As we turn the calendar to November, many of us start to think about our year-end checklists. The closing of the year can also be a good time to check in on necessary tax strategies to ensure we are prepared for another tax season. Sooner than we know it, April 15 will be here!
When sizing up your tax situation, you first need to consider the taxable implications of what you’ve accumulated over the year. For some of us who are over the age of 70 1/2, part of your tax income sources may include RMDs, or Required Minimum Distributions. Individuals over the age of 70 1/2 (and certain individuals who have inherited IRAs from others) are forced to take a distribution each year from their pre-tax retirement accounts. The amount is determined by the size of the pre-tax retirement accounts and your age.
While the RMD may be a welcome and needed source of income for some, it can be a tax conundrum for others. For those who have other sources of income saved in retirement, an RMD may be a forced, unnecessary taxable distribution. Worse yet, it could place you into a higher bracket or cause other sources, such as capital gains and Social Security, to be taxable, resulting in an exponential increase of taxes owed. If this is the scenario you find yourself in, consider utilizing Qualified Charitable Distributions, or QCDs.
If you are charitably inclined, you likely write numerous checks to charities throughout the year. Using QCDs, you can accomplish that while being more tax efficient. A QCD is a distribution from your pre-tax retirement account made directly to a qualified non-profit. In most scenarios, this would be taxable, but because it is made to a non-profit, the IRS has deemed this a non-taxable event. Better yet, the distribution counts toward your RMD amount. In 2015, Congress made this strategy permanently available to US taxpayers.
With a little planning, you can create a strategy that satisfies both your charitable intent, while being tax efficient. If you are in the position of receiving RMDs each year that you may not need, consider using a QCD to lighten your tax load.
Thank you for considering a QCD gift to Sauk Prairie Healthcare Foundation. As always, before implementing any strategy that can affect your financial situation, please always consult your financial, tax and legal professionals.