Are you close to taking money out of your IRA? If you’re a traditional IRA owner, you have to start taking out your required minimum distribution (RMD) at age 70 ½ to avoid tax penalties. However, there is a way you can do this while still being tax-efficient. A qualified charitable distribution (QCD) can help you satisfy your RMD while also helping you reach your philanthropic goals.
How does a QCD work?
In a traditional IRA, when you take a distribution, you pay taxes on it. You didn’t pay taxes when you put in your money. In retirement, your distributions are taxed the same as income. Plus, when you turn age 70 1/2, you are required to take out a minimum amount from your IRA. The year you turn age 70 ½, you would be taking out the minimum amount by April 1 the following year. This amount depends on the value of your IRA as of December 31 the year prior, and your distribution period, which changes according to your age. There are some exceptions to this rule. For most people, these figures will determine your annual minimum distribution amount.
Now, if part of your goals include philanthropy, you can donate to a qualified charity from your traditional IRA, up to $100,000, without it being taxable. You have to make sure that the organization qualifies, but if it does, neither you nor the charity will have to pay taxes on the donation. With high maximums for donation, you can use a qualified charitable donation to satisfy your required minimum distribution and donate. One thing to note: Because you’re using a QCD to satisfy your RMD, you can’t also use the qualified charitable donation as an itemized deduction. However, with the changes that came with the TCJA, the benefit of QCDs is even greater. Standardized deductions can improve tax savings.