How To Take Your Required Minimum Distribution & NOT Pay Federal Income Tax (Part 1)

Sound too good to be true? It’s not. It’s called a Qualified Charitable Distribution (or QCD some of us ‘in the biz’ like to call it). If you do it the right way. That’s the key. You must follow the rules precisely if you don’t want to pay Uncle Sam his cut. If you’re in the fortunate situation where you flat out don’t need your required minimum distribution (or RMD that those of us ‘in the biz’ like to call it) then a proper gifting strategy may be an appealing tactic for you to employ this year.

There’s a few rules you need to follow but it isn’t really all that complicated. You only need to execute it properly. Alright, I’ve held you in enough suspense. You’re probably on the literal edge of your seat right now (I know I am). Here are the rules you need to follow in order for your RMD to be EXCLUDED (Yes, I said excluded) from your gross income on your federal tax return:

  • The IRA owner must be 70 ½ years old.[1] (Pay attention to this because it can get confusing. An IRA owner generally must take his/her first RMD during the first calendar year that he or she turns 70 ½). Just remember, the IRA owner must have already turned 70 ½ years old in order to perform a QCD. So many abbreviations, I know.
  • The maximum allowable amount of a QCD is $100,000 USD per calendar year on a ‘per-taxpayer basis.’ [2]
  • The QCD must come from an Individual IRA (such as a Traditional IRA or Rollover IRA). A QCD cannot generally come from a SIMPLE IRA or SEP IRA. An IRA owner is able to take a QCD from his or her ROTH IRA, but distributions from a ROTH IRA are generally tax-free anyway so that wouldn’t make a ton of sense. [3]
  • The QCD must go to a public charity. Private foundations, or donor-advised funds are not qualified to receive a QCD. (A private charity may quality for a QCD but you would need consult a qualified tax professional to proceed with that route). [4]
  • The RMD check has to be issued directly to the charity. The IRA owner cannot have the RMD sent to him or her, cash it, then write a check to the charity. Doesn’t work that way. (The IRA owner can have the check made payable to the charity and mailed to the IRA owner if they want, but I’d say it’s cleaner and easier to just have the check made payable to the charity AND mailed directly to the charity as well).[5]

So, there you have it! Pretty easy, huh? If you’re so inclined and feeling generous a QCD might be a great strategy for you. If this idea appeals to you, contact me and I can assist you through the process.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Other specific rules may apply as laws may change. Consult a professional before making any decisions in regard to gifting required minimum distributions.

[1] Source: https://www.law.cornell.edu/uscode/text/26/408.

[2] Source: https://www.irs.gov/uac/special-charitable-contributions-for-certain-ira-owners

[3] Source: https://www.law.cornell.edu/uscode/text/26/408

[4] Source: https://www.irs.gov/uac/special-charitable-contributions-for-certain-ira-owners

[5] Source: https://www.irs.gov/uac/special-charitable-contributions-for-certain-ira-owners

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