How Sending Your Charitable Contributions Through RMDs Could Also Mitigate Taxes

By Simon Heslop

Charitable giving is part of your existing financial plan. Benefiting from tax savings strategies is also a priority for you. Is there a way to marry those two ideas together? In fact, there is. 

If you’re taking an RMD (required minimum distribution) and also prioritizing charitable giving, learn how you can combine these, resulting in tax savings to boot.
Benefits of Making a Qualified Charitable Distribution
While cutting out yourself as a middleman saves you a lot of time and administration, that’s not where the greatest benefit of a QCD (qualified charitable distribution) lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first. 

When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break. 
Are You Eligible to Make a Qualified Charitable Distribution?
Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made. 

In addition to having the right kind of account, these other requirements must be met:

You must be age 70½ or older.
To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?
After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. 

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:

Private foundations
Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?
Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding. 

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified. 
Work With a Professional
We understand that giving to charity is a top priority for you. You’re going to give regardless, so why not do so in the most tax-efficient manner possible? QCDs are a great opportunity for anyone who is required to take minimum distributions from their retirement accounts. 

Many specific rules and requirements must be met in order for distributions to qualify for exempt status, so it’s a good idea to work with an experienced financial professional to ensure you make a QCD the right way. If you’re interested in learning more about qualified charitable distributions, FSA Wealth Management is here to help. If you’d like to partner with a financial planner who strives to simplify financial management and help you secure your financial future so you can focus on what matters most, schedule an introductory phone call by reaching out to us at 781-455-1020 or email greg@fsawm.com. 
About Simon
Simon Heslop is Managing Partner at FSA Wealth Management, a Registered Investment Advisor firm offering fee-only services and known for its independence, objectivity, and results. With a passion for excellence and 20 years of financial services experience, Simon applies his results-driven approach to creating tailored investment and financial planning solutions for clients seeking to fulfill their vision of financial success. He has a history of developing targeted investment portfolios to help investors meet their long-term objectives, and truly enjoys the process of getting to know each FSA Wealth Management client.

Simon earned his undergraduate degree in engineering from Union College and an MBA from Northeastern University and holds the Chartered Financial Analyst® designation. Outside of work, Simon loves to hike with his family; (one day they’ll find it funny that Dad gets them lost at least half the time). He has a passion for woodworking and is perhaps one of the few people who idolize Norm Abrams and The New Yankee Workshop. He enjoys all types of bicycle riding and has a goal of riding across the country (despite the fact that he has barely ridden across New England). Simon is constantly striving to find a better and higher self, help others, and leave the world a better place. To learn more about Simon, connect with him on LinkedIn.

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