Charitable Giving + Required Minimum Distributions – How it Works

Required Minimum Distributions (“RMDs”) are an annoyance for many IRA investors. The benefits of an IRA, tax-deductible contributions (for some) and tax-deferred growth (for everyone), make them attractive retirement savings tools. But, the IRS isn’t in the generosity business: eventually they want you to pay tax on the income and gains you’ve realized in your IRA.

That’s where the RMD comes in: at age 70 ½, IRA owners must begin withdrawing money from their accounts. The percentage is small at first – roughly 4% to begin – but increases each year. And because RMDs are taxable, they allow the IRS to finally get its pound of…well, you get the idea.

One bright spot that’s developed in the RMD game is the ability to donate your RMD to a 501(c)(3) non-profit organization of your choice. These gifts, known as Qualified Charitable Distributions or (“QCDs”) allow IRA holders to avoid the income tax normally associated with an RMD. In years past, Congress would annually extend this exemption, but last year they made it permanent. This is a great benefit to taxpayers and non-profit organizations alike.

There are some limitations:

  1. QCDs must be made directly to the non-profit organization – if you withdraw the money from an IRA and deposit the money into your checking account first, you’ll be liable to pay income tax.
  2. The annual cap on QCDs is $100,000.

But if you intend to make one or more charitable gifts, and you’re also required to take an RMD this year, a QCD may well reduce your taxable income, allowing you to do well for yourself, while doing good for others.