Want to Reduce Your Retirement Tax Bill? Consider Qualified Charitable Donations
Do you donate to your favorite charity’s yearly fundraiser? Do you give to your alma mater, church or other non-profit? You might want to consider making the same gift from your Individual Retirement Account (IRA) directly. This is known as a Qualified Charitable Donation (QCD). This action may assist in lowering your effective tax rate, reducing taxes on your Social Security, and lowering Medicare premiums.
Effective January 1, 2023, the SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement) altered a variety of requirements in the retirement planning space. Traditional IRAs and 401(k)s require that a minimum amount be distributed as the government is tired of seeing those funds continue to grow tax deferred. The Required Minimum Distribution (RMD) age has been pushed to 73 years old. This means that if you have not already started taking an RMD, this requirement has been bumped for you. If you are currently taking RMDs, QCDs can be counted towards satisfying that requirement. For those who fail to take the entire RMD, there is 25% tax penalty on the remaining RMD amount. (I believe it would be better to donate those funds than send them to Washington D.C.!) Please be advised that a distribution for the current year does not count towards the RMD requirement for the following year.
What are the requirements for making a QCD?
- You must be older than 70 ½ years old.
- The distribution must come from funds that would have been taxed as ordinary income.
- The annual QCD limit is $100,000 per individual.
- The recipient must be a 501(c)(3) organization - Private foundations and donor-advised funds will not qualify.
- The funds must come out of your IRA by December 31.
Many are under the impression that you must be wealthy to take advantage of this, however, there is no minimum account size, nor minimum distribution, for this strategy to be utilized. QCDs reduce your expected taxes whether you itemize your taxes or take the standard deduction. To claim the deduction, you simply must receive some sort of acknowledgement from the recipient.
What are the benefits?
- Make an impact today – not during your estate settlement.
- Avoid income tax upon distribution of your IRA!
- Reduce your Required Minimum Distribution for the current year.
If you’d like to review other creative charitable and legacy planning ideas, give us a call at the office today!
Sources:
(1) https://ksufoundation.org/wp-content/uploads/2022/06/IRA-QCD.pdf
(2) https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds