The Advantages of Sending RMDs Straight to Charity

At Tapparo Capital Management, our team and client family believe in giving back and living generously. Chances are, these values resonate with you too. You understand that your impact reaches beyond your immediate circle, and you’re passionate about making a real difference in the world. With an appreciation for the opportunities you’ve had, you’re looking for ways to give back and contribute positively to your community.

When it comes to charitable giving, your goal is to make a meaningful impact, and we’re here to help make that happen in the most effective way possible. Every tax dollar we help you save is another dollar you can put toward improving the world.

One important part of retirement planning is managing required minimum distributions (RMDs). Rather than simply depositing these funds, you can direct them to a charity through a qualified charitable distribution (QCD) and continue your generous efforts.

Benefits of Making a Qualified Charitable Distribution

While cutting out yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first. 

When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break. 

To illustrate the potential tax savings and charitable impact of a QCD, consider the following example:

John and Sarah, both 75 years old, are passionate about supporting their local animal shelter. They have a combined taxable income of $100,000 per year, and John is required to take a required minimum distribution (RMD) of $15,000 from his traditional IRA this year.

If John takes the $15,000 RMD and then donates it to the animal shelter, the couple will have to report the $15,000 as taxable income on their tax return. Assuming a 22% marginal tax rate, this would result in an additional $3,300 in federal income taxes owed.

However, if John makes a QCD of $15,000 directly from his IRA to the animal shelter, the couple will not have to report the $15,000 as taxable income. This means they will avoid paying the additional $3,300 in taxes, effectively saving that amount.

Furthermore, by making the QCD, John and Sarah can support the animal shelter with a larger donation. If they had taken the RMD as income and then donated the after-tax amount, the animal shelter would have received less than $15,000 due to the taxes paid on the distribution.

In this scenario, by utilizing the QCD strategy, John and Sarah were able to:

  1. Save $3,300 in taxes by excluding the $15,000 RMD from their taxable income.
  2. Provide the animal shelter with the full $15,000 donation, rather than a lesser after-tax amount.
  3. Satisfy John’s RMD requirement for the year.

As you can see, by making a QCD, John and Sarah were able to save a significant amount on their taxes while also providing more support to their favorite charity. This strategy can be particularly beneficial for those who are required to take RMDs but don’t necessarily need the additional income.

Are You Eligible to Make a Qualified Charitable Distribution?

Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made. 

In addition to having the right kind of account, these other requirements must be met:

  • You must be age 70½ or older.
  • To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
  • QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
  • Total QCDs cannot exceed the limit of $105,000 as of 2024 (this amount is indexed for inflation) per calendar year per taxpayer, regardless of the number of charities donated to.
  • Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?

After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. 

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:

  • Private foundations
  • Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
  • Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?

Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding. 

It’s important to note that Form 1099-R does not specifically identify QCDs as a separate distribution type. This means that your tax preparer may not be aware that you made a QCD unless you inform them. Be sure to communicate any QCDs you made during the year to your tax professional to ensure that they are properly reported on your tax return and that you receive the full tax benefit.

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was, in fact, qualified. 

Partner With a Trusted Professional

We know that supporting charities is important to you. Since you plan to give anyway, why not do it in the most tax-efficient way possible? Qualified charitable distributions (QCDs) offer a fantastic opportunity for those required to take minimum distributions from retirement accounts.

To meet all the specific rules and requirements for exempt status, it’s wise to consult with an experienced financial professional. If you want to learn more about QCDs, Tapparo Capital Management is here to assist. 

Are you ready to connect with a financial advisor who simplifies managing your finances and helps you focus on what matters most? To schedule a “Get Acquainted Call” to see if we are a good fit for each other, call 978-887-1121 or email andrew@tapparocapital.com.

About Andy

Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.

Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.

Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.

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