If you are age 73 or older, IRS rules require you to take required minimum distributions (RMDs) from your individual retirement accounts (IRA) whether or not you need the income. However, if you make a qualified charitable distribution (QCD) from your IRA you can realize tax savings and satisfy the RMD requirement.
Key Points to Remember:
- A QCD can be a significant tax advantage for IRA account holders over 70 ½
- A QCD can satisfy the Required Minimum Distribution
- Proper planning and timing of distributions are critical to achieve maximum benefit
- MB Foundation’s experienced advisors are ready to help you benefit from this tax-law provision.
What is a QCD?
A QCD is a direct transfer from your IRA to a qualified charity. Since the funds go to charity, rather than you, it is not taxable income, unlike an RMD which is taxable. A QCD can effectively let you receive a tax benefit for your charitable giving even if you take the standard deduction on your tax returns. Additionally, a QCD can lower your adjusted gross income which may allow you to maximize the tax-free portion of Social Security benefits and limit your exposure to the Medicare surtax. However, the timing of distributions from your IRA is critical to receive this benefit.
First Dollars Out Rules
Under the tax rules, the first dollars distributed from an IRA in any year are deemed to satisfy the RMD. Therefore, those who want to reduce their RMD income with a QCD must ensure the QCD is the first distribution in a calendar year, prior to any RMD. A QCD cannot satisfy the RMD requirement retroactively.
Example: Bob’s RMD is $4,000 which he receives in quarterly payments of $1,000 on the last day of each calendar quarter. In November, he learns how the QCD can be used to satisfy the RMD and reduce his taxable income. Unfortunately for Bob he has already received $3,000 of his RMD and the QCD can only offset $1,000 remaining of his RMD. As a result of not planning ahead, he will pay taxes on the first $3,000 and only benefit from $1,000 of tax-free distributions to charity. If Bob had withdrawn the $4,000 as a QCD first, it would have been completely tax-free and satisfied his RMD.
MB Foundation Can Help
MB Foundation has helped many people maximize savings and generosity through IRA giving. With an IRA Designated Fund, you can take one QCD from your IRA and bless multiple charities that are close to your heart. Contact us today to speak with one of our planned giving advisors.