Capture Tax Savings: an IRA RMD for Charitable Giving

You will be turning or have turned 70 ½ years old this year, and you must begin taking a required minimum distribution, or RMD, from your IRA or other tax-deferred accounts.

You may choose to defer your first RMD until April 1st of next year. However, you’ll be required to take two RMDs next year, which might push you into a higher tax bracket. If that occurs, you’ll defeat your goal of minimizing your tax bite.

Whether you are taking your first RMD or not, did you know that you may directly donate the funds to a qualified charity and avoid paying taxes on the distribution.

According to the IRS, it’s called a qualified charitable distribution (QCD). It is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or older that is paid directly from the IRA to a qualified charity.

The amount you choose to donate will satisfy the RMD requirement up to $100,000.

Let’s consider an example that illustrates the benefits of a QCD.

Tom is 75 years old, married, and is required to take $20,000 from his IRA by December 31. He receives his check on December 20 and turns around and writes a $20,000 check to a qualified charity.

The $20,000 distribution is counted as regular income. Given today’s higher standard deduction that followed 2018 tax reform ($24,400 in 2019 for married filing jointly), Tom is unable to itemize (his other deductions in our example fail to lift him above the $24,400 threshold). He loses the ability to deduct the charitable donation.

Instead, Tom must direct his IRA custodian to transfer the funds directly to the qualified charity, up to the date of the annual RMD deadline. That way, he satisfies the RMD requirement AND takes full advantage of the tax deduction earned by donating to his favorite charity.

If Tom decides to donate $14,000 via a QCD, he must still withdraw an additional $6,000 to satisfy the RMD.

If Tom’s RMD is $150,000, he can directly donate no more than $100,000 via a QCD. The remaining $50,000 would be payable directly to him.

Tom’s wife is also eligible to participate in a QCD, up to $100,000 from her IRA.

If you are required to take an RMD by year-end, consider a QCD. You will enjoy a considerable tax benefit, while helping to fund a charity that is near and dear to you. Feel free to consult with your tax advisor with specific questions.