Charitable Giving with RMDs

January 15th 2019 | Posted in Blog, Financial Planning, Strategy

Once you reach age 70½, Uncle Sam wants you to start paying taxes on at least a portion of your IRA or 401k balance. He gets you to do that by requiring you to withdraw a percentage of money from your tax-deferred account, and every dollar that you withdraw from your IRA or 401k is taxed as ordinary income. The minimum amount that you must withdraw each year is not surprisingly called the Required Minimum Distribution (RMD). Those who don’t take the required minimum distribution are assessed a 50% excess accumulation penalty on the amount they should have withdrawn.

The new tax laws have significantly limited your ability to itemize deductions. For years you listed your gifts to ministries and charities on Schedule A of Form 1040 and received deductions that helped reduce your taxes. You gave, not to receive a tax deduction, but because you wanted to give. No doubt, you will continue to give even if your giving does not provide any tax benefit. (Now that the standard deduction is $24,000 for married couples under age 65 filing jointly and $26,600 for married couples age 65 and older filing jointly, most of us will not itemize deductions.)

One tax advantage does remain for those of you with charitable intent, provided you attain at least age 70½ this year and you own an IRA or a 401k. If you do not take constructive receipt of your required minimum distribution but send it directly to charity, you will not be taxed on the distribution.

Let’s say, for example, you have determined to give $12,000 to your church this year, and the RMD for your IRA is also $12,000. If you instruct the custodian of your IRA to send $12,000 directly to your church instead of to you, your RMD will be excluded from your income, and you will not pay taxes on this amount. Generally speaking, if you are in the 22% tax bracket, you would save $2,640 in taxes.*

Some of our clients are already employing this tax strategy known as a Qualified Charitable Distributions (QCD). Remember, you need to be at least age 70½ this year and you need to own an IRA or a 401k. If you meet these two requirements and are not using this strategy, we would encourage you to talk with your advisor at Master’s. He can help you get started.

Let’s continue to give generously, “not reluctantly or out of compulsion” but out of a heart of gratitude. If the IRS wants to reward generosity, let’s be thankful for that as well!

*Other factors can influence the amount of tax savings. You should seek professional tax advice to see how this will impact your specific situation.

Robert B. Miller | CRC® Advisor

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