Giving generously and unconditionally can break the power that money has on you. This is a very powerful money lesson and hopefully, you have found a giving rhythm in your financial life. For years, we have helped our clients not only to feel empowered and to give generously but also to maximize the related tax benefits. Last year, a portion of the tax code was made permanent that should be of interest to those age 70 or older.
Are you ready for some acronyms or alphabet soup? The IRS has recently made permanent a rule that will allow those 70.5 years of age and older to make a Qualified Charitable Distribution (QDC) of their Required Minimum Distribution (RMD) from their Individual Retirement Account (IRA).
Now in English. As you may know, when an IRA owner turns 70.5 the IRS mandates they begin taking money out of their account, what’s known as an RMD. The IRS uses a factor to determine how much needs to be taken out of the account each year. The first year RMD factor is 27.4, so one would take the IRA account value at the end of the previous year and divide it by this factor. For example, if an IRA account is worth $1,000,000 then the first year RMD would be $36,496, which becomes taxable income to the owner. The RMD factor increases each year, which means more taxable income to the owner. All good if you need the money to live off, but if you are charitably inclined and have other sources of income, the permanency of this tax code will be of interest.
An IRA owner may choose to distribute all or a portion of their RMD (up to $100,000) directly to a qualified charity and those monies will not count towards taxable income but will satisfy the RMD.
So who should consider this strategy?
- An IRA owner who does not need the entirety of their RMD to satisfy basic living expenses.
- An IRA owner that is charitably inclined and has a large IRA balance.
- An IRA owner who does not own appreciated securities in an after-tax account.
- Giving appreciated securities to a Donor Advised Fund or directly to a charity may offer a higher tax benefit. Consult P&A and your tax advisor to determine the best course of action in this case.
- An IRA owner with little to no itemized deductions to help reduce taxable income.
If you are a client of P&A and are approaching 70.5 years of age, this new permanent law is something we will proactively bring up during our planning meetings with you. We want you to get busy giving and get busy saving on taxes by doing so.