Age 70? Here’s a Little-Used Tax Strategy

In 2015, Congress made permanent the law allowing Qualified Charitable Distributions (QCDs) which allows someone who is age 70½ or older to make Required Minimum Distributions (RMDs) directly to a qualified charity and exclude that distribution from income.

As a reminder, when you turn age 70 ½, you must begin to take IRS-mandated minimum distributions from your IRA accounts.  The amount (actually a percentage) of the required minimum distribution (RMD) is based on a published IRS table and the percentage rises each year based on that table (based roughly on life expectancy).

Assuming you make gifts to charities, using the QCD strategy can save you lots of money.  Most people take their RMD and simply deposit the check into their personal savings or investment account and during the year, also write checks to their favorite charities.  Depositing the RMD into your account has the effect of raising your adjusted gross income which can make it harder to qualify for an array of income tax deductions such as medical deductions and miscellaneous deductions.  It also could have the effect of raising the premiums you pay for Medicare Part B and D.

For Medicare premium purposes, carefully watching your adjusted gross income numbers can save a couple over a thousand dollars a year!  For example, if you file a joint return and your total adjusted gross income is $176,000, then you are subject to income adjusted Medicare Part B and D premiums of $66.80 per person per year.  By giving $5,000 from your RMD directly to a charity (QCD strategy), then you reduce your adjusted gross income to $171,000.  This puts your income below the threshold of $175,000 and saves you as a couple $1603 for the year!

Here are some of the more important QCD rules:

  • It only applies to IRAs, not other retirement plans
  • You must be age 70 ½ or older to qualify
  • QCD transfers cannot exceed $100,000 in a tax year
  • You don’t get a charitable deduction … simply an exclusion from income

Even if you use the standard deduction because your charitable deduction is below the standard deduction threshold, you can still benefit from this strategy.

What you should do

If you are age 70½ or older; and are giving money to tax-deductible charities or religious organizations; and you are taking required minimum distributions from your IRA; then plan to get with your tax advisor and see how much money you could save using a QCD strategy.  It could literally save you hundreds or even thousands of dollars.  Doing the direct transfer to your favorite charity is not a difficult process.  In fact, it’s quite easy.

If you’d like to have me answer your financial question email me at [email protected] and place in the subject line.  Consult your own professional legal, tax or financial advisor before acting upon this advice.