A Way to Avoid Ordinary Income Taxes
As some of you may know, the IRS requires Traditional IRA, SEP IRA, Simple IRA and other qualified retirement plan investors to take a minimum distribution from those investment vehicles starting in the year the investor turns 72 years old. The calculation of the minimum distribution is calculated every year by the IRS based on the age of the investor and the value of the account as of December 31st the year before. All distributions from these accounts are 100% taxable as ordinary income. If you are younger than 72 you may want to consider diverting a portion or all of your retirement contributions to a Roth IRA or Roth 401k to avoid or reduce your required minimum distribution later in retirement. Please read my recent article What’s So Great About Roth IRAs?
The IRS has allowed investors to direct their required distributions to a charity of choice with that distribution being tax-free to the investor. Some important rules:
- The distribution must go directly from the retirement plan/IRA account to the charity
- The tax-free distribution to the charity cannot exceed $100,000
- This tax-free distribution can not exceed the investors required minimum distribution amount
- The tax-free distribution can go to as many charities as the investor would like
- And, the tax-free distribution can be a portion of the required minimum distribution; it does not have to be 100% of the distribution.
For example: Jane Doe has a $25,000 required minimum distribution she must take out by the end of the year. She distributes the following:
- $5,000 to her church
- $5,000 to her favorite charity
- $2,000 to her favorite college university
- $13,000 goes to her bank account
Jane Doe has $12,000 of tax-free distributions and $13,000 of taxable distributions to add to her ordinary income taxes.
In the year you turn 72 be sure to stop sending your charity and/or tithing donations from your bank account, social security or pension payments. Set-up a new plan to pay all of your charitable gifts from your required minimum distribution. If you are near or turning 72 and would like help in setting up your qualified charitable distribution plan, please give us a call and we’ll walk you through it.
Remember, your 1099 may OR may not indicate you made a qualified charitable distribution from your IRA so it’s important to have a copy of your statement showing the qualified charitable distribution to give to your accountant during tax time.
If you have any questions or would like some advice on qualified charitable distributions, please give me a call.
CERTIFIED FINANCIAL PLANNER™
Partner, Windsor Wealth
620 Spring Street SE
Gainesville, GA 30506
The accounts discussed here are long-term retirement accounts. Non-qualified distributions prior to age 59 ½ may be subject to taxes and possible penalties. RMD’s are generally subject to federal income tax and may be subject to state taxes.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.