Why You Should Send Your RMDs Straight to a Charity
By Daniel Baumgartner & Petra Peters
For many retirees, required minimum distributions (RMDs) charity donations might be a financial burden. Even though they provide a consistent income stream, they also come with a tax bill. But what if you could convert this required withdrawal into a tax-free charitable donation?
In this article, we explore how to optimize your RMDs by making a direct qualified charitable distribution (QCD). Knowing how QCDs work and who’s eligible can help you make wise decisions about your retirement assets and contribute to the causes that are important to you.
What Can You Gain From Contributing to a Qualified Charity?
An attractive option for optimizing the impact of your charitable contributions and possibly decreasing your tax burden is through QCDs.
You can satisfy your RMD requirement without paying income tax by sending money straight from your IRA to an approved charity. This tax savings can be significant, particularly if you’re in an elevated tax bracket. QCDs can also lessen the effect that RMDs have on other income like Social Security taxes.
Beyond the financial gains, QCDs give you the opportunity to significantly impact other people’s lives. You can make larger charitable contributions without using up all your after-tax dollars by withdrawing your contributions directly out of your IRA. This gives you significant tax savings in addition to allowing you to support causes you’re passionate about.
How to Determine if You Can Make a QCD
The ability to use funds as a QCD isn’t possible for all types of retirement accounts. It must be an IRA that’s either inherited, traditional, rollover, SEP, or a SIMPLE plan that’s no longer in operation. If no employer contribution is made during the plan year that ends during the tax year that the charity contribution is made, the SEP or SIMPLE is deemed inactive.
In addition to having an eligible account, to make an RMD charity donation, other requirements must also be satisfied, including:
- Donations must be given directly to the charity. If you withdraw funds and then contribute the same funds to a charity, it doesn’t qualify as a QCD.
- The total amount of the QCD can’t be more than $100,000 per calendar year per taxpayer. Even if you donate to multiple charities, you can’t give more than $100,000 total, per year.
- QCDs cannot exceed the amount (excluding non-deductible contributions) that would otherwise be subject to ordinary income tax.
- You must be older than age 70½.
- The money must be removed from the IRA account by the RMD deadline, typically December 31, in order for it to count against the RMD for the year. Extra donations cannot be applied to RMDs for subsequent years.
How to Determine if You Can Receive a QCD
Once your eligibility has been established, you must confirm that your charity is also qualified to receive a QCD. Your organization must first qualify as a 501(c)(3) nonprofit in order to be accepted as a recipient of tax-deductible contributions.
In addition, there are specific types of organizations that are not eligible to receive QCDs. These include:
- Donor-advised funds managed by public charities for individuals, families, or organizations
- Private foundations
- Supporting organizations (charities that exist to solely to sustain other organizations, usually public charities)
Partner With a Professional
We understand that contributing to your favorite charity is a primary focus for you. And since you’re going to donate anyway, why not make your donation as tax-efficient as possible by utilizing the RMD charity donation strategy?
When you’re ready to learn more about QCDs and how they can help optimize your RMDs, our team at Terra Nova Asset Management is here to help.
You can reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.