What Does RMD-QCD Spell? A Gift Planning Opportunity

The tax incentives for some forms of charitable giving have been partially diminished by the increase in the standard deduction.  One area in which this has not happened is with “Required Minimum Distribution” (RMD) gifts.  Many charities, and even more donors, find this area confusing.  In this posting, we will try to offer some practical tips for charities and donors.  The Q & A format will help keep matters organized!

I Don’t Understand What a Required Minimum Distribution (RMD) Is.  Can You Help?

Yes, we can.  RMD means “Required Minimum Distribution.”  It is a mandatory annual withdrawal for someone 72 years of age or older who has one or more Individual Retirement Accounts (IRAs) that hold pre-tax (never taxed) money.  Upon withdrawal, the money is taxed.  The federal government offers IRAs as a tax-deferred savings method, but RMDs insure that at some point, the money is taxed.

How Much Needs To Be Withdrawn for an RMD?

It depends upon the size of the IRA or all the IRAs collectively.  It also depends on the age of the IRA owner.  If an IRA of $500,000 is owned by a 75-year-old man, the RMD is about $21,800.  A 90-year-old with the same account will have an RMD of about $43,800.  The theory is that the 90-year-old has to withdraw the money faster, since his life expectancy is lower.  The IRS provides tables that make the calculation easy.

So, RMDs Are Taxable?

Yes, they are taxable as ordinary income.  More importantly for retirees, that additional income can push them into a higher tax bracket.  That can have reverberating impacts.  Higher income can trigger additional taxes on a retiree’s Social Security payments.  It can also double or even triple the amount the retiree pays for Medicare.  The whole theory behind the so-called science of “retirement account withdrawal management” is to keep ordinary income as low as possible.

Where Do Charities Come In?

Well, under a provision in the law, retirees can direct up to $100,000 a year of RMD withdrawals to a charity.  If they do that, there is no charitable deduction, but there is also no tax on the RMD.  Most important, the amount of the RMD is NOT included in the retiree’s taxable income.

So Then Where Does QCD Come In?

The mandatory withdrawal from an IRA is . . . an RMD.  If it is directed to a charity (and the rules are followed) it becomes a Qualified Charitable Distribution (QCD).  It’s “qualified” because there’s no tax.  It’s “charitable” because it is going to a charity.  And it’s a “distribution” because all money coming out of a retirement account is called a distribution.  It’s a tax thing.

We Saw the Parenthetical in the Last Answer: “And the Rules Are Followed.”  There’s Always a Hitch!  What Are the Rules?

Actually, they are fairly straightforward:

1. The distribution must be made directly to the charity from the IRA custodian (Fidelity, Vanguard, etc.).  It can’t be a check that is sent to the donor and then he writes a check to the charity.
2. The charity must be qualified to receive these gifts.  Public charities qualify, but donor advised funds and private foundations do not.
3. The donor must be 72 years old.  NOTE: Due to a wrinkle in the law, donors who are 70 ½ years old may make QCDs even though they are not required to take RMDs.

Can the Donor Give MORE Than His RMD Amount?

We thought you would never ask.  Yes, and with the same tax treatment.  However, the excess amount cannot be carried over to satisfy RMD amounts for a future year.

Do You Have Any Special Tips for Those of Us in Gift Planning?

A few key items occur to us, presented here as CCK TIPS:

• Sizeable QCDs may be a good indicator of substantial assets.  That information is useful for bequest cultivation.
• The fiduciary that submits a QCD should be noted in the donor’s file.  That information may help in the future to avoid a “lost” IRA of which your organization is a “pay on death” beneficiary.
• If your organization is OTHER than a garden-variety 501(c)(3) organization, check with your legal counsel on whether QCD gifts may be received.  If your organization is not eligible, it can still receive the funds, but the donor will not receive the special benefits.  As an ethical matter, in such a case, you would probably need to return an attempted QCD to a donor.  (Oftentimes they can be resubmitted through a 501(c)(3) affiliate, but the distribution MUST come directly from the fiduciary.)