Last Week’s Question of the Week: Since 1929, the stock market has averaged what percentage in returns? Is it 5% or 10%?
HOST: Today you are discussing ways that our listeners can consider donating their RMDs to charity. First please remind us about the details of RMDs.
KLAAS FINANCIAL: Many of our listeners have heard us talk about what happens when you need to begin taking Required Minimum Distributions which for those of you who have been listening to us in recent months, have heard that this age has been recently adjusted as a result of the Secure Act which went into effect January 1, 2020. Remember that RMDs are designed to ensure that investments in IRAs don’t grow tax-deferred forever. The IRS wants to begin receiving the associated taxes on these accounts.
a) The IRS now requires that most owners of IRAs withdraw part of their tax-deferred savings each year, after reaching the age of 72…or after inheriting any IRA account.
b) Your first RMD must now be taken by April 1st following the year you turned age 72.
c) Subsequent RMDs must be completed by December 31st each year.
d) If you withdraw less than your RMD, you may owe a 50% penalty tax on the difference.
e) Inheriting IRA’s and RMD’s:
- The rules for when IRA beneficiaries must take RMDs depend in part on the account owner’s age on the date of his or her death.
- If you inherit a Roth IRA and transfer the assets to an Inherited Roth IRA, unlike the original owner, you must take RMDs. As long as the assets have been in the Roth IRA for five or more years, these RMDs can be withdrawn federally tax-free.
- With the passing of the Secure Act, non-spouse beneficiaries of IRAs will generally need to withdraw 100% of the investments within a ten year period which effectively eliminated the former “stretch IRA” provision.
HOST: So how much are you required to take out for your RMD every year and how is a person’s RMD calculated?
KLAAS FINANCIAL: Remember, your required minimum distribution is the minimum amount you must withdraw from your account each year. A couple of things to remember:
a) You can withdraw more than the minimum required amount.
b) Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
c) How the RMD is calculated: The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” This table gives us our life expectancy. A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.
Note: A new revised Uniform Life Table is likely to go into effect in 2021 which will likely decrease the percentage amount of the current RMD schedule. Go to investor.gov which is a website hosted by the SEC (Securities & Exchange Commission) and you can calculate what your RMDs may look like; or go to irs.gov and type in RMD Worksheet and you can do an easy hand calculation.
HOST: For those people who are needing to take RMDs, what can they do with regards to donations to charity?
KLAAS FINANCIAL: This is a great topic to discuss with your financial advisor and your accountant to see if it may make sense in your own situation. Many people are unaware of this opportunity. Given the fact that higher standard deductions have come into play for our income tax filings, many people can no longer itemize, hence this strategy can help lower your tax situation. QCDs were made permanent in 2015 with the passage of the Protecting Americans from Tax Hikes (PATH) Act.
A QCD, Qualified Charitable Distribution rule, provides the opportunity for you to transfer UP TO $100,000 per taxpayer, per year from your IRA directly from your IRA custodian to a “Qualified Charity.” This is only available for IRAs and individuals who have reached age 70½ years old. This age was not adjusted with the Secure Act. In other words, even before you are required to begin your RMD withdrawals, you can interact with the QCDs to reduce your taxable income if you are charitably minded.
Unlike conventional RMDs, QCDs are not subject to ordinary federal income taxes. Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This lowers both your adjusted gross income and taxable amount of your IRA, which results in a smaller tax liability.
For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31st each year.
NOTE: Eligible/Qualified charities include 501(c)(3) organizations and houses of worship. However, Donor Advised Funds and so-called supporting organizations are not permitted to receive QCDs on a tax-advantaged basis. And your children are not a charity. Remember that when you do a QCD, you don’t also get to take a charitable deduction. But you will have satisfied your distribution requirement, and not have had to pay income taxes on that money.
HOST: Can you explain what Donor Advised Funds are? Can we save on taxes by using these?
KLAAS FINANCIAL: DAFs were first established in the 1930s and have become very popular in recent years. A DAF is a charitable investment account, held at a financial institution or community foundation. It is another conduit that offers some tax efficiency for your gifts, allowing you to maximize your contributions, track donations and streamline philanthropic endeavors.
According to a study by National Philanthropic Trust, in 2018, there were over 450,000 individual Donor Advised Funds in the US, holding more than $121 billion in assets. Giving from DAFs now accounts for over 12% of all individual gifting in America today. Key items to note:
There are many tax advantages:
- Tax-free growth for your gift.
- Appreciated assets that are donated can help reduce your capital gains liability.
- The use of “bunching” strategies allows you to bunch several years’ worth of gifts which helps taxpayers who can no longer itemize charitable gifts due to the higher standard deduction.
Speak to your accountant and financial professional to see if utilizing one of the funds might make sense in your charitable giving and tax planning strategies.
This Week’s Question of the Week: How much per taxpayer, per year can you transfer to a charity using the Qualified Charitable Distribution Rule? Is it $10,000 per year, or $100,000 per year?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.