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.
SECURE 2.0: RMDs
SECURE 2.0 brought significant changes to retirement planning and distributions, including updating the Required Minimum Distribution (RMD) requirements. As background, RMDs are the minimum amounts that individuals who attain their ‘required beginning date’ must withdraw from their retirement accounts each year.
SECURE 2.0 introduced several changes to the rules on RMDs, including the following:
Delaying the Age for RMDs
The age for starting RMDs has been raised from 72 to 73 years. This increased age provision phases in over time, with the final adjustment taking effect in 2033 to age 75. The change recognizes that many Americans are working and saving for retirement for longer periods, and the later distribution requirement allows for more flexibility in managing retirement assets.
No RMDs from Roth Accounts
Starting with the 2024 calendar year, participants are no longer required to take RMDs from their retirement plan Roth accounts. This change aligns the RMD rules for Roth accounts in retirement plans with the rules applicable to Roth IRAs.
Decreased Penalties for Missed RMDs
The excise taxes for failing to take an RMD have been decreased from 50% to 25% of the RMD amount not taken. The penalty may be further reduced to 10% if the RMD is corrected in a timely manner.