Tax Strategies for the Retired Taxpayer

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 If you don’t take your RMD, the IRS imposes a severe penalty—it’s a tax of 50% of the amount that was not withdrawn in time!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.

After years of saving for retirement, it’s time to start using those savings—even if you don’t really need to. 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 tax payer. 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 31st.

What is the benefit to making a QCD?
QCDs don’t count as taxable income!

As long as basic requirements are met, 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.

With the 2020 tax law changes, there’s 1 additional factor to consider: you may take advantage of the higher standard deduction ($12,400 for single filers, $24,800 if married and filing jointly).

The Rules of Qualified Charitable Distributions:

A QCD must adhere to the following requirements:

You must be at least 70½ years old at the time you request a QCD. If you process a distribution prior to reaching age 70½, the distribution will be treated as taxable income.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 generally December 31 each year.Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity . You can then request that the check be mailed to the charity, or forward the check to the charity yourself. Note: If a distribution check is made payable to you , the distribution would NOT qualify as a QCD and would be treated as taxable income.The maximum annual distribution amount that can qualify for a QCD is $100,000. This limit would apply to the sum of QCDs made to one or more charities in a calendar year. If you’re a joint tax filer, both you and your spouse can make a $100,000 QCD from your own IRAs.The account types that are eligible for QCDs include:Traditional IRAsInherited IRAsSEP IRA (inactive plans only*)SIMPLE IRA (inactive plans only*)Under certain circumstances, QCDs may be made from a Roth IRA. Roth IRAs are not subject to RMDs during your lifetime, and distributions are generally tax-free. Consult a tax advisor to determine if making a QCD from a Roth is appropriate for your situation.Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations. You are not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers your cost of playing in a charitable golf tournament, your gift would not qualify as a QCD.Contributing to an IRA may result in a reduction of the QCD amount you can deduct.*

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.

Consult a tax advisor regarding your specific situation.

Helpful Links:

IRA FAQs – Distributions (Withdrawals): https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

What Are Traditional IRA Withdrawl Rules? : https://www.ramseysolutions.com/retirement/traditional-ira-withdrawal-rules