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Some people grumble about having to take their annual Required Minimum Distributions (RMDs).  A required minimum distribution (RMD) is the amount of money that must be withdrawn from a traditional, SEP, or SIMPLE IRA account by owners and qualified plan participants of retirement age. Participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70 1/2.

They may grumble because they do not need the funds to handle their monthly expenses, and they do not want to pay taxes on the distribution.

Here is an alternative way of handling RMDs.  As always, contact your competent tax professional to see if this makes sense for you.

The IRS tax code allows you to give up to $100,000 of your RMDs as a charitable contribution. These distributions are called qualified charitable distributions, or QCDs. If you are married, both individuals can give away the maximum for a total of $200,000. If you enjoy giving to charities, this may be an option you want to consider.

This option eliminates the need to list these distributions with your Adjusted Gross Income (AGI). That makes these donations tax free if certain conditions are met. Your charitable gift won’t be taxed, as it would be if you were to take a distribution and then donate the cash to charity.

Making these contributions can assist in other ways.

  1. It may help you (the donor) with other tax breaks.
  2. It may reduce taxes on your Social Security benefits.
  3. It may help you avoid a high-income surcharge for Medicare Part B and Part D premiums.

High-net-worth individuals may benefit from taking qualified charitable distributions if:

1. You don’t itemize deductions. Only someone who itemizes benefits tax-wise from regular charitable donations. Using QCDs provides a way for people who don’t itemize to gain a tax benefit from making these charitable donations.

2. You do itemize, but part of your charitable deduction would be phased out based on your adjusted gross income (AGI) or delayed by the 50%-of-AGI restriction.

A QCD can’t be a last-minute decision in the calendar year. If you take your RMD before planning for the QCD, it is too late for it be a donation from the IRA account directly.

Funds must be disbursed to the charity directly.  Your custodian will report it as a normal distribution (1099).  Then you (the account holder) reports this on lines 4a and 4b on your 1040, showing that the funds are not taxable because it was a QCD. The check will be made payable to the charity, not to the individual account holder.

Discuss this with your tax advisor to get a full understanding if this if a good option for you.

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