A Better Way to Take Your RMDs

As we make our way toward the end of the year, you might be thinking about things you can do right now to save on taxes for 2019.  Well here’s one strategy you may not have heard about – one that could be a real help if you have both a required minimum distribution, AND you’re looking to donate to a qualified public charity this year.

It’s called a Qualified Charitable Distribution, or QCD for short. It works like this: once you’re at least age 70 ½, you tell your IRA custodian to transfer some amount of money directly from the IRA to the charity.  Then, when you do your taxes, you do not show this amount as a taxable event.  The amount can be any amount you want up to a combined $100,000 for the tax year, and that amount will count toward satisfying your RMD

The result is that by sending the money via a QCD directly from your IRA, your charity receives the money you intended them to get, AND it counts towards your Required Minimum Distribution for this year for your IRAs.  Great!

Now – what many people do instead is to take the RMD themselves as normal, and then turn around and write a personal check to the charity.  The RMD is taxable coming in, the check to the charity is deductible going out, and they just wash each other out, right?  Well, not necessarily.  When you take the RMD and put it on your tax return, that income is above-the-line, meaning it adds to your adjusted gross income for the year. The deduction, if you can even itemize, happens farther down your tax return, below the line.  When your Adjusted Gross Income goes up, it can increase the taxability of your Social Security.  It can increase your Medicare premiums. It can increase your capital gains taxes.  It can also phase out some of your itemized deductions, among other things.  So it creates a kind of ripple effect across your tax return.

By doing a Qualified Charitable Distribution, you avoid increasing your AGI with your RMD, thus potentially avoiding those issues I mentioned a moment ago.  And here’s a bonus: if you don’t itemize and thus can’t deduct your charitable contributions, by doing a QCD, you get what amounts to a de facto deduction.  Not bad!

A few rules for doing a QCD: First, the IRA owner must be at least age 70 ½ to do this.  So if you don’t turn 70 ½ until the end of December, you may not have time to do it for this year.  Also, you have a $100,000 per year donation limit through a QCD.  This is per taxpayer, so a married couple can each do up to $100,000 if each distribution comes from his or her respective IRA.  And third, this works only for individual IRAs, and not from any kind of employer-sponsored retirement plan, like a 401(k).

There are a few other rules as well, so check with your advisor before doing this to see if it makes sense for you.  But if you want to potentially maximize the benefits of charitable giving, a Qualified Charitable Distribution could be just the ticket!