With about four weeks left in the year, seniors are urged to engage in strategic financial planning, particularly paying attention to fulfilling their required minimum distributions while keeping an eye on the tax liability these withdrawals may incur. It is also opportune for seniors to explore any potential tax-saving strategies and leverage available tax deductions before the year concludes. Qualified Charitable Distributions often allow seniors to do both at the same time.
Federal tax law generally requires senior investors aged 73 or older to withdraw a mandated amount from their retirement accounts by the end of the year to avoid penalties. The required minimum distribution (RMD) is calculated as the value of the traditional retirement account on the last day of the prior year divided by the distribution period from the Uniform Lifetime Table, corresponding to the taxpayer’s attained age. RMDs apply to all employer-sponsored retirement plans and traditional IRAs, including IRA-based plans such as SEP IRAs and SIMPLE IRAs. Roth IRAs are not subject to required distributions while the owner is alive.
Charitably inclined seniors in a financial position to donate may consider making a Qualified Charitable Distribution (QCD) from their IRA or IRA-based plan. A QCD allows individuals aged 70½ or older to directly transfer up to $100,000 annually from their IRA to qualified charities without incurring income tax on the distribution. This can be advantageous for seniors seeking tax-efficient ways to fulfill their charitable intentions. Furthermore, by making a QCD, seniors can fulfill their RMDs while simultaneously supporting causes they care about. The QCD amount is excluded from the senior’s taxable income and does not qualify for a charitable deduction on their tax returns. At first glance, this may not appear to provide a tax benefit; however, by excluding the distribution, taxpayers lowers their adjusted gross income (AGI), which helps with other tax breaks that are pegged at AGI levels, such as medical expenses if itemizing deductions, passive losses, and taxable Social Security income.
The maximum annual amount that can qualify for a QCD is $100,000—a limit that will be indexed for inflation starting in 2024. However, a QCD doesn’t have to be all or nothing, nor are you limited to one charity. You can give to multiple charitable organizations up to the $100,000 overall limit. If you file taxes jointly, your spouse can also make a QCD from their own IRA within the same tax year for up to $100,000. While amounts donated that exceed your RMD do not count toward future years’ RMDs, the distributions still lower your account balance, potentially reducing future RMDs.
The charity must be a 501(c)(3) organization, eligible to receive tax-deductible contributions, but cannot be private foundations or donor-advised funds. The distribution must also be made directly from your IRA administrator to the charity, as QCDs are not subject to federal withholding. If funds are distributed to you first, you are liable for the taxes due.
A trusted tax adviser can help seniors with this strategy, providing a tax-savvy approach to philanthropy while allowing seniors to maximize the impact of their charitable contributions and optimize their financial position during retirement.
If you have questions about fulfilling your annual RMD by making a qualified charitable distribution, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the December 2, 2023 “Henssler Money Talks” episode.
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