Qualified Charitable Distributions: A Powerful Way to Support Your Favorite Charities
If you are age 72 or older and you have an Individual Retirement Account (IRA), you are required by the Internal Revenue Service (IRS) to take annual minimum distributions (RMDs). The amount of these distributions is based divisor taken from a government life expectancy table and the value of your IRA(s) on December 31 of the previous year. The older you are, the larger the divisor.
For example, if you are age 75, the divisor for 2021 is 22.9. If the value of your IRAs at the end of 2020 was $1 million, your RMD for 2021 is $43,668. You must take this amount before December 31, 2021.
What happens if you fail to take your RMD? The amount that is not withdrawn is taxed at 50%. If you took only $25,000 of the $43,668 required distribution, the shortfall would be $18,668 ($43,668 - $25,000). You would owe a penalty tax of $9,334 (50% of $18,668). So, you do not want to fail to take your RMDs.
But what if you do not need the money? If you are charitably inclined, you can satisfy the IRS requirement by making a "qualified charitable distribution" (QCD) to satisfy part or all of your required minimum distribution. The maximum annual amount that you may donate to a qualified charity is $100,000. If you are married, you and your spouse can each make QCDs up to $100,000.
You are eligible to make a QCD at age 70 1/2, a bit earlier than the age for RMDs. The QCD must be a direct transfer by the custodian for your IRA (e.g., Fidelity, Schwab) to the qualified charity. Your QCD will be excluded from your taxable income. Thus, your taxable income will be lower and that may help you pay lower taxes on Social Security and lower Medicare premiums.
The QCD is a great way to take your RMDs, support your favorite charity and improve your own financial situation.
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