As year-end approaches, it’s a good time to revisit your distribution and giving strategies, especially if you’re subject to a Required Minimum Distribution (RMD). By directing it to a charitable cause, you can make a difference while potentially easing your tax burden.
What You Need to Know About RMDs
Once you turn 73, traditional Individual Retirement Account (IRA) owners are required to withdraw a minimum amount each year (your RMD). These withdrawals are taxed as ordinary income and can push you into a higher tax bracket, which may create retirement planning concerns.
How a Qualified Charitable Distribution (QCD) Can Help
A QCD allows you to donate part or all of your RMD (up to $100,000 annually) directly to a qualified charity, satisfying your distribution requirement while potentially reducing your taxable income.
Here’s how it works:
- Choose a qualified charity recognized by the IRS.
- Notify your IRA custodian of your intention to make a QCD and specify the amount.
- The custodian sends the donation directly to the charity.
Important: The donation must go directly from your IRA. If the money is sent to you first, you may lose the tax benefit
Who Should Consider a QCD?
A QCD may be right for you if you:
- Want to support a charitable organization with your RMD.
- Prefer donating directly to an approved charity rather than establishing a foundation.
- Are seeking to reduce your Adjusted Gross Income (AGI) to manage overall tax exposure.
- Intend to make a larger impact through tax-efficient giving.
Make Your Year-End Strategy Count
Your RMD doesn’t have to be just another withdrawal, it can be an opportunity to align your wealth with your values. RMDs must be taken by December 31 each year.
Save More. (And Save Smarter.)
No matter our job titles here at Shepherd Financial, we are all nerds. Every last one of us. Case in point: every year, the IRS announces new contribution limits for retirement savings.
Because it’s vital information for how we operate, timeliness is essential – so at a meeting several weeks ago, I jokingly suggested there would be a prize for the team member that conveyed the new information to me first. Perhaps the IRS caught wind of our challenge; instead of releasing the limits mid-October, as they traditionally have, we waited with bated breath until November 1st.
(I’m completely serious when I tell you one team member set her Twitter account to alert her every time the IRS tweeted. She still didn’t win.)
In brief, the new limits: in 401(k), 403(b), and most 457 plans, the contribution limit was raised from $18,500 to $19,000. Not a huge jump, and the limit tends to increase by about that much every year. Significantly, though, the IRS has increased the contribution limit for traditional individual retirement accounts (IRAs) for the first time since 2013 (the limit is now $6,000).
But what’s the big deal, you might be asking? Essentially, the government has enabled Americans to save more. Larger retirement contributions can mean lower tax bills and more income in retirement. And if you happen to be an American with a late start on your retirement savings, this is good news. If you’re over age 50, between your 401(k), IRA, and catch up contributions, you could save $32,000 in 2019. That doesn’t even take into account an employer match or integrating a health savings account in your retirement investment strategy.
And that’s where saving smarter comes in. All these investment vehicles play a unique role in your overall retirement savings strategy. If you’re not sure about how to best utilize each one, call our team at Shepherd Financial. We nerds have a great time figuring this out every day.