by Trent Krassow, ARe, ARM, CMA, EA, MBA
Season’s Greetings! This is a special time of year – a time of family, festivities, food, and not forgetting about your Required Minimum Distribution (RMD)! If you have not already taken your RMD from your retirement account for 2018, it is not too late – you have until December 31st.
First, what is an RMD, and why is it required? Required Minimum Distributions apply specifically to retirement accounts that generated a tax deduction in prior years. For example, if you contributed to your IRA or 401k in earlier years, the amount you contributed reduced your income, and therefore your taxes. As a result, Uncle Sam is sad because he has not been able to share in your retirement. Beginning when you reach age 70 ½, you are required to annually take money out of these accounts.
Because this money was not taxed when you put it in, it is generally taxable when you take it out. However, for those individuals who are charitably inclined, there is a way to take your annual RMD without having that distribution raise your income, and therefore your tax, even if you do not itemize your deductions. However, to do this, the mechanics matter. If you simply take your distribution, and then give it to charity, you will still have to itemize your deductions in order to deduct this on your taxes.
However, you can have your investment advisor initiate a Qualified Charitable Distribution (QCD) instead of your RMD. How this works is that the investment company issues the funds directly to the registered charity of your choice, up to $100,000 per tax year. Such a distribution does NOT increase your income, therefore, there is no need to itemize your deductions. Of course, if you are itemizing anyway, you can still take possession of the funds and then deduct your contribution, but you may run into the 60% limitation, depending upon your income. Here are a few simple examples:
Example 1: John Doe, age 75, must take a RMD of $30,000 this year, which will make his Adjusted Gross Income (AGI) $40,000. He is married to Jane, so they file jointly. They take the distribution, then write a check for the whole amount to charity. If they itemize, their charitable contribution deduction will be limited to $40,000 x 60% = $24,000, so they will have to “save” the remainder of their deduction for a future year. Assuming no other credits or deductions, their taxable income will be $13,400, with a tax of approximately $1405. However, if they have their investment broker initiate a Qualified Charitable Contribution directly to that same charity, their Adjusted Gross Income is $10,000, AND they still get the Standard Deduction, which reduces their income to zero, and therefore no tax, a savings of $1405.
Example 2: Same as above, except the RMD is $10,000, and Adjusted Gross Income is $50,000. In this case, the 60% rule is not a limiting factor, but the Standard Deduction ($24,000 + an additional $1300 for each of them due to being over age 65= $26,600) is above their actual deductions, so they again get no tax benefit from taking the distribution and then giving it to charity. If they take the Standard Deduction, they probably have taxable income of $23,400, and a tax of approximately $2617. However, using the Qualified Charitable Distribution method, the $10,000 distribution is not included in income, so Adjusted Gross Income goes back down to $40,000 before the Standard Deduction of $26,600, making taxable income $13,400, and therefore a tax of $1405. This is a savings of $1202, and all that changed was having the funds sent directly to the charity rather than having the Doe’s write the check. That is an expensive check!
Here are the general guidelines for making a Qualified Charitable Distribution:
· It must be done by December 31st for a given tax year
· You must specify to your broker that you wish the distribution to be a QCD, and specify the charity or charities to which you would like the funds to go
· Some brokerage companies may require their internal forms to be completed, so check with your broker
· You can contribute up to up to $100,000 per year with this method.
· If your spouse is at least 70 ½ and also must take Required Minimum Distributions, each of you can separately employ the Qualified Charitable Distribution on your own accounts. You can each contribute $100,000 using this method.
· As a practical matter, it’s usually a good idea to get some form of written confirmation from your broker that the distribution is a Qualified Charitable Distribution, showing the date of the distributions, the amount, and the charities to which the funds will be sent. This is not a tax requirement, but is helpful for making sure that your wishes are properly carried out. It is also helpful for tax preparation purposes to ensure that the 1099-R you receive is accurate.
· Contributions can be made at any time in the year for that tax year. Thus, if you have already taken a distribution for 2018 either as an RMD or as a QCD but wish to use this method for 2019, you can, of course, do so.
Should you have any questions about this, please let us know. Additionally, if you would like us to be on a call with you and your broker to initiate such a transaction, we are happy to assist in any manner possible. If you are looking for a worthy organization to support this season, please consider Partners Mentoring Youth, a Northern Colorado organization that is making a difference in the lives of youth in Weld and Larimer Counties! If you would like to make a donation to Partners, please click here.