Qualified Charitable Distributions: Tax Free Karma and a strategy for Required Minimum Distributions
You have spent your working years building up your retirement assets. Your retirement income looks good, and you are confident that your funds will outlast you. You are now at a point in life where you have begun to consider what people and what organizations could use the funds more than you. You want to begin focusing on using your hard-earned money to change the world for the better. And then, Uncle Sam starts asking you for more money!
Starting at age 72 the US government begins forcing retirees to take Required Minimum Distributions. RMDs are calculated based on account size and the owner’s age. In the first few years, these forced distributions may be unnoticeable, adding up to a smaller amount than you would have taken out as income anyway. As time goes on, and RMD amounts increase, the required distribution amount creeps up higher and higher than what you need for income. The increase require you pay more in taxes.
A lesser-known rule allows people to limit or avoid tax increases caused by RMDs, while continuing their gifting goal. Qualified Charitable Distributions allow IRA owners, 70 years of agequalified-charitable-donations-tax-free-karma-and-a-strategy-for-required-minimum-distributions or older, to make donations directly from IRAs to qualified charities tax free, up to $100,000 per year. The IRS also allows QCDs to satisfy your RMD in any year.
Qualified Charitable Distributions is a good strategy to use to lower your RMD tax consequences, not only in the early years of your RMD period, but also as a strategy to keep your IRA balance low in future years, as your RMDs increase. It is also one of the most straight forward ways to take advantage of tax efficient gifting.
But, while the concept is simple, the process can be arduous. Getting QCD strategies right requires an understanding of the administrative process and some time. It is important to know how the custodian of your account handles QCDs and what paperwork is involved. It is also important to understand how the charity of choice accepts delivery of QCDs. Everything from if QCDs are accepted to where the funds should be sent.
You must also give yourself plenty of time to enact this strategy each year. This is not an action you should take in December. Any administrative misstep could send the funds back to your IRA causing you to miss an RMD before the deadline and potentially having to pay penalties. If this strategy is something you feel would be beneficial, you should plan to start the process before entering the fourth quarter of the year.
If done right, QCDs are a great solution to help solve the problems of the world and solve your own tax headaches. Win win!