Written by Ronald L. Ecklund, CPA, CFP
In recent years, Congress has flip-flopped on legislation that allows individuals age 70 ½ and older to transfer IRA required minimum distributions (RMDs) directly to qualified charities. In fact, legislation to enable this allowance for 2012 was not enacted until the passage of the American Taxpayer Recovery Act on January 1, 2013. The provision, known as the qualified charitable distribution (QCD) rule, makes it possible to satisfy annual minimum distribution requirements, support charitable causes, and receive a tax break all at the same time.
Per federal RMD requirements, as a traditional IRA owner age 70 ½ or older, you must make a minimum withdrawal each year in order to avoid a stiff IRS penalty. Under the renewed QCD rule, beginning at age 70 ½, you can elect to have all or part of your RMD transferred directly to qualified charities (up to $100,000 per taxpayer, per year). Unlike conventional distributions, QCDs aren’t subject to ordinary federal income tax (i.e. they are tax free).
While the QCD provision may appear to be most beneficial for wealthy individuals with significant IRA balances, it’s actually more advantageous for lower income taxpayers. Why? Because RMDs often increase taxable social security income. As an example, a conventional $5,000 RMD withdrawal may increase a taxpayer’s income by $7,500. In addition, the extra RMD income may affect the taxpayer’s ability to qualify for the Nebraska Homestead Exemption. At HBE, we have seen instances where the marginal tax rate on RMDs, after taking into account social security taxation, reduction of medical expense deductions, and increased real estate taxes due to Homestead Exemption exclusion, can be as high as 60%.
Again, having the legislation in place throughout the entire 2013 calendar year enables all of us to proactively plan our tax and charitable contributions strategy in order to get the most value for our dollar. At HBE, we have a team of experts who can help you fully understand the best approach for fulfilling your annual RMD requirements, whether you have charitable intent or not. Give us a call at (402) 423-4343 and we’d be glad to speak with you.