Why You Should Consider Sending Your RMDs Straight to a Charity
By Net Worth Advisory Group
At Net Worth Advisory Group, we believe in giving back to our communities and embracing a spirit of generosity. If you feel the same, you share values with our clients. You recognize that the world extends beyond just you and your family, and you aspire to leave a positive impact whenever possible. You appreciate the opportunities you’ve had and wish to pay it forward in a meaningful way.
This is the motivation behind your charitable giving, and our role is to help you do it as wisely as possible. Every dollar saved in taxes is another dollar you can contribute to making a difference.
As part of retirement planning, required minimum distributions (RMDs) can play a significant role in this effort. Instead of depositing the money into your bank account, consider directing your RMDs straight to a charity through a qualified charitable distribution (QCD).
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, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.
To illustrate the potential tax savings and charitable impact of a QCD, consider the following example:
Mark and Linda, both 72, want to support a local food bank. Mark has a $20,000 required minimum distribution (RMD) from his IRA this year, and the couple’s annual taxable income is $120,000.
If Mark takes the RMD and then donates it, the $20,000 will be added to their taxable income, costing them $4,800 in federal taxes (at a 24% tax rate). However, if Mark makes a qualified charitable distribution (QCD) directly from his IRA to the food bank, the donation is not counted as taxable income, saving them $4,800 in taxes.
With a QCD, the food bank receives the full $20,000, Mark satisfies his RMD, and they avoid extra taxes. This strategy helps reduce taxes while maximizing their charitable impact.
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:
- 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 the limit of $105,000 as of 2024 (this amount is indexed for inflation) 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. 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.
It’s important to understand that Form 1099-R doesn’t distinguish QCDs as a unique distribution type. As a result, your tax preparer may not know you made a QCD unless you let them know. Be sure to inform your tax professional about any QCDs you made during the year so they can be accurately reported on your tax return and you can receive the full tax benefit.
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.
Partner With a Trusted Advisor
We know that charitable giving is important to you. Since you plan to donate anyway, why not do it in the most tax-efficient way? Qualified charitable distributions offer an excellent opportunity for those required to take minimum distributions from their retirement accounts.
There are specific rules and requirements that must be met for these distributions to qualify for tax exemption, so it’s wise to collaborate with a knowledgeable financial professional so you execute a QCD correctly. Net Worth Advisory Group is here to help. Are you looking for a financial planner dedicated to simplifying financial management and helping you pursue your ideal financial future? Call us at 801-566-6639 or schedule a complimentary, no-obligation consultation to see if we are a good fit to help you pursue your goals.
To learn more, visit our website.
About Net Worth Advisory Group
Founded in 2003, Net Worth Advisory Group is an independent, fee-only, CERTIFIED FINANCIAL PLANNER® and investment advisory firm located in Salt Lake City, Utah. We specialize in helping people transition from the workplace into retirement and ensuring that those who are already retired will not outlive their nest egg. Our top priority is to have clients experience a greater sense of ease with diligent, personalized wealth care and the implementation of customized financial plans and ongoing personalized asset management. We equip all clients with a comprehensive financial plan, meeting every six months to update as needed and review investment performance. Our team is passionate about providing comprehensive financial planning with the fee-only model, and we love feeling like we’re making a difference in our clients’ financial lives.
As a NAPFA-registered fee-only advisory firm, our recommendations are untainted by a hidden agenda to sell financial products paying large commissions. Unlike our competitors at brokerage firms, insurance companies, and banks, we are compensated solely by our clients, so we are financially motivated to provide objective advice that is always in our clients’ best interests. Anyone can call himself or herself a financial planner, but only an advisor with the CERTIFIED FINANCIAL PLANNER®, CFP® designation has met the education, examination, experience, and ethical requirements mandated by the CFP® board. According to the CFP Board, there are 97,000+ CFP® professionals in 2023, representing about 1 in 3 financial advisors in the U.S. Net Worth advisors are also members of NAPFA, which only has about 4,600 advisors, and are either CFP® professionals or CFP® professionals in training.
Net Worth Advisory Group’s mission is to significantly improve the lives of our clients by delivering exemplary financial planning and wealth management advice that enables them to live the lives they have imagined.
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