If the Required Minimum Distributions from your IRA are causing issues for you, a Qualified Charitable Distribution may be a better option.
When taxpayers reach the age of 70 and a half, the IRS forces them to start taking money from their Individual Retirement Accounts or IRAs. They do this by mandating a Required Minimum Distribution or RMD. Once this money is withdrawn from an IRA, the government can tax it by adding it to your income.
An alternative distribution of these funds can be made in the form of a Qualified Charitable Distribution (QCD), and there are several benefits to choosing this option. First and foremost, the distribution is not included in adjusted gross income (AGI) on your tax return. By keeping it out of AGI, it does not impact the taxability of your Social Security benefits or your Medicare premiums. Also, you don’t need to itemize your deductions to benefit from a QCD, so it still works for taxpayers who take the standard deduction.
For higher income taxpayers, the distribution may help you avoid the alternative minimum tax. For those who itemize, it won’t impact your medical expense deductions since it has no impact on AGI.
The second major benefit is that the QCD counts against your required minimum distributions. This really helps those who are forced to take RMDs but don’t really need the money for living expenses. Instead of taking an RMD amount that you don’t need and paying taxes on it, you can pass that money directly to a charity and satisfy your required minimum distribution.
Other things to keep in mind
- You must have reached age 70 ½ to make a QCD.
- QCDs can only be made from Traditional IRAs. You cannot make a QCD from a retirement plan, a SEP IRA or a SIMPLE IRA.
- A QCD is limited to $100,000 per taxpayer per year. So, a husband and wife who each have IRA accounts can make total distributions of up to $200,000 if they would like.
- The distributions must be made directly by your IRA trustee to a qualified charity.
- You need to make sure your accountant reports it correctly on your tax return. The QCD does not receive any special coding on the 1099-R issued by your IRA trustee, so you will need to make sure your accountant knows you made a QCD.
If you have additional questions, please contact your Old National Advisor or your qualified tax professional to discuss your specific tax situation.
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