Strategizing For Your Required Minimum Distributions From Your IRA


Starting at age 70 ½, Required Minimum Distributions (RMDs) must be taken from your traditional IRA. These required distributions are included in your taxable income with the exception of any amounts that were taxed before distribution. A good strategy to reduce taxable income related to the RMD  is to make a Qualified Charitable Distribution (QCD) using your IRA funds. There are many advantages to turning your RMD into a QCD, namely that making a QCD allows you to benefit a charity of your choosing while also steering clear of some of the tax that could be associated with the required distributions from your traditional IRA.

This concept is especially helpful with the huge changes to the tax code that took place in 2018. In 2018 the standard deduction was increased significantly (now $24,000 for married filing joint, $12,000 for filing single) making it much more unlikely for taxpayers to be able to itemize their deductions and thus reducing the tax benefit of making charitable contributions. This tax season, we frequently saw clients who over the last several years had made large charitable contributions in order to itemize their deductions not enjoy that benefit because of the standard deduction being so large. If these clients met the requirements listed below for making eligible QCDs, they are still able to contribute to their favorite organizations while maintaining  tax benefit of doing so.

Requirements to make an eligible QCD:

  • Must be at least 70 ½ years of age
  • The maximum annual allowed QCD amount is $100,000 ($200,000 if you and your spouse file together and have separate IRA accounts).
  • Funds must be contributed to a qualifying charity by your RMD deadline (most often December 31st).
  • Funds must be distributed directly to the qualifying charity from your IRA, the funds cannot be distributed to you and then used as a charitable contribution.

The charities you choose to donate to will have to meet specific IRS requirements in order for your contribution to be considered a QCD:

  • Must be a 501(c)(3) organization
  • Cannot be a private foundation, donor-advised organization, or an organization whose purpose is to financially support other organizations.

Keep in mind, choosing to make a QCD does not allow you to also itemize those charitable contributions if you plan to itemize in the tax year.  As an example, Jim and Patsy, each age 72, are financially comfortable and do not need all of their IRA money to finance their retirement. Patsy has $535,000 in a traditional IRA, and her RMD for 2019 is $20,898.  Assume the following facts about their tax situation:

  • Adjusted gross income (including the RMD) is $205,353
  • Total state and local taxes paid equal $8,361
  • They have budgeted $10,000 in charitable contributions they would like to make to qualified 501(c)(3) organizations
  • They have no other itemized deductions

If Jim and Patsy receive their RMD and donate the $10,000 to charity, they will incur tax on the RMD of $4,598 ($20,898 x 22%).  Even though they donated the $10,000 to charity, their total itemized deductions will be less than the standard deduction ($18,361 in total itemized deductions compared to the $26,600 standard deduction).  Strictly from a tax standpoint, their situation is the same as had they not made the donation to charity.

A better option would be for Jim and Patsy to make the $10,000 charitable contribution via a QCD directly from the IRA.  In that scenario, their adjusted gross income drops to $195,353 ($205,353 less $10,000 in QCD).  They will still take the $26,600 standard deduction so their tax situation has improved by $4,598 just by rearranging where the donation comes from.  Their cash position is the same and the charity receives the same benefit.

If you think QCDs could be an option for using your RMDs, contact your tax advisor or IRA custodian to for more information. Your custodian will be able to assist you in making the QCDs by the deadline.