After you attain the age of 70 1/2, you’re required to take a minimum distribution from your retirement plans on an annual basis, regardless of whether or not you need the money. If you don’t need your required minimum distribution (RMD) and have a charitable intent, it is possible to donate the RMD directly to charity and avoid paying income tax.
Details to note:
- Does the law include transfers from 401K’s or other pension accounts besides IRAs? The answer is no. A Qualified Charitable Distribution must come – and must come directly – from an IRA account.
- Is there a limit on the contribution? If you’re 70 ½ or older, you are allowed to transfer up to $100,000 to charity tax-free each year, even if that is much more than your RMD. Your RMD for the year will have been satisfied, and the rest will not be included in your adjusted gross income.
Cautions:
- You cannot “double dip” by also deducting the money you’ve transferred to the charity as a charitable deduction.
- You cannot withdraw the money from the IRA and then write a check to the charity; the money needs to be transferred directly from the IRA to the charity.
Bonus benefits:
- Because making a tax-free transfer (rather than taking your RMD) keeps the money out of your adjusted gross income, you help avoid the Medicare high-income surcharge.
- Keeping money out of adjusted gross income can mean less of your Social Security benefits might be taxable.
The Qualified Charitable Distribution is just one example of the overlap between tax and estate planning. And while the attorneys at Rebecca W. Geyer & Associates do not offer tax advice, we do coordinate efforts with other advisors to address the tax aspects of the planning process, and we make sure we keep our clients apprised of all the latest updates in tax law.
When it comes to IRAs, we don’t want you to miss out on any of the details, cautions, or benefits!
– by Rebecca W. Geyer
