Donate RMD to Charity: Qualified Charitable Distribution - YouTube

Hi everyone. I am Ara Oghoorian with ACap Advisors  and Accountants, and welcome to another edition  

of the ACap ReCap, where we go behind the blog  and answer some of your most important questions.  

Today we're going to talk about how as a retiree  you can take money out of your IRA and not pay any  

tax on it. So, if you're a retired individual  or if you're getting close to retirement,  

you need to start taking money out of your  IRA. Today we're going to talk about how  

you can take money out of your IRA and not  pay tax on that. However, before we begin,  

remember to subscribe, like and share our channel,  and if there's a topic you want us to cover,  

be sure to include it in the comments section  below, and we will cover it in a future episode.

If you're getting close to retirement or  are in retirement and have an IRA, then you  

probably already are aware of the required  minimum distribution also known as the RMD.  

The RMD is essentially the IRS, saying you've  deferred your taxes long enough in an IRA,  

and now it's start it's time to start taking money  out of that account and starting to pay tax on it.  

Because, as a quick refresher, an IRA is  either money, that you put into on a regular  

basis per year and it's and you've got a tax  deduction for it, and it's grown tax deferred,  

or it's an old 401k or multiple 401k plans, that  you've rolled over into an IRA, but you've never  

been taxed on that money. And they've now  accumulated in value, and the IRS is saying  

at some point you have to start taking money out  and pay tax on it. That's essentially what the RMD  

is. And the RMD continues to increase every year  as your age increases. So, when you first retire  

and the earliest you have to start taking RMD  is 70 and a half, so even if you are are still  

working and you have an IRA and you're 70 and a  half you have to start taking RMDs. At 70 and a  

half it starts escalating every year, so, the goal  is to completely wipe out the value of the IRA  

upon your passing. Now the SECURE Act changed  the age of the RMD from 70 and a half to 72,  

so keep that in mind if you don't need the money  and you're at that age below 72 you have until 72  

to be able to start taking RMDs out of your IRA.  There's a special rule within the Internal Revenue  

called the qualified charitable distribution.  The qualified charitable distribution allows  

you to donate your RMD, what you would have  received as an RMD, directly to the charity,  

and by doing so, you're avoiding taxation of  that RMD that money that you're going to receive,  

and the charities getting deduction or the  charities getting a donation, that you would have  

given anyway. So, if you normally give charitable  contributions and you're also subject to the RMD,  

you're probably better off, instead of donating  cash to that charity, use the RMD through this  

qualified charitable distribution to donate  money directly to the charity, so that way you  

don't pay tax on that RMD and you've also helped  that charity out. The maximum you can do with a  

qualified charitable distribution is a $100,000  a year, so keep that in mind, as you're making  

these charitable contributions through your IRA  directly. A couple of things to keep in mind, when  

you're making a qualified charitable distribution:  the first one is, if you do a qualified charitable  

distribution, then you're not able to take  that charitable deduction on your schedule A  

as you normally would, if you were to donate cash.  So, if you donated cash or non-cash items on your  

schedule A, you would put on there what that  amount is and you get a charitable deduction  

as an itemized deduction. However, if you  do the qualified charitable distribution,  

then you can't have that both ways, you can't  also deduct it on your itemized deductions and  

exclude it from your income. So, if you  do a qualified charitable distribution,  

it's only going to be excluded from your income  and you cannot deduct it again on your schedule  

A itemized deductions. The other thing is when you  donate cash and you itemize it on your schedule A,  

there's income limitations, so, it's usually 50%  of your AGI you're not able to deduct. So, if  

your AGI is a $100,000, you can only deduct up to  $50,000 of charitable distributions or charitable  

deductions on your itemized deductions. Whereas,  if you do a qualified charitable distribution,  

you don't have that AGI limitation, that you  do with a cash or non-cash distribution. The  

other thing to keep in mind is if you're going  to go the route of a charitable contribution  

distribution through your IRA directly to the  charity, it cannot be to a private foundation.  

Also you cannot do it to a donor advised fund.  So, unlike, when you donate cash to a donor advice  

fund and you get a deduction, you cannot do that  unfortunately with a RMD distribution, that goes  

directly to the charity. Also, you cannot do it  to a charitable remainder trust or a charitable  

annuity. So, those are some of the limitations  with doing a charitable distribution from your  

IRA. A couple of other benefits of donating your  IRA directly to the charity is that it reduces  

your taxable income. So, if you were to take that  RMD regularly, then your taxable income would  

be higher, but if you donate it directly to the  charity, then your taxable income is lower. So,  

obviously you pay less tax on that, but the other  benefit is that if you're getting social security,  

sometimes depending on your income your  social security may be taxable to you,  

but if your taxable income is lower, now  your social security either may not be taxed  

or may lower a smaller amount of it may be taxed.  So, that's another advantage of donating your IRA  

directly to a charity. Another benefit is let's  assume you don't itemize at all and you're just  

subject to the stamp or you only get the standard  deduction. Well, if you do the donating IRA  

directly to charity, you're still getting a tax  benefit, because your taxable income is lower  

even though you don't itemize, so you get a  win-win in that situation, as well. Now let's look  

at a couple of examples, let's assume that you're  75 years old and you have an RMD for the year  

of $50,000, so you have to take out $50,000 from  your IRA, and you decide to donate $5,000 of that  

to your favorite charity. If you do that, the  5,000 of that 50,000, 5,000 automatically go to  

that charity from your IRA, and then the other  45 would go to you. So, what ends up happening  

in this situation is you fulfilled your RMD  requirement, because you were supposed to  

take out 50,000 and that that's occurred, but of  that 50,000 you're only taxed 45,000, because you  

diverted 5,000 to your favorite charity. So, you  now you've reduced your taxable income by $5,000.  

Let's take a look at another example! Let's  assume, that you take the standard deduction  

on your taxes, which means, that you don't itemize  and on a regular basis you donate $20,000 to your  

favorite charity, in this example, by donating  at $20,000 you don't get a tax deduction, because  

again you're atomizing your deductions. Now, let's  further assume, that instead of donating cash to  

your favorite charity, you decide to donate a part  of your IRA, that you would have to take as an RMD  

directly to that charity. Now, let's assume  further, that you're in a 30% tax bracket to  

calculate what your tax savings would be, if  you did this scenario, if you're in a 30% tax  

bracket and you donate $20,000, you essentially  save $6,000 of taxes, that you would have paid  

by donating the money directly from your IRA  to the charity. Because in this situation,  

what happens is your taxable income is now $20,000  less, and if it's $20,000 less, you multiply that  

$20,000 times the tax rate, that you would have  paid, and that's what gives you the tax savings.  

Now you can still do this as I mentioned earlier,  even if you don't itemize, so, in this scenario,  

if you're not itemizing your deductions and you're  getting the standard deduction, you're still  

getting that tax benefit of $6,000 by donating  your IRA directly to charity, instead of taking it  

as an RMD. Now let's discuss, what would happen,  if you have an IRA, that's got basis in it and  

taxable amounts in it. So, what's the situation  that would arise to an IRA with basis and taxable,  

it would be, when you make a non-deductible  contribution to an IRA and then an IRA grows. So,  

let's assume, that you made a non-deductible IRA  contribution of 5,000 and now that IRA is worth a  

$100,000. Well, you have basis of 5,000, meaning  you don't pay tax on that, when you take it out,  

but the other 95,000, which is growth, is what's  called taxable, and you have to pay tax on it  

when it comes out. Traditionally, when you take  money out of an IRA, assuming in an RMD situation,  

you would take that money pro rata, so every time  you take money out, a portion of it's going to be  

considered basis, and another portion of this can  be considered taxable. But, if you donate the IRA  

RMD directly to charity, then the basis is ignored  that $5,000, and all the tax of a portion is given  

to the charity, so you continue to whittle away  at the taxable portion as you donate to charity,  

and the basis remains the same, and over time what  happens is now, instead of having an allocation,  

where it's 5,000 basis, 95,000 taxable, the  basis becomes a larger percentage of the IRA,  

and pro rata becomes less taxable, when you take  it out. A couple of closing thoughts. First off,  

don't donate money to charity through your IRA,  if you cannot afford to donate that money to the  

charity. So, obviously, if you need the money to  live off, then you're going to have to take the  

RMD. Also, this doesn't just apply to regular  IRAs, it applies to SIMPLE IRAs, SEP IRAs,  

any IRA, that really has an RMD requirement  to it. Roth IRAs, as most of you know, does  

not have an RMD requirement, so it doesn't make  any doesn't really make any tax sense to donate  

to charity your Roth distributions to a charity,  because you're not going to get taxed on it  

anyway. So, thank you again for joining us for  another edition of the ACap ReCap. Hopefully, this  

was helpful for you in determining how to donate a  part of your IRA to charity and not pay tax on it.  

If you have a question or a comment or you want us  to cover a particular topic in the future, be sure  

to include it in the comments section below and  remember to subscribe, like and share our channel.