Making the most of your RMDs

One undesirable result of the recent tax bill is that those who are charitably inclined may benefit a little less from their donations. I will be the first to mention, many do not donate to charity solely for the tax benefits. However, being able to itemize your charitable contributions has been a win-win for charitable organizations and individual donors for the better part of several decades. Only 25 percent or so of taxpayers usually itemize their deductions, and with the newly doubled standard deduction, that will likely be reduced to closer to 5 percent. I hope this tax bill does not bring a decline in charitable contributions, and I want to bring to light a way that those who are charitably inclined and over age 70.5 can continue to make their charitable donations tax-advantaged.

Individuals over age 70.5 who have a traditional IRA or other qualified plan are subject to required minimum distributions, known as RMDs. The IRS basically says  a minimum amount of money must be distributed from your pre-tax accounts on an annual basis after you turn 70.5. Pre-tax money doesn’t get to stay pre-tax forever. Individuals subject to RMDs who previously made and/or deducted charitable contributions could stand to benefit from a law passed in 2016 allowing for qualified charitable distributions. A QCD allows for a direct distribution from your IRA to the charitable institution of your choice. The amount you send to the charitable organization will count toward satisfying your RMD, and of course avoid income taxes. The maximum QCD you can utilize is up to $100,000 per year, per person.

The obvious benefit of the QCD is that you are essentially getting the same tax deduction you previously had from itemizing your charitable contributions. You can satisfy all or a portion of a required minimum distribution without paying income tax on it. One of the overlooked benefits is the potential impact it has on how your Social Security is taxed. Considering that you are likely claiming Social Security at age 70.5, the QCD has the potential to lessen the taxes paid on your Social Security benefits. Your QCD has the benefit of reducing your modified adjusted gross income, which is one of the three components that determine if your Social Security benefits are taxable.

Itemized deductions do not affect AGI. They are deducted after AGI is calculated on page 1 of your 1040, potentially leaving your Social Security benefits to be taxed. As I have previously written about, the taxation of your Social Security benefits can cause some significant undesirable and unintended consequences on your tax bill throughout retirement. My job, and the job of any financial planner, is to analyze how to best maximize each dollar for clients. The QCD presents a great opportunity for those who are subject to RMDs to enhance their retirement tax strategy.

You should talk to your financial advisor or tax professional to determine if a QCD is a proper strategy for your situation.

Robert Jeter is a certified financial planner with InFocus Financial Advisors Inc. He works mainly with retirees and has offices in Salisbury, Md., and Georgetown. He regularly holds financial education events on the topic of retirement throughout Sussex County. He can be reached at robertj@retireinfocus.com.

The opinions expressed above are those of Robert Jeter and are not intended to be advice. Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.