Don’t need your RMD? Give up to $105,000 of it as a QCD
Sunday, November 17, 2024
This month, millions of U.S. residents gather with family and friends. But you can help others find thing to be thankful this Thanksgiving season by donating to charitable organizations.
Gifts typically are cash, which in Internal Revenue Service parlance includes those made by check and credit card. If the tax agency rules are met, the donations also might be tax deductible.
But some older philanthropists have another option. They can give part or all of their required minimum distribution, or RMD, to their favorite charities. For the 2024 tax year, that could be as much as $105,000.
However, there are some special considerations with a donated RMD, known as a Qualified Charitable Distribution, or QCD. Here’s an overview.
RMD time and age issues: If you have a tax-deferred retirement account, you must start taking out some of the funds when you’re a septuagenarian.
The reason is easy to understand. Uncle Sam is tired of watching your traditional IRA or workplace 401(k) grow for years, sometimes decades, and not getting his cut. RMD appease the tax collector.
When and how much you must withdraw from affected retirement accounts is based on your age, in some cases your spouse’s age, and the amount of your tax-deferred accounts.
Tax law changes in recent years, notably the latest Setting Every Community Up for Retirement Enhancement (SECURE) Act, have pushed the RMD starting age back a bit. In 2023, the RMD trigger age went from 72 to 73. In 2033, it won’t kick in until age 75.
The exact RMD is calculated each year after you hit your starting age by using one of the IRS' life expectancy tables. They are found in Appendix B of IRS Publication 590-B. These tables are created for various lifestyle situations, but most people use the Uniform Lifetime Table, which the IRS updated in 2020. You also can use AARP's online RMD calculator to determine the amount you must withdraw.
Depending on how much you've saved, an RMD could be in the tens of thousands. And even if your account is in an investment vehicle, such as a mutual fund, withdrawals from tax-deferred retirement accounts are taxed at ordinary tax rates, which now top out at 37 percent.
Such a hefty chunk of change could bump you into a higher tax bracket, as well as increase your Medicare costs. But a QCD could prevent those unwanted tax and financial consequences.
Tax savings for RMD donors: If your RMD-mandated account is a traditional IRA and you don't need the required withdrawal to cover living expenses, you can use the money to make a QCD.
What about your tax-deferred 401(k) money? You can't make a QCD directly from that workplace retirement plan, but you can roll your 401(k) funds into an IRA and then make the QCD from that new tax-deferred account.
By designating your RMD amount as a QCD, you meets your legally mandated account withdrawal amount for the year. But since the money is donated to an IRS-authorized charity without you taking possession of or having access to it, is excluded from your taxable income.
The bottom line is that you’ve met your RMD but don’t owe tax on the amount.
The key here is how the donation is completed.
RMD to QCD rollover rules: With a QCD, you roll your RMD directly from your IRA to an IRS-qualified charity. Let me repeat that. You transfer your RMD directly from your IRA to an IRS-qualified charity.
This can be done a couple of ways.
The easiest, and safest for record keeping, is to instruct your IRA trustee to directly issue the RMD amount as a QCD to the charity, either electronically or by check payable to your chosen nonprofit. Since QCDs were created as part of the Pension Protection Act of 2006, financial firms and charitable groups are familiar with the process, so the gift giving is seamless.
In some cases, though, the plan trustee will issue the QCD amount as a check payable to the charity, but mail it to you, the IRA account owner. Then you can deliver the check to the charity, in person or mail along with a personal written note.
The key here is that the money from your tax-deferred retirement account is made payable to the charity.
It is not a QCD if you take possession of the distribution yourself, then write a personal check for the same amount to the charity make the charity. That’s a basic RMD, and it means you owe tax on the amount, regardless of subsequently giving it all away to a charity.
Pre-RMD gifts allowed: Technically, you can make a QCD before you must take money as an RMD. The law says IRA owners age 70½ can make tax-free charitable donations this way.
If you don't itemize, which most older taxpayers don't, a pre-RMD QCD is a tax-smart way to make a contribution with pre-tax dollars. You support your favorite charity with money on which you won't owe any tax.
It also allows you to give without taking any money from the non-IRA funds you're using to meet your daily expenses.
Also, by reducing your IRA amount before RMDs start, you could lower the eventual amounts you'll be required to withdraw in your 70s.
No donation, no problem: Finally, note that even though you are giving money to a charity with a QCD, that amount is not tax deductible. Again, that's not typically a problem for older taxpayers, who generally find that the standard amount is their best filing option.
Plus, the no tax break is offset by not owing any tax on the money you donated from your tax-deferred retirement plan.
Overall, it's a win-win-win. Your chosen charity is happy. The IRS is happy that you followed the law, if not so happy about not getting any tax money. And you are happy about not owing additional tax.
QCD inflation bump: The base maximum QCD amount you can exclude from your gross income was set at $100,000 when the option was created by Congress back in 2006. That donation limit held stead until passage of SECURE 2.0. The comprehensive retirement law provided for QCD inflation indexing beginning in 2024.
As noted at the start of this post, inflation has bumped the QCD amount this tax year to $105,000 in 2024. That’s for a single taxpayer. It’s also this week’s By the Numbers figure.
If you're married, filing a joint return, and your spouse also is facing an RMD from an IRA, the maximum QCD amounts of $105,000 apply to each of you separately. This special philanthropic option will let you exclude up to $210,000 this year from your joint income.
For those with longer-range retirement and donation plans, the QCD amount in 2025 goes to $108,000.
QCD reporting and documenting: Even though the QCD isn’t taxable income, you still must report the gift on the tax return you file for the year of the gift.
Your IRA trustee will send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in early 2025 documenting the amount taken from your plan.
The full amount of any IRA distribution goes on Line 4a of Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. Enter “0” on Line 4b if the full amount is a QCD, marking it as such.
As for the donation, even though you can’t deduct your QCD, you need to get a written acknowledgement from the charity showing the contribution date, amount, and confirmation that no goods or services were received.
As with most other charitable receipts, you don’t have to submit the acknowledgement with your tax return. Just file it with your tax records in case the IRS ever has questions about your RMD and QCD.
You also might find these items of interest:
- 7 tax breaks for older taxpayers
- Some Social Security recipients owe tax on federal retirement benefits
- Law changes, inflation boost benefits of tax-favored retirement plans, especially for older workers
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