You’ve spent a lifetime saving for retirement, and you did a really great job. So great, in fact, that you don’t need to take money out of your IRAs. But, you’ve turned 70 1/2, and now the IRS is forcing you to withdraw money from your IRA every year in the form of a Required Minimum Distribution, or RMD. Is there any way to get around having to take an RMD?
Mitigating Your RMD’s Affect On Your Taxes
The IRS gave you years of tax relief on the funds in your IRA. They only did that to encourage you to save for retirement. Now, that you’re retired (or at least retirement aged) they want their money now in the form of taxes on your IRA withdrawals, but if you played your cards right, you might not ever need to withdraw, and the IRS would have to wait longer for that money. The IRS hates waiting.
The RMD keeps this from being the case. Once you turn 70 1/2 years old, you have to take some money out every year, and the government is there, waiting to tax it.
Unfortunately, there is no way to get out of having to take a Required Minimum Distribution, but there is a way to minimize it’s impact on your taxes.
A Qualified Charitable Donation, or QCD, is one way to minimize the effect of forced RMDs on your taxes.
As with any charitable donation, you can deduct the donation from your taxes, but the QCD has one extra advantage a regular donation doesn’t. Because the donation is made directly from your IRA account, it does not count as income to you.
An example may help to explain the value.
Let’s say Louis is 71. For easy math, let’s say he is required to take an RMD of $10,000. For more easy math, let’s say that Louis’s adjusted gross income is $100,000.
If he takes the $10,000 RMD and then donates it to charity, the $10,000 counts toward his Adjusted Gross Income, or AGI, increasing it to $110,000. He gets to deduct the $10,000 on Schedule A, Line 16. That increases the itemized deductions reported on Form 1040, Line 40.
But, those deductions are “below the line,” meaning that while they do reduce your tax bill, they do not reduce your AGI. Your AGI, determines what deductions and credits you are eligible for, and any phaseouts of those same tax credits and tax deductions. It also affects the taxability of your Social Security, Medicare premiums, which tax bracket you are in, and whether or not your long-term capital gains are taxable.
A QCD is reported like any other IRA distribution on Line 15 of Form 1040. However, Line 15 has two parts, an A and a B.
The A is the total distribution amount. The B is the taxable amount.
When you make a proper QCD, the amount donated is not taxable. The donation is reported on Part A as part of the total distribution, but is not entered on Part B as taxable. As such, the amount never ends up in your income at all, therefore reduces your AGI.
Requirements for Qualified Charitable Distribution
There are several requirements for a QCD. First, a QCD can only be made from an individual IRA. It cannot be made from a SEP-IRA or SIMPLE IRA. Technically, you can make a QCD from a Roth IRA, although in most cases, distributions from a Roth IRA are not taxable already, and Roth IRAs do not have RMD requirements, so there is limited value in making a QCD from a Roth IRA.
A second important requirement is that the QCD distribution must be made directly to the charity without the owner of the IRA ever taking control of the funds. In other words, your IRA custodian must make the check out to the charity, not to you. If you get a $5,000 check, deposit it, and then donate the money, that’s game over. You took a $5,000 distribution, and you are getting taxed on it. (You can still deduct the donation amount.) In many ways, this is similar to a rollover where the check is FBO to the taxpayer, but not deposited by the taxpayer.
Instead, you’ll need to fill out the proper form from your IRA custodian. Many financial institutions and brokerages make QCD forms available on their websites. By filling out the form, you are instructing the custodian to make the proper payment directly to the charity, and not you. If you can’t find the form, make a phone call and tell them that you want to do a Qualified Charitable Distribution. It is fine if the you receive the check and then forward it on to the charity, so long as the check is made out to the charity and not to you. DO NOT CASH OR DEPOSIT THE CHECK.
Also, QCDs may only be made to the usual 501(c)(3) charitable organizations. They may not be made to donor-advised funds, supporting organizations, or private foundations.
Finally, the maximum QCD is $100,000 per year.
Ask your financial planner or IRA custodian for help using a QCD to help with RMD tax affects.