Using your RMD for charitable giving

Nearly two years ago, Congress did something they generally don’t…they made a decision that actually benefits savers!  Did you know that if you’re over the age of 70.5 and are the owner of a traditional IRA you can use your required minimum distribution (RMD) to help support your favorite charities?  Through what’s known as a Qualified Charitable Distribution, those who qualify can avoid paying income tax on the amount of the IRA distribution if it is sent directly to the charity.

For many years, Congress waited until December before extending this provision, but in 2015 lawmakers decided to make this a permanent feature of the tax code.

Here are the details:

  • Must be age 70.5 or older.
  • Must have a traditional IRA (can’t be done out of a 401k account).
  • You can donate up to $100,000 per year directly to a non-profit organization from your IRA account.
  • In doing so, you will avoid paying ordinary income tax on the amount of the distribution.
  • Doesn’t have to be all to one charity or in one lump sum.
  • Can be done anytime during the year.

Here’s an example:

Let’s say Henry is 71 years old and has an IRA worth $700,000 as of December 31, 2016.  His required minimum distribution for 2017 would be around $26,415.  This is based on the RMD table factor of 26.5, meaning the $700,000 balance is divided by 26.5 to arrive at this year’s RMD amount of $26,415.  If Henry is in the 25% marginal tax bracket, he’d be looking at roughly $6,600 in additional income tax exposure.  If instead, Henry used all of his RMD to fund his charitable giving, then he would avoid the added income tax liability.

The benefit here is that using your RMD to give to charity satisfies your RMD requirement for the year, but this amount doesn’t get included in your adjusted gross income (AGI) for income tax purposes.

Some important notes:

  • Charitable distributions are reported on Form 1099-R in the calendar year of distribution.
  • Give the charity a heads up prior to doing this.
  • This IRA distribution can’t be sent to a donor-advised fund.
  • You are not allowed to take a charitable deduction for contributions made this way.
  • For those who don’t itemize, and can’t deduct charitable contributions, this is a great way to get some tax advantages for being charitable.
  • By keeping this money out of your AGI, you may keep your tax bill down related to Medicare surcharges and even Social Security benefits as well.

So if you’re over the age of 70.5, have a traditional IRA, and are charitably inclined, you might talk to us and/or your accountant about utilizing the Qualified Charitable Distribution technique. With the potential for major tax reform on the table, we’re not sure how long this provision will continue to be available.



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