For many people, their 72nd birthday is also when the required minimum distributions (RMDs) kick in for their individual retirement account (IRA.) If your RMDs are high, that means you run the risk of being taxed at a higher bracket, because those RMDs are counted as income.
There are a variety of options to bring down the RMD amount and subsequent taxes, including qualified charitable distributions.
What are qualified charitable distributions?
Qualified charitable distributions, or QCDs, are distributions made directly from your IRA to a qualified charity.
These donations can be counted toward your annual RMD total, as long as you follow the rules. One of those rules is that the money cannot go to you before the charity; it must be directly donated to avoid taxation.
Do qualified charitable distributions affect my taxes?
QCDs, when used correctly, can lower your taxable income. That’s because when you give money directly from a retirement account that has an RMD, you can satisfy that requirement while still giving some of that money away. The donated money is not counted as income, so you decrease the amount of money that can be taxed.
The reason some retirees do this is that their RMDs are much higher than what they need, especially as they age. So if you don’t need the full amount coming from your RMDs, then this is a good way to deflect some of those tax consequences.
What are the rules for making qualified charitable distributions?
Here are the current rules for making a QCD, according to the IRS. You must:
- Be at age 72
- Pay no more than $100,000 per person, per year in qualified charitable distributions
- Pay from an IRA account
Who should use qualified charitable distributions?
QCDs are an excellent opportunity to simultaneously support a charity and cut down on the taxes you owe in retirement. If you find that your RMD amount is going to be much higher than what you need to live on, this strategy can give you an alternative option for where you want your money to go.
Here are more resources to help you assess your retirement income needs:
How to Plan Strategic Retirement Withdrawals
Approaching Retirement: Prepare Your Portfolio
How to use a Deferred Compensation Plan for Retirement
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.