RMDs, Fulfilling Charitable Goals and Tax Obligations with QCDs
by, Jeremy Reif, CRPS
Required Minimum Distributions (RMDs) are the ultimate chess match between you and the Federal Government, more specifically, the Internal Revenue Service (IRS). The old saying is that there will always be death and taxes. If you are in this predicament, that means two things: One, you did a good job saving for retirement. Two, you failed to plan to get all your money in tax-free retirement before the government made it their business, and they want to collect their taxes.
Hopefully, we can stave away the grim reaper for many years to come, but as one gets to the age of (RMDs), the best thing to do is to have a game plan in mind to minimize taxes. Fear not; you are not the only one facing this tax challenge.
What is an RMD?
RMDs are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
Account owners in a workplace retirement plan (for example, a 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire unless they’re a 5% owner of the business sponsoring the plan.
Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs to age 73. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. Notice 2023-23PDF permits financial institutions to notify IRA owners no later than April 28, 2023, that no RMD is required for 2023.
What are some retirement RMD options?
For most retirees out there, little or no planning was done ahead of time. Don’t worry about this, as the first option is to do nothing, and the IRS will handle the rest. Pay the taxes on your regular distributions. The only thing here is to make sure that the normal distribution also satisfies the RMD mandatory federal amount. The amount that is owed changes year by year. Please see the link for the RMD
For those who would like an idea on how to save on the fly, here is a great idea. Qualified Charitable Distributions (QCDs) offer a strategic and tax-efficient approach for individuals with philanthropic inclinations in retirement. When facing RMDs from their Individual Retirement Accounts (IRAs), retirees can opt for QCDs to fulfill their RMD obligations by directly transferring funds to qualified charities.
This method not only supports charitable causes but also provides a financial advantage by reducing the individual’s taxable income. By directing RMDs to charitable organizations, retirees can potentially lower their overall tax liability, as the distributed funds for qualified charitable purposes are excluded from taxable income. This symbiotic approach allows individuals to fulfill their charitable goals while optimizing their tax strategy during retirement.
A little planning can go a long way. Sometimes, life can be complicated, and ideas like this only add to the complexities of life. For others, you might have already been gifting to local charities or churches, and now this is a new way to gift and do it more efficiently. Best of luck to you on your chess match with the IRS.
Sources:
RMD Definition https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
RMD Table – Table I https://www.irs.gov/publications/p590b#en_US_2021_publink100090049