Qualified Charitable Distributions (QCD) and Required Minimum Distributions (RMD)

by Mark Parker

Now that you are 70 ½ years old, and you own a traditional IRA, the IRS requires you to take or withdraw a required minimum distribution (RMD) each year for the rest of your life. The amount is calculated each year based on the value of your IRA account and it will be included in your taxable income.

For individuals who regularly contribute money to charity and now must take the RMD from their IRA, there is a tax provision that allows you to maximize the tax ramifications for both. Instead of writing a check to your charity, you can direct the trustee of your IRA to transfer funds directly to the charity of your choice.  The amount transferred will count toward the minimum amount that you were required to withdraw for the year.  The maximum amount that can be excluded from income in one year is $100,000.

The tax benefit comes from the fact that you will not have to report the withdrawal as income. Although you do not get to claim the amount as a charitable contribution, you will benefit by reducing your adjusted gross income (AGI) which can help you in other areas, such as the taxation of your social security benefits, a reduction in the net investment tax, and a reduction in state and local taxes paid.  Also, with the passage of the new tax law which doubles the standard deduction in 2018 there will be fewer people who are able to itemize deductions and hence won’t see the tax benefit of their charitable contributions.  For people who make charitable contributions by using the QCD, they will still get the benefit of the donations by the fact that they are reducing their taxable income.

For individuals who are charitable and have an RMD requirement, this is a smart strategy that makes the most sense in reducing taxes and providing funds to your favorite charity.