Please note the information below is intended to provide generalized information that is appropriate in certain situations.  It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.  The contents of the information provided below should not be acted upon without specific professional guidance.  Please call us if you have any questions.

After years of saving for retirement, it’s time to start using those savings—even if you don’t really need to. Once you reach 70 ½ years old, you must begin taking annual distributions from your qualified retirement plan. This is called a required minimum distribution (RMD.) If you don’t take your RMD, the IRS imposes a severe penalty—it’s a tax of 50% of the amount that was not withdrawn in time! Additionally, any RMD taken is considered ordinary income and will count toward your taxable income for the year.

What if you don’t need that money for current living expenses? An excellent alternative to consider is converting your IRA’s RMD into a qualified charitable distribution (QCD.)

A QCD is a direct transfer of your IRA funds to a qualified 501 (c)(3) charitable organization. QCDs can be counted toward satisfying your RMD for the year, as long as the amount is $100,000 or less per taxpayer. For a QCD to count toward your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is typically December 31^st.

What is the benefit to making a QCD?

QCDs don’t count as taxable income! As long as basic requirements are met, most of which are mentioned above, your RMD will not be included in your ordinary income. QCDs don’t require you to itemize, which means that with the new tax law changes, you may take advantage of the higher standard deduction while still using a QCD for charitable giving.

Scenario:

Taxpayer John Smith is 71 years old and retired. His wife is 67 years old and still employed. They both collect Social Security and have comfortable investment income. Taxpayer Smith must take an RMD from his retirement plan. Most of their itemized deductions were a result of charitable giving, but due to the recent tax law changes, they expect to fall within the significantly increased standard deduction. Knowing that he won’t be itemizing his deductions any longer, Taxpayer Smith still wants to be charitable, but is looking for a way to offset his taxable income. In this situation, Taxpayer Smith should consider converting his RMD into a QCD—that way, he can take advantage of the more favorable standard deduction, have the RMD not included in his taxable income, and support his preferred charitable organizations!

How is a QCD treated for tax reporting purposes?

• Whether the QCD is mailed to you or your eligible charitable organization, the check must be payable to the charity.
• A QCD is not subject to income tax withholding
• For a non-inherited IRA, the QCD will be reported as a normal distribution on form 1099-R.   For an Inherited IRA, the QCD is reported as a death distribution.
• The taxpayer must receive a donation acknowledgement from the charity.

Contact us to find out more about strategies for the retired taxpayer.