Here it is, the end of the year, and you may be faced with that pesky government requirement that forces you to take money out of your IRA whether you want to or not. The distribution is considered ordinary income and you pay taxes on that amount at your tax rate. If you don’t, you’ll end up paying an excise tax equal to 25% of what was supposed to a be withdrawn but could be only 10% if the RMD is corrected within two years of the time it was supposed to be distributed. But what if you didn’t have to pay taxes on the RMD?

 

There’s a well-kept secret available to the RMD crowd that’s especially beneficial if you give to charity—a Qualified Charitable Distribution. In 2006, the Pension Protection Act (PPA) included a provision allowing taxpayers 70 ½ or older to transfer money from their IRA accounts directly to charity without paying taxes on the distribution.

 

As long as you are 70 ½ or older you can make Qualified Charitable Distributions of up to $100,000 every year to 501(c)(3) tax exempt organizations. If you’re married, your spouse can also give up to $100,000.

 

QCDs cannot be made from 401(k)s, 403(b)s, SEPs, or SIMPLE IRAs. But you can do a direct rollover from those types of retirement accounts into your IRA and then make QCDs out of the IRA.

 

QCDs must be sent directly to the qualified charity by the custodian or trustee of your IRA. The distributions cannot be made to donor advised funds, supporting organizations, or private foundations.  They may not be used to fund life-income gifts such as charitable gift annuities, charitable remainder trusts, or pooled income funds.

 

How does that benefit you? You get to meet your required minimum distribution, up to $100,000 and you don’t pay taxes on the distribution. Your gift is not included in gross income and therefore becomes a non-taxable distribution. However, since it’s not included as income, the IRS does not allow you to claim the gift as a charitable deduction.

 

If you make Qualified Charitable Distributions of more than $100,000 each year, anything above that amount does become taxable. Still, meeting your RMD without paying taxes on it, and making a gift to a worthy charity can be an effective planning tool.

 

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.