At the end of 2015 (December 18th, 2015) Congress passed legislation that allowed Qualified Charitable Distributions from IRAs to count toward Required Minimum Distributions aka RMDs. This change was made effective retroactively to the beginning of 2015. Going forward retirees over 70 ½ can now make charitable distributions from their IRAs that will count toward satisfying their RMDs.
First, what is a Required Minimum Distribution or RMD?
An RMD is required by law for all IRA owners post 70 ½. You technically have until the April following the year you turn 70 and ½ to make your first distribution, but if you delay until that time you will have two RMDs due that year. RMDs are also required from retirement plans such as 401Ks and 403bs if you are no longer working for the company where you hold that account. See this related article.
What are the details of the new QCD law?
The QCD can fulfill your RMD calculation for the year but:
- You must be age 70 ½ at the time of the distribution.
- The distribution must be sent directly to the charity from the IRA.
- The distribution won’t be included in your taxable income.
- You will not be allowed to receive a deduction for the donation.
- The QCD is capped at $100,000.
- QCDs can come from IRAs (and SEPs and Simple IRAs if you are currently not contributing), not 401Ks or other work retirement plans.
What are the main benefits of using a QCD for RMDs?
Since your gross income will be reduced by the amount of the QCD you may be able to:
- Reduce your Medicare Part B premiums which are based on modified adjusted gross income (MAGI) and increase at certain income thresholds.
- Reduce taxes on your Social Security benefits- for couples, if your modified adjusted gross income is between $32,000 and $44,000, you pay income tax on up to 50 percent of your benefits for income over $44,000 up to 85 percent of your benefits are taxed. For individual filers, the numbers are (between $25,000 and $34,000 up to 50% of your benefits are taxed and after $34,000 in income up to 85% of benefits are taxed).
- Reduce the chance that itemized deductions and exemptions will be phased-out.
- Eliminate exposure to the 3.8% investment surtax on net investment income.
Who might be a good candidate for a QCD?
If you are charitably inclined, don’t necessarily need you entire RMD distribution to live on, and are close to the thresholds for higher Medicare Part B premiums, having your deductions phased out, or being exposed to the surtax on your investment income this may be a good strategy for you.
Talk to your CPA and financial planner about whether or not a QCD makes sense for your situation.
