You Can Still Get Tax Benefits From an RMD, Just Not What You Thought!
By Trent Derrick, CMT®
At Legacy Wealth Management, we hold a strong commitment to giving back to our communities and embracing a generous lifestyle. If you share this passion, you’ll find kindred spirits among our clients. We understand that the world extends beyond just you and your family, and you aspire to make a positive impact, leaving a lasting difference wherever and whenever possible. Grateful for the opportunities you’ve received, you seek to pay it forward in a meaningful and purposeful way.
We understand this is your purpose in giving to charity, and our mission is to assist you in doing so wisely. Every dollar saved in taxes means an extra dollar you can channel toward making the world a better place.
Required minimum distributions (RMDs) play a significant role in retirement planning cash flow, and they can be utilized for your charitable endeavors. Instead of transferring the money into your bank account, explore the option of sending your RMDs directly to a charity through a qualified charitable distribution (QCD). This way, you can make a meaningful impact while optimizing your financial strategy.
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.
When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, potentially, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.
In addition to having the right kind of account, these other requirements must be met: (1)
- You must be age 70½ or older.
- To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
- QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
- Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
- Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.
Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.
On top of that, there are certain types of organizations that are not eligible to receive QCDs. (2) They are:
- Private foundations
- Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
- Donor-advised funds managed by public charities on behalf of individuals, families, or organizations
How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.
Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.
Here to Guide Your Steps
We know how important giving to charity is for you, and we understand that you want to do it in the most tax-efficient manner possible. QCDs present an excellent opportunity for anyone required to take minimum distributions from their retirement accounts.
To be sure your distributions qualify for exempt status, it’s crucial to follow specific rules and requirements. Partnering with an experienced financial professional can help you navigate the process of making a QCD correctly. If you’re curious to learn more about qualified charitable distributions, Legacy Wealth Management is here to assist. We aim to simplify financial management, realize your ideal financial future, and enable you to focus on what truly matters. Book a consultation with me here or email me at trent@legacywm.com to get started!
About Trent
Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. Trent is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent has a bachelor’s degree from the College of Charleston and studied economics at the University of South Carolina, Columbia. He is a Chartered Market Technician® (CMT®) professional. Trent serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. When he’s not working, Trent, a proud Eagle Scout, enjoys volunteering with the Charleston Animal Shelter’s outreach program. Trent and his wife love to cook international cuisines and host dinner parties with their friends. To learn more about Trent, connect with him on LinkedIn.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Legacy Wealth Management and LPL Financial do not offer tax advice or services.
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