Required Minimum Distributions and Charitable Gifts: A Way to Reduce Taxes

A choice for IRA owners who want to reduce taxes linked to IRA distributions.

Provided by Brian Wyatt

Do you have an Individual Retirement Account (IRA)? By law, you must take Required Minimum Distributions (RMDs) from a Traditional IRA once you reach age 72; there are very few exceptions to this. The downside of these RMDs? The entire distribution is taxable. (You never have to take RMDs from a Roth IRA provided you are its original owner.)¹

While the income from the RMD is nice, the linked taxes can be a headache. Did you know that you can potentially satisfy some or all of your annual RMD requirement in a way that can help you manage taxes and make a charitable impact? ²

Consider the Qualified Charitable Distribution (QCD). This may be particularly useful if you are already making charitable contributions. A QCD is a direct asset transfer from an IRA to a charity or non-profit organization of your choice. The organization must be tax-exempt under Internal Revenue Section 501(c)(3).²

A QCD, sometimes called a Charitable IRA Gift, is intended to accomplish two things. One, it gives you a chance to contribute up to $100,000 in a single year to a cause or charity. Two, you can count the entire amount of the QCD toward your RMD for the year, and the QCD amount may not be included in your gross income.²   

You must be at least 70½ years old to make a QCD.  You may want to coordinate a QCD with the help and guidance of a financial professional, because if you improperly manage the transfer of assets between your IRA and the charity, the tax break you hope for could be lost. You also need to allow enough time for the asset transfer to occur, meaning QCDs are best arranged before the very end of a calendar year.^2,3

In 2020, the age limit for putting money into a Traditional IRA was lifted, and some older IRA owners wondered if they could make a QCD to a charity and simultaneously characterize it as an IRA contribution. The Internal Revenue Service said no to that.²

It should be noted that the tax treatment of IRAs can change from year to year, and remember, this article is for informational purposes only and does not constitute real-life advice.

Brian Wyatt may be reached at 360-386-9887 or brian@wyattwm.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Advisory services are offered by Wyatt Wealth Management a Registered Investment Advisor in the State of Washington.  BBWyatt LLC dba Wyatt Wealth Management is a registered investment adviser in the State of Washington.

Citations

1. Forbes, February 23, 2021

2. TheStreet, August 31, 2020

3. Investopedia, October 29, 2020