Today we are continuing our conversation around charitable planning. The rules around Individual Retirement Accounts are forever in flux. One of the more intricate mandates within IRA management is the Required Minimum Distribution (RMD) — where the IRS requires one to being “spending” or “distributing” funds from their IRA. These distributions face the most penal tax structure – ordinary income. However, there’s a silver lining for those that wish to harness their RMDs for good — Qualified Charitable Distributions (QCDs).
Setting the Scene with RMDs
Understanding RMDs is important and something that requires an investor’s attention. — they are the IRS’s way of ensuring that tax-deferred retirement accounts are used for what they were designed for: the financial support of your retirement. But this regulation, while rooted in good financial sense, comes with its complexities and tax implications. Primarily it is not voluntary. The distributions are required per their moniker. However, for the charitably inclined there are some interesting incentives.
Understanding QCD’s
Qualified Charitable Distributions can be beneficial provisions for those with charitable inclinations. QCDs enable you to direct contributions from your IRA directly to qualified charities, effectively repurposing your RMDs for a noble cause while addressing the impact that taxable distributions can bring.
In most cases QCDs are not taxable. By channeling a portion of your RMDs through QCDs, you’re not only fulfilling your required withdrawal but doing so in a manner that exempts those funds from your taxable income. It’s a financial two-for-one that could significantly reduce your tax burden and leave a more substantial legacy for causes you cherish.
The process of enacting a QCD is fairly straightforward:
Consult the financial plan
As we construct your plan at PrairieFire the amount of your RMD’s can be estimated. From these estimates we can work on an amount that might work to direct to the charities your family supports. We contact those charities on your behalf and make certain they are eligible. From there we will deal with our beloved paperwork and make the distribution directly from your IRA account.
It’s important to ensure that the charity you’re looking to support is indeed a ‘qualified’ one. The IRA Charitable Rollover rules are strict, and your charity must adhere to the IRS’s guidelines.
Timing is of the essence. To execute a QCD, it must happen by the end of the tax year in which you’d like it to count. Be sure to allow for processing times, especially during the busy end-of-year period.
For those considering the QCD approach, please include your team at PrairieFire. We have experience helping families determine amounts, timing, processing and making sure the charities say “thank you!” 😊
