Charitably minded investors can satisfy RMDs with QCDs

ESTATE & GIVING

Qualified charitable distributions allow your required IRA distributions to benefit a worthy cause – while you benefit from a reduced tax liability.

Helping others when you’re gone is a noble and rewarding aspiration. But think how much more rewarding it could be, both personally and charitably, to help others while you’re still here.

Giving during your lifetime can take many forms, one of which is using qualified charitable distributions (QCDs). It’s an option that can also reduce your tax liability, as it involves donating pre-tax dollars before they become taxable income as a required minimum distribution (RMD).

Here’s how it works.

Transform RMDs into QCDs

Philanthropy is often reward enough, but charity and tax deductions seemingly go hand in hand. As the standard deduction has risen to $13,850 for individuals in 2023 (double for married filing jointly), you may want to consider giving strategies that don’t require itemizing on your tax return. A QCD is a great way to carry out your charitable intent that doesn’t require itemizing and also reduces your taxable income.

The required start age to begin taking distributions from your IRA has increased over the past few years from 70 1/2 to 73. However, the age that you can begin QCDs is still 70 1/2. These RMDs are generally treated as taxable income. Thankfully, the Protecting American from Tax Hikes (PATH) Act of 2015 permanently allowed an IRA owner to make qualified charitable distributions of up to $100,000 directly from their IRA to a charity without getting taxed on the distribution. Basically, you can satisfy your RMD amount without reporting additional income.

There is, however, another important benefit. When a QCD is used to satisfy an RMD, that amount is also excluded from tax formulas that could impact multiple categories such as Social Security taxation, Medicare Part B and D premiums, and the Medicare tax on investment income.

Rules to follow

You must be eligible. You must be age 70 1/2 or older at the time of the QCD (but remember, RMDs now begin at age 73). QCDs from Ongoing SEPs and SIMPLE IRAs are not permitted.

There is an annual limit. Your QCD cannot exceed $100,000 per tax year, even if your RMD is greater than $100,000. New legislation, the SECURE Act 2.0, indexes this $100,000 limit for inflation now in 2024.

Only qualified organizations count. The IRA trustee or custodian must make the distribution directly to a qualifying charity (private foundations and donor advised funds are not eligible). For instance, you cannot take the distribution yourself then write a check to the charity.

RMDs: A real-time legacy

By donating the RMD to a qualified charity, you can enjoy the satisfaction of knowing you are helping a worthy cause while simultaneously reducing your taxable income. This strategy also helps you live out your values in real time, effectively living your legacy in the here and now.

To learn more, seek guidance from your financial and tax advisors. They’re a good source of information when it comes to living and giving generously.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.