During your working years, your ability to support your favorite charities has some constraints. You want to be generous, but also be sure you are saving enough for old age.
Once in retirement, your future financial picture becomes clearer. And if your financial picture is strong enough, you can more comfortably enhance your level of charitable giving. And a hidden part of the federal tax code shows us an ideal strategy to create a win/win situation.
Recall that Required Minimum Distributions (RMDs) are the amount you MUST take out of your retirement accounts, once you turn 72. Those distributions are taxable as ordinary income. But donating the distribution to your favorite charity (or charities) means you won’t owe any taxes on your RMDs.
Qualified Charitable Distributions (QCDs) enable a direct transfer of funds from your IRA to a qualified charity. The good news: QCDs can be counted toward satisfying your RMDs. The better news: If you can reduce your income to low enough levels (by, for example, donating a portion of your RMD), you can avoid the dreaded “tax torpedo.”
This hidden tax kicks in once your income reaches certain levels. (Talk to your financial planner for more details about that). You don’t actually pay the tax torpedo. Instead, your Social Security benefits get taxed once you exceed certain income thresholds. Getting your declared income low enough enables you to keep 100% of your Social Security checks.
The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.) Abd partial donations of your RMDs result in only a partial tax break.
Please also know that you cannot donate your RMDs to:
- Private foundations
- Supporting organizations: i.e., charities carrying out exempt purposes by supporting other exempt organizations, usually other public charities
- Donor-advised funds, which public charities manage on behalf of organizations, families, or individuals
While we’re on the topic of retirement and charities, you may also want to consider favored charities in your estate plans. Legacy-focused charitable giving is one of the best ways to ensure that future generations will live in a more equitable and supportive environment.
Talk to your attorney, financial planner, your local Community Foundation or your favorite charities about how you can support them through your estate plans.