Another charitable giving strategy, for those old enough, is to donate your unneeded required minimum distributions (RMDs) by converting them into qualified charitable distributions (QCDs).
How it works
Anytime you set up a qualified retirement account, the government gives you tax deductions (depending on your income level) when you contribute to that specific account, with the understanding that you will pay taxes on the income generated from that account in the future. If you do not have a need for the income, you can allow that account to accumulate over the years without any taxation.
Once you reach the age of 70½, however, you are required by the IRS to withdraw a certain percentage of all of your qualified accounts. Whether you choose to draw the funds from one or multiple accounts, the overall percentage is the same. This is one of those things, like death and taxes, that cannot be avoided. You will eventually be required to do something with that money, and every year the percentage required to withdraw will increase.
If you have no need for the income, you would just be adding additional and growing taxation to your financial situation. However, converting your RMDs into QCDs might just be the solution you were looking for. To achieve this, an experienced wealth advisor can help you set up the RMDs to be deposited directly to the charity of your choice, effectively creating QCDs.
In addition, money donated through QCDs do not count against your charitable tax deduction for the year, meaning you can donate 100% of your RMDs, pay no taxes on that money, fund the charity of your choice, and also continue to receive tax deductions for the other charitable contributions you make on top of the QCDs. For example, if you have always wanted to give back to your alma mater but have felt a burden to fund other charities that seem to have a greater need, this is a great opportunity to finally give back and avoid taxation while doing it.
Benefits at a Glance
- Avoid paying income taxes on unneeded RMDs.
- Donations made as a QCD don’t count against your charitable tax deduction for the year, so this method can be used with other charitable giving strategies to fund multiple causes you care about.