Can a Charitable Distribution Help You Meet Your IRA Required Distribution?

Do you enjoy charitable giving? Do you have an IRA (Individual Retirement Account)? Do you like paying less income taxes? Now that you have hopefully completed your 2023 income tax return, it’s time to begin thinking about how to save on your 2024 income tax bill.

As you may know, the IRS requires individuals who are age 73 (if born between 1/1/1951 to 12/31/1959) or age 75 (if born on 1/1/1960 or later) and older and have an IRA account to withdraw a certain amount from that account every year, known as a Required Minimum Distribution (RMD). The amount of the required distribution is based on the balance of your IRA and is only required for traditional IRAs, as Roth IRAs are exempt (if you are the original owner). If you do not take the RMD, you are subject to a tax penalty—in addition to the regular income tax—on the required amount you were supposed to withdraw.

While the official age to begin taking an RMD has recently increased, there is an allowable tax strategy for those over 70 ½ with IRA accounts. If you have a traditional IRA, rollover IRA, inherited IRA, SIMPLE IRA, or SEP IRA, you may be able to make a charitable gift directly from your retirement account and avoid income tax on the distribution. This strategy is a way to receive a tax deduction for charitable giving even if you don’t itemize your deductions.

The recipient of the charitable gift, technically called a Qualified Charitable Distribution (QCD), must be a 501(c)(3) charitable organization. To take advantage of this strategy, reach out to your IRA custodian, such as Charles Schwab, Fidelity Investments, or Vanguard, and select the dollar amount and charitable recipient of your donation. Request the check be made payable to the charity, but you might consider having the check mailed to you. Once you receive the check, you can forward the check to the charity, but request and keep the charitable receipt in your 2024 tax file.

If you are donating to a small organization or your contribution is significant, you may want to inform the charity’s treasurer ahead of time so they can plan their budgeting accordingly.

When you complete your tax return next year, you will report the distribution on your tax return as an IRA distribution, but the taxable portion will be reduced by the amount of the QCD. For example, if you distributed $30,000 from your IRA over the year but $10,000 of that amount was directed to charity, you would report $30,000 as distributed from the IRA, but only $20,000 would be taxable. This strategy can be especially helpful for those who are unable to itemize income tax deductions.

Although waiting until later in the year to have charitable conversations is typical, we recommend starting QCD conversations as early as possible each year to avoid RMD income if you are eligible to make a QCD. Known as the “first-dollar-out rule,” the IRS requires that the first dollars withdrawn from an IRA in a year where an RMD is due first go to satisfy the RMD requirement. If you take an RMD before a QCD, you cannot offset that RMD income with a QCD later in the year.

There are some caveats to this strategy, so make sure you talk to your tax professional or financial advisor before implementing. Below are some of the nuances to keep in mind.

• You cannot make a QCD to a private foundation or a donor-advised fund. The QCD must go directly to a charity or ministry.
• The IRS limit for a QCD is $105,000 per taxpayer and does satisfy your annual RMD requirements.
• If you are currently receiving any employer contributions into a SEP IRA or SIMPLE IRA, you cannot make a QCD from those accounts.
• The QCD would be reduced by the amount of any deductible IRA contributions made after you turn age 70 1/2.
• You can distribute a QCD to a scholarship fund or gift annuity, but there are some limitations in these instances, so consult your tax expert.

While the RMD appears simple on the surface, it can become quite complex when you consider all of the options and possibilities. If you have any questions about your RMD or QCD, please don’t hesitate to contact us at info@bluetrust.com or 1-800-987-2987.

As with any investment strategy, there is potential for profit as well as the possibility of loss. Blue Trust does not guarantee any minimum level of investment performance or the success of any investment strategy. All investments involve risk and investment recommendations will not always be profitable. Diversification does not guarantee investment returns and does not eliminate loss. Past performance does not guarantee future results.

17997180-03-24