If you are looking for your financial legacy to leave an impact on the world, there is a way you can make a difference. You can use your Required Minimum Distribution (RMD) to make charitable donations, a strategy that could benefit both you and the causes important to you.
You must withdraw money once you turn 73 if you have a traditional IRA. These withdrawals, or RMDs, are taxed at the ordinary income tax rate, which can sometimes push your annual income into a higher tax bracket, which could cause retirement concerns.
However, there's a strategy that may help you put these distributions to good use and help you manage your tax situation, the Qualified Charitable Distribution (QCD) rule. This rule allows traditional IRA owners to deduct their RMDs on their tax returns if they donate the money to a charity or a non-profit organization. You can effectively manage your income taxes by lowering your Adjusted Gross Income (AGI). Please note the IRA puts a $100,000 limit on the total distribution.
Here's how it works:
Once you decide to make a Qualified Charitable Distribution, you choose a charity that qualifies as a charitable organization under IRS rules. Let your financial advisor, or whoever holds your IRA account know your intention to donate your distribution and the amount you'd like. They will then send a check to the charity on your behalf.
It's important to remember that QCDs must be made directly from your IRA; you may lose the benefit if the distribution is paid to you first and then passed to a charitable organization.
Who should consider using the QCD rule?
- If you would like your RMD to benefit another organization
- If you would like to support an approved charity rather than a foundation
- If you would like to make a larger donation than you are able to in cash
Conclusion
This approach can provide some tax relief while helping fulfill your philanthropic goals. This section is for informational purposes only and is not a replacement for real-life advice. Consider speaking to a tax, legal, or accounting professional before modifying your charitable giving strategy.
1. United States Senate Committee on Finance. "SECURE 2.0 Act of 2022
2. IRS.gov, November 16, 2023
3. The Internal Revenue Service has specific rules and guidelines for charitable contributions. Before taking any specific action, be sure to consult with your tax professional.
4. Once you reach age 73, you must begin taking the required minimum distributions from a traditional IRA in most circumstances. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Contributions to a traditional IRA may be fully or partially deductible, depending on your adjusted gross income.
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