Required Minimum Distribution
A Tax-Efficient Strategy For Charitable Giving
Upon turning 73, traditional IRA account holders must take an annual required minimum distribution (RMD). If you don’t need the income – and don’t want the tax liability – you can make a qualified charitable distribution (QCD) instead.
How to Use Your RMD as a QCD
What Happens When You Take Your RMD
- You need to pay taxes on the income from your RMD – and, subsequently, taxes on the gains your IRA has made over time.
- Your adjusted gross income (AGI) may be pushed to a higher tax bracket.
- If your new AGI exceeds certain thresholds, you’ll have to pay the high-income surcharge on Medicare premiums.
- More of your Social Security may be taxable.
How You Can Avoid These Effects
Rather than receive the RMD from your IRA, tell your IRA custodian to direct it to your parish or favorite charity. This is the only way to make your RMD a true QCD and avoid the listed effects of taking your RMD.
At this time, a distribution from your IRA to a donor advised fund is not a qualified charitable distribution. However, IRA distributions to a donor designated fund — which benefits only one designated charity — do qualify as QCDs.
Flexing the RMD Strategy Further
You have some flexibility with RMDs. You can make a partial QCD and then take the rest directly as an RMD. Or, if you want to do more of your charitable giving from your IRA, you can roll over money from another qualifying account (just not a Roth account). You can transfer up to $100,000 annually from your IRA to a 501(c)(3) charity – even if that is more than your RMD.
Build a Lasting Legacy with RMDs
For many folks thinking about leaving a perpetual charitable legacy, the $50,000 minimum of a permanent endowment is daunting. But perpetual support to your favorite charities can be built over time, and RMDs can be a great tool for that. Each year, you can build up the fund – and CCF, too, will build it up through prudent investing – until it reaches the threshold to begin yielding annual distributions.
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Christopher D. Nelson, J.D.
Vice President of Development & Donor Engagement