When Good Planning Can Be Costly and What You Can Do About It!

This article is for information purposes only and does not provide tax planning, financial planning, or legal advice.

Congratulations!  You did a great job!  You worked hard, saved, and invested wisely for your retirement.  Who has have ever thought those Required Minimum Distributions (RMDs) would come so soon?  This is a problem facing many Americans who planned well and executed well.  While some people will struggle in retirement, not all will.

Did you know that those RMDs can come with financial consequences?  RMDs are taxable income that can affect finances.  There are four potential impacts to be aware of.

  1. RMDs can push retirees into a higher tax bracket. Since distributions are ordinary taxable income, they can push some retirees into a higher marginal tax bracket.
  2. Medicare surtax. RMDs also increase the taxpayer’s modified adjusted gross income, or MAGI, which could trigger the 3.8% Medicare surtax. The surtax applies to the lesser of net investment income or MAGI in excess of $200,000 for individuals or $250,000 for married couples filing jointly.
  3. Taxing Social Security. Even modest distributions from a retirement account can cause Social Security benefits to become taxable, up to 85% for single filers with income above $34,000 annually or married couples with income above $44,000.
  4. Medicare Part B and D premiums are calculated using a taxpayer’s MAGI from the prior year. So large RMDs can cause sharp increases to your Medicare costs, with the wealthiest taxpayers shouldering up to 80% of the cost

OK, but there is good news!!  A friend recently asked me, can you give money to charity using your IRA?  I was curious because of my work with a local non-profit, Chair the Love, so I did a little research.  For individuals 70 1/2 or older – the answer is usually yes. What many retirees don’t know is that they can donate all, or a portion of, their required minimum distribution (RMD) directly to charity. It’s called a qualified charitable distribution (QCD). You can also make charitable distributions directly from an IRA before RMDs begin. The Secure Act raised the RMD age for some taxpayers to 72 but didn’t raise the QCD age from 70 1/2. Here’s how to donate your RMD using a qualified charitable distribution.

A QCD can be a very tax-effective way to support a cause. However, as with any financial and tax strategy, it’s important to first understand the details and limitations. Qualified charitable distributions do not provide a charitable deduction for taxpayers, regardless of whether you itemize deductions.

Instead, with a qualified charitable distribution, a check is sent directly from an IRA to charity. This allows the donor to exclude the amount from taxable income.

As with any tax strategy, it’s important to pay close attention to the IRS rules. Here are some of the major ones:

  • The retirement account owner must be age 70 1/2 or older.
  • The annual QCD limit is $100,000 per account owner. Note: the limit can exceed the annual required minimum distribution.
  • Donations must go directly from your IRA to the qualified public charity.
  • Most types of IRAs qualify: traditional IRA, rollover IRA, inherited IRA, and inactive SEP and SIMPLE IRAs. Sometimes QCDs from Roth IRAs are allowed as well.
  • QCDs only apply to taxable distributions. So, if you’ve previously made non-deductible contributions, you’ll need to do some extra math to figure out the tax benefits.
  • Making tax-deductible IRA contributions can reduce your deduction for qualified charitable distributions when both are made in the same tax year.
  • Pay attention to ordering rules if your goal is to donate only your RMD to charity. Since the IRS will first satisfy the RMD with any withdrawals throughout the year, it’s important to plan ahead, especially if taking monthly distributions.

If you have questions, talk with your CPA they can provide specific guidance.  Chair the Love is a high-impact global mobility mission that delivers wheelchairs to people in need around the world.  We are a 501 c3 and if you’d like to learn more, visit us at ChairTheLove.org or give me a call at 863 662 9429.

Augie Byllott

Augie Byllott is the founder of Common Wealth Trust Services, an avid real estate investor, author, and serves on the Board of Chair the Love, LLC a 501 c3 non-profit.  You can reach him by email at augie@CommonWealthLandTrust.com.