QUALIFIED CHARITABLE DEDUCTIONS (QCDs) CAN REDUCE THE TAX BURDEN ON REQUIRED MINIMUM DEDUCTIONS (RMDs)
If you’re over 70 1/2 and have a traditional IRA or 401K plan, you are eligible to start taking withdrawals from those plans as Qualified Charitable Distributions (QCDs). In most cases, you’re required to start taking withdrawals from those accounts when you are 73 1/2. At 73 1/2, the government prescribes how much you have to withdraw each year, which is called a required minimum distribution (RMD). Unfortunately, you have to pay federal income taxes on those withdrawals and also state income taxes in some jurisdictions. One way to avoid paying taxes on those withdrawals is by making a qualified charitable distribution (QCD). Rather than writing a check or donating securities, a QCD is a transfer from your IRA or 401K plan directly to a qualified charity like the Life Ministries Food Pantry. When you do this, you don’t pay any tax on the withdrawal. This has the effect of also lowering your Adjusted Gross Income (AGI) and Modified Adjusted Gross Income (MAGI), which can generate additional taxes on investment income or higher Medicare premiums known as IRMAA. This provision in the tax law allows you to give money to charities using funds that you would have to withdraw anyway without generating additional taxable income.
Taking these actions early in the year is important because once you reach your RMD for the year, you can no longer process a QCD for that year. It is also important for the transfer to occur directly from the institution holding your assets to the charity. As you think about your charitable giving in the new year, you may want to consider whether a qualified charitable distribution works for you. Talk to the financial institution that holds your funds to determine the best way to manage this for you.
The information provided herein is for informational purposes only and should not be construed as tax advice. Please consult your tax advisor for guidance specific to your financial situation.