Tax planning and charitable giving go hand in hand. One way to merge the art of giving with the science of tax planning is to leverage Required Minimum Distributions (RMDs) from retirement accounts.
Here’s a look at what RMDs are and how they may be useful to your tax planning and charitable giving strategy.
What is a Required Minimum Distribution (RMD)?
Required Minimum Distributions (RMDs) are a minimum amount required to be withdrawn from a retirement account each year. The government’s primary objective in implementing RMDs is to ensure that individuals use their tax-advantaged retirement accounts to fund retirement and avoid indefinitely sheltering funds from taxation.
It’s important to note that the RMD age changed to 73 when the SECURE Act 2.0 was passed in 2022. That means you’ll have to start withdrawing your RMD no later than April 1, following the year you turn 73.
How to Calculate Your Required Minimum Distributions (RMDs)
The exact amount of your RMD changes from year to year and is based on the estimated remaining years of your lifetime. It is calculated by dividing your account’s year-end value by your life expectancy factor. The IRS has published life expectancy tables you can utilize to calculate your RMD.
There are three different life expectancy tables. Use the one that is applicable to your situation and work with your financial advisor to calculate numbers based on your circumstances.
- If you are a beneficiary of an IRA, use the Single Life Expectancy table (Table I)
- If you’re married, the sole beneficiary of your account is your spouse, and if he or she is more than 10 years younger than you, you use the Joint and Last Survivor table (Table II)
- All other original IRA owners use the Uniform Lifetime table (Table III)
Tax Implications for Charitable Giving
Qualified Charitable Distributions (QCDs) allow you to donate your RMD directly to a qualified charity in a tax-advised manner. By doing so, the distribution is not counted as taxable income. This strategy can be particularly beneficial for individuals who do not need the entire RMD for personal expenses and wish to minimize their tax liability.
Turn your retirement savings into a meaningful gift
According to U.S. News & World Report, as of 2024, account holders aged 70½ or older can make IRA-qualified charitable distributions of up to $105,000 each year without owing income tax on the transaction. This can also count as your RMD for that year.
For example, if your RMD amount is $50,000 a year, you can direct a $30,000 distribution to charity and take the remaining $20,000 yourself, paying taxes on just $20,000. You can also give the full $50,000 to charity if you choose to do so, and will not have to pay taxes on your RMD for that year.
This allows you to support your favorite charity or any community impact fund, such as Supporting Our Heroes, at Rancho Santa Fe Foundation. Please note distributions to your Donor Advised Fund are not allowed.
Given the complexity of tax laws and individual financial situations, consulting with a professional tax advisor is crucial. Your advisor can provide personalized advice based on your specific circumstances, helping you navigate the tax implications of RMDs and make informed decisions aligned with your financial and philanthropic goals.
Where to Give
Gifts can be made directly to the nonprofits you regularly support or to an existing community impact fund with Rancho Santa Fe Foundation (Non-Profit Tax ID #95-3709639).
When to Give
Required minimum distributions (RMDs) are mandatory distributions from your Individual Retirement Account (IRA) that must be completed by year’s end. Most IRA plan sponsors must be contacted by early December to ensure timely distribution.
How to Give
Our team is available to answer any questions you might have on donating your RMD. Since your situation is unique, we always recommend that you discuss the benefits of an RMD gift with your professional advisor before finalizing your gift.
We look forward to helping you with your distribution request.
