It feels great skipping out on taxes and saving towards retirement by contributing to an IRA, but not so much when it comes time to withdraw that money – and pay those taxes. Hefty required minimum distributions (RMDs) can push you into a higher income bracket, which means paying even more taxes.
Sound like you or someone you know? It’s only natural to wonder if there’s another option rather than biting the financial bullet. Luckily, there is! If you’re age 70.5 or older, consider this altruistic loophole to solve your tax woes: qualified charitable distributions, or QCDs. Here are some of the benefits of making a QCD:
1) Tax Planning
If you’re going to donate funds to charities, consider utilizing your IRA directly, rather than from other types of funds. You’ll save on taxes and support your favorite causes at the same time.
2) Unlike other IRA withdrawals, QCDs aren’t taxed
The process of making a QCD involves your IRA custodian sending funds directly from the account to an eligible 501(c)(3) organization. The money never enters your personal accounts, meaning those funds aren’t categorized as taxable income. Not only do you get to save on taxes – the organization of your choice also gets to make maximum use of your contribution!
3) QCDs can cover your RMD requirements
Are you managing financially without relying on taking money out of your IRA? Or maybe you could use some funds, but find yourself with a larger RMD than you need? In cases like these, making a QCD is the perfect solution! QCDs may be lower, equal to, or higher than your RMD, so you can contemplate making one or more QCDs as long as your total remains under $100,000. If desired, you may take a partial RMD for yourself, pay the tax, and then choose a QCD to satisfy the remaining RMD amount to make it tax free.
4) QCDs don’t interfere with other tax-beneficial donations
If you’re already in the habit of charitable giving, you might be wondering how making a QCD would impact your other tax-beneficial donations. While QCDs are reported on your taxes, they aren’t counted towards your taxable income. On the one hand, this means you can’t include them as part of charitable deductions if you itemize your deductions. On the other, you can plan out your charitable contributions without worrying about your QCD exceeding your donation thresholds for tax purposes. If you’re passionate about helping others, consider QCDs as a way to further your good will!
QCDs can be a great option for IRA holders with RMDs. Still, there are many factors to consider before making one, such as the type of IRA account you have, or the general health of your retirement funds. If you’re looking for ways to handle your RMD or otherwise cut down on taxes, consider reaching out to Cowen Tax Advisory Group. With over 40 years of retirement planning experience, we will help you navigate the sea of financial acronyms and beyond. Schedule a free consultation today!
Lindsey Restelli
lindsey@cowentaxgroup.com
As Cowen Tax Advisory Group’s Digital Marketing Assistant, Lindsey provides in-house copywriting and manages the company’s electronic records system, email marketing, and blog.
