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January Thoughts: Required Minimum Distribution (RMD) from a Qualified Retirement Account

Traditionally, December marks the end of the calendar year and is also the month in which many donors make annual charitable contributions to those organizations and causes they care the most about. And for those readers who are less than 70 ½ and who are not yet mandated to take a Required Minimum Distribution (RMD) from a Qualified Retirement Account, this may well be your plan for some years to come. But for those who have reached 70 ½, please read on.

One of my favorite authors and experts on the subject of charitable planning is Professor Russell N. James, III J.D., Ph.D., CFP. He writes a monthly blog for the Planned Giving Design Center Network and I glean so much useful information from his writings.

As the New Year begins, individuals who are required to take an RMD, the most tax-efficient way to use some or all of the RMD is to donate it to charity. Distributions from a traditional IRA are taxed as ordinary income; however, a QCD transfers directly to the charity and although it counts against the RMD, it does not count as income. And an individual can gift up to a maximum of $100,000 per year (all IRA’s owned are aggregated) even though the RMD might be less than $100,000.

It sounds pretty simple… but please read Dr. James’ most recent post about some of the possible pitfalls to this plan to be sure that your charitable intentions can be fulfilled.

We at Rancho Santa Fe Foundation also want to call your attention to the fact that current tax law does not allow an individual to use his/her QCD to fund a donor-advised fund. So, it is important that individuals who qualify by age make certain that the QCD goes directly to their charity of choice or to a designated endowment fund at a community foundation. They could even use a QCD to create an endowed fund for their charity of choice and each year some or all of the funds could go into that fund to assist the organization to build for the future.

Because charitable grants of this sort have no tax consequences, there are no tax filing requirements but you will receive a letter from the charity acknowledging that your gift was received directly from the plan trustee or administrator and that it is your intention for all or a portion of your gift to qualify as a qualified charitable distribution from your IRA under section 408 (d) (8) of the Internal Revenue Code.

Donors are encouraged to retain the letter from the charity and to provide it to the tax preparer.

There are many ways to use personal assets in a tax-advantaged way to support the needs of your community. We would welcome the opportunity to discuss them with you in our offices.

Together we can begin the New Year in an impactful and meaningful way.