A recent column on required minimum distributions (RMDs) from traditional IRAs for those 70 1/2 and older generated a number of letters.
Most thanked me for the April 1 RMD reminder for people born between July 1, 1947, and June 30, 1948. (If you missed the column, email me at firstname.lastname@example.org.)
A few chastised me for failing to talk about QCDs – qualified charitable distributions.
Attorney R.B. wrote: “At first, I was mildly stunned to find that in your article on RMDs for the 1948 vintage of boomers you didn’t mention the charitable-contribution-from-IRA ploy.” And D.F. voiced even stronger feelings: “You failed to mention that part of our RMDs can be sent tax-free to a charity of choice. ... Not mentioning this was a disservice to readers and to their charities.”
A.C., who is a longtime reader, commented: “Connected with RMDs, qualified charitable distributions from traditional IRAs is [an] area of mistaken assumptions and miscalculation. I know you have discussed these in your column, Julie, probably a couple of times, but many taxpayers, and even their accountants and tax preparers (and many 501(c)(3) charitable nonprofits!) remain uninformed of the tax-planning advantages of QCDs.”
Well, I’m happy to have triggered such interest.
Why do these readers feel strongly about QCDs? QCDs are a way to avoid income taxes that you would normally pay on your RMD, but only if you want that money to go to charity instead of taking the cash yourself.
Here are some guidelines: You need to be 70 1/2 or older. The money must go to the charity directly from the trustee or custodian of your traditional IRA, not from you. The most you can use each year as a QCD is $100,000.
I believe that QCDs are particularly important in today’s environment for this reason: People who normally donate to charity may not have the opportunity to take a deduction under the new tax laws.
Why? The new standard deduction is very generous. Now individuals get a standard deduction of $12,000, up from $6,350 in 2017; the standard deduction is $24,000 for married filing jointly, up from $12,700 for 2017. That means that fewer taxpayers will be itemizing deductions on Schedule A, which is where charitable deductions are reported.
Taxpayers either take the standard deduction or claim itemized deductions. If you take the standard deduction, you cannot claim itemized deductions. If you are married filing separately and one spouse itemizes, the other spouse must also itemize.
For more about the new tax act that affects 2018 tax returns, read the IRS publication “Tax Reform Basics for Individuals and Families” at https://www.irs.gov/pub/irs-pdf/p5307.pdf.
By the way, if you do itemize, you’ll notice that the limit on charitable cash contributions is now 60 percent of adjusted gross income (up from 50 percent).
While the new tax rules do not affect RMDs per se, Joe Gaynor, director of Retirement & Income Solutions at Fidelity Investments, pointed out: “One impact may come into play if an IRA owner was taking his or her RMD, then later donating to charity using a charitable deduction – which required itemizing deductions. Since fewer people will be itemizing their deductions, this path is not as beneficial from a tax perspective.” The QCD will be a better alternative. There is no itemization required, and the amount donated is excluded from taxable income.
Gaynor points out that QCDs have very specific rules that you must follow. As discussed, the donation must go directly from the IRA custodian to the qualified charity (meaning the IRA owner can’t deposit it into his or her own account first).
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On another note, let me update you on the 401(k) Champion Award, which acknowledges 401(k) participants who “love” their 401(k)s. Participants from 15 states applied. Judges have now identified nine finalists; three Champions will be announced in April. For more information, go to www.juliejason.com/award.
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Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and author, welcomes your questions/comments at email@example.com.