your tax return entirely.

First, we will talk about how beneficial this could be. Second, we’ll talk about the mechanics. Last, we will cover some of the restrictions.

The tax benefit of a QCD

We are oversimplifying the 1040 tax form with these hand-drawn images, however, they provide a clear and basic understanding. Knowing that many other factors have been ignored, final numbers will vary in real situations.

Assume a couple has $100,000 of income, including $20,000 of RMDs from their IRAs. Assume this couple donates $10,000 to charities each year. They are not likely to get a tax deduction for their $10,000 donation. At age 70½, you typically have minimal itemized deductions. When choosing between a $24,000 standard deduction and $10,000 of itemized deductions, you’ll pick the standard. This renders your charitable donation tax irrelevant. After reducing the income by $24,000, your net income runs through the marginal tax brackets to determine your tax bill. See image.

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Using a QCD, you can recover your tax benefit from a charitable donation. The donation can be erased from your income from the beginning. You then take the standard deduction of $24,000 in addition to the $10,000 reduction. See image.

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This puts $1,200 back in your pocket for giving a slightly different way.

How do you do it?

It is accomplished by providing a letter or a form to your IRA provider telling the institution that you would like to send some money to a charity. The provider will mail a check to the charitable institution on your behalf. The funds cannot go to your bank first. Get the name and address of your charity ready and provide that to your IRA provider.

This gets a little tricky for those who are accustomed to paying a regular tithing each week or month. You need to stop paying from your bank, reduce your IRA withdrawals by your tithing amount, and then send those funds directly to your church from your IRA

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Restrictions

• You can give up to $100,000 per year. If you are married, each of you can give up to $100,000 per year from your own IRAs.  

• The transfer must be a direct transfer from your IRA provider to the charity.

• Your RMD may be satisfied any time during the calendar year, however, during your first year, a QCD can only be satisfied if the donation occurs after you are 70½ years old. You might turn 70 in February, and 70½ in August. You would need to wait until reaching 70½ in August before sending your donation from your IRA to the charity.

• 401(k) accounts do not allow for QCDs. You must first roll those funds to an IRA to be able to do a QCD. Remember, the first money to leave your account must be your RMD. This includes rollovers. If you are over 70½, the 401(k) provider will send that year’s required minimum distribution and then roll the remainder to an IRA. This means you will need to wait until next year to do a QCD. The other option is to ensure that you roll your funds to an IRA prior to the calendar year in which you turn 70½. There are other differences (not related to charitable giving) to consider between IRAs and 401(k)s not discussed in this article.

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Summary

Most of us will take the standard deduction. Most of us will get no benefit from trying to itemize our charitable giving deduction. If you know someone over 70½ who is charitably inclined and has tax-deferred retirement accounts, you should be nudging them (or maybe kidney-punching them!) to do a QCD. Of course, as always, we would be happy to answer their questions if they would like to call.

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