Have you ever found yourself being forced to take a distribution from your retirement account when you didn’t need the funds? Worse yet, has that distribution pushed you into a higher tax bracket or resulted in a higher percentage of your social security being taxed or increased your Medicare premiums?
Required Minimum Distributions (RMDs) are the amounts account owners of non-Roth retirement accounts are required to withdraw each year per the current tax code. The good news is the starting age for RMDs continues to be pushed back and now stands at 73-75, depending on the year you were born and assuming you haven’t already started taking distributions.
Nobody wants to pay more in taxes than is required by law. One way to be more tax efficient with your non-Roth retirement accounts is to make a Qualified Charitable Distribution (QCD) instead of taking an RMD.
A QCD is a distribution from a retirement account that is sent directly to a qualified charity. The good news is a QCD counts as your RMD and is excluded from your taxable income. In other words, you can meet your RMD requirement and not pay taxes on it if the funds are given to a qualified charity.
A couple of important points to keep in mind: first, you must be at least 70 ½ years old to make a QCD and second, you can only make a QCD up to $100,000. If the amount of your RMD is greater than $100,000 you will be required to take the excess as an RMD, thus increasing your taxable income and your tax bill. However, with careful tax planning and some foresight you can develop a plan to keep your RMDs at or below the $100,000 QCD threshold.
If regularly contributing to qualified charities is part of your giving plan, a QCD makes a lot of sense because it reduces the amount of taxes you end up being required to pay while meeting your RMD obligation. Keep in mind the recipient of your distribution must be a qualified charity. Your neighbor’s Go Fund Me campaign will likely not qualify.