It’s that time of year again.
Year-end is coming up and many of my readers will be moving money out of their Individual Retirement Accounts (IRAs) to satisfy the IRS Required Minimum Distribution (RMD). Whether you need the money to spend or not, the IRS makes those who are age 70 ½ and older take a portion of IRAs out every year and pay income taxes on the withdrawal.
The amount is based on your account balance on December 31st of the prior year divided by the years left of your life expectancy. Who decides how many years you have left? That’s right, the IRS!
Here’s an example.
Take, for example, Bathsheba, a 78-year-old retired nurse from Kansas City. Bathsheba had $150,000 in her IRA account on December 13, 2016. According to the IRS, her remaining life expectancy is 20.3 years. Her RMD is $150,000 divided by 20.3, or $7,389 that must be taken out by December 31, 2017.
Bathsheba gives $100/month to her church, or $1,200/year. She could take a tax write off on these donations, or, even better, direct $1,200 of her RMD directly to the church as a charitable donation. The IRS allows up to $100,000 in charitable gifts to 501(c)(3) organizations per year direct from RMD distributions. To clear up confusion, this would not include your chronically unemployed grandson under an approved charity.
The advantage to this is the IRA distribution that goes to charity never even hits your taxes as income in the first place. This is even better than a write-off.
The bottom line.
If you are over aged 70 ½, consider this strategy as a tax-savvy way to make the most of your charitable donations. Ask your financial adviser for details on how to process the RMD and direct all or part of the proceeds to your charity.