Traditional IRAs offer a number of appealing benefits, including a tax deduction when you put your money in.
But once you reach a certain age, starting from the following April 1st, it’s time to pay the piper in the form of required minimum distributions (RMDs).
The chart below gives you the age when you have to start taking RMDs1
Your Birth Year
Your Mandatory RMD Age
1950 or earlier
72 (70.5 for those who turned 70.5 before 2020)
1960 or later
Whether or not you want or need the money right then, the law requires you to take out a certain amount each year and pay taxes on it.
To make sure you honor your RMD requirement, the tax law levies a 50 percent penalty on the amount you were required to withdraw but failed to withdraw. That’s an attention-getting penalty.
After you reach the RMD age, the tax code allows you to donate directly from your IRA account up to $100,000 per year in qualified charitable distributions (QCDs).
- The QCD donated money escapes income taxes and also does not count as adjusted gross income (AGI).2
- The QCDs can satisfy all or part of your RMD requirement.3
- The QCD doesn’t bump up against the 50-percent-of-AGI ceiling4 that applies to cash donations.5
Planning 101 for RMDs
You likely will want to use the plan in this article if you donate money to your church, a school, or some other 501(c)(3) organization, such as the Red Cross or American Cancer Society.
Rule 1. You must make your QCD donation to a qualifying 501(c)(3) organization, such as your church, a school, or the Red Cross.6 Your QCD cannot go to a private foundation, a donor-advised fund, or a charitable supporting organization.7
Rule 2. Don’t touch the money. The trustee must make the check or transfer payable to the charity (not to you).8
Double dip. You get a double-dip benefit when you don’t itemize deductions and you contribute directly from your IRA to a charity.
- First, you get the benefit of the standard deduction.
- Second, you get the benefit of the direct charitable contribution deduction because it cancels your RMD income, making the RMD tax-free.
To put this another way, with the IRA-to-charity contribution, you (the non-itemizing taxpayer) create a deduction where none existed before. And because of the Tax Cuts and Jobs Act, you are less likely to itemize these days.
Save on Medicare premiums. The government bases the Medicare premiums that you pay on the AGI reported on your tax returns two years ago (e.g., your 2023 payments are based on your 2021 tax return). To see how you can save, consider this:
- If you take the IRA money directly, it adds to your AGI, which can increase your Medicare premium costs in 2023.
- If you use the QCD method, you add nothing to your AGI.
Pay less tax on your Social Security benefits. Before 1984, you paid no income taxes on your Social Security benefits. Today, you have to add together your AGI, your tax-exempt income, and half of your Social Security benefits, and then pay taxes at your regular tax rate on:9
- 50 percent of the Social Security benefit on the computed amount if that computed amount is between $25,000 and $34,000 ($32,000 and $44,000 on joint returns), and
- 85 percent of the Social Security benefit on the computed amount that exceeds $34,000 ($44,000 for joint returns).
The taxable RMD adds to your AGI and can make more of your Social Security benefits taxable.
Solution. Avoid the RMD taxable income inclusion with the direct IRA-to-charity donation, and that, in turn, can cut the taxes you are paying on your Social Security benefits.
Shrink the net investment income tax (NIIT). You pay the 3.8 percent NIIT on investment income when your modified AGI is greater than $200,000 ($250,000 for joint returns).10
Would your required IRA RMD make you subject to this tax? If so, consider making the RMD disappear with the direct IRA-to-charity strategy.
Don’t Do the QCD with a Roth IRA
There is no legal prohibition on funneling Roth IRA amounts to a charity, but there’s no tax advantage for doing so.
You have no tax-law reason to take the money. For example, the Roth IRA has no RMD requirement.11
But you also have no reason not to take the money. You put the money into the Roth IRA post- tax. The rules of the Roth IRA allow you to withdraw the money tax-free when you are over age 59 1/2 and satisfy the five-year waiting period.12
As you see in this article, the RMD that arrives as taxable income on your Form 1040 can do more tax damage than you would first think.
If you currently give money to a church, a school, or other 501(c)(3) charity, use a QCD donation from your traditional IRA to
- make your RMD tax-free,
- avoid the 50 percent limit on donating to charities,
- reduce your Medicare premiums,
- cut the income taxes you pay on your Social Security benefits, and
- shrink your NIIT taxes.
In many of these circumstances, your wallet is talking to you and telling you to use the QCD donation strategy.
1Pub. L. No. 117-328, SECURE 2.0 Act of 2022, Section 302(b), p. 831.
2IRC Section 408(d)(8).
4IRC Section 170(b)(1)(A).
5IRC Section 408(d)(8).
6Id.; IRC Section 170(b)(1)(A).
8Notice 2007-7, Q&A 41; IRC Section 408(d)(8)(B)(i).
9IRC Section 86.
10IRC Section 1411(b).
11Reg. Section 1.408A-6 (Q&A 14).
12IRC Section 408A(d)(2)(B) 2018.