Forced to Take an RMD? Make It Count!

Many people don’t realize that once they turn 70½, they have to take required minimum distributions (RMD) from their tax-deferred retirement accounts each year. This is part of the IRS tax code, so there’s no getting around it. For some, these RMDs push them into a higher tax bracket, increasing their overall tax liability and potentially reducing their eligibility for certain tax deductions and credits. Not a good situation to be in.

If you’re nearing age 70½, take heart. There’s a way to make these RMDs work for you – and for others, as well.

RMDs as Charitable Contributions

If you have an interest in helping others, using an RMD to make a qualified charitable distribution (QCD) is a great way to support a worthy organization while also keeping your RMD from impacting your taxable income. QCDs of up to $100,000 count toward your annual IRA distribution requirement, and because the money is going to a charity, it’s excluded from taxable income. So you can help others and keep your tax liability to a minimum at the same time. It’s a win-win.

How is a QCD Different from an RMD?

When you request a distribution from your IRA, the money you receive is classified as income, and you’ll have to pay taxes on it. When you request a distribution for a charitable organization, the check is made out to the charity and sent directly to the organization, or it’s mailed to you so that you can forward it on to the organization. Either way, the money goes to the charitable entity, and not into your bank account. This is the difference between the two types of distributions.

While you could request a distribution from your IRA and then use it to make a charitable donation, the impact on your taxes isn’t the same. Under this scenario, the distribution is considered income, and you’ll pay taxes on it, even if you turn around and donate that same money to charity. It’s all in how the funds are distributed.

Am I Eligible?

There are eligibility requirements for RMDs and QCDs. Talk to your accountant before taking any distributions from your IRA accounts to make sure you’re handling them in a way that makes sense for your situation.

Below are the general requirements for QCDs.

1. You must be 70½ or older at the time you request the distribution.
2. For a QCD to count toward the current year’s RMD, the funds must be withdrawn before the RMD deadline of December 31.
3. The funds must be distributed directly to the qualifying charity organization.
4. The maximum amount that may be withdrawn from your IRA annually for qualified charitable distributions is $100,000.

There are a few other rules around which types of IRA accounts are eligible for QCDs and which charities are eligible (or not) to receive this type of contribution. Check with your accountant to make sure you’re following the rules. Using RMDs to make a difference in the lives of others is a good thing to do at the end of the year, but make sure you’re doing it right so you also get benefits.

At Adams Accounting Solutions, we’ll help you sort out the impacts of RMDs and QCDs on your tax situation. Give us a call today to make sure you don’t miss the December 31 deadline.