Year-End Checklist: Required Minimum Distributions and Charitable Giving

As we enter the holiday season, we know there are many things to get done. One of those here at Charter Oak is ensuring all our clients have taken their Required Minimum Distributions (RMD).  

You do not need to worry about remembering to take your RMD or calculating the amount. The Charter Oak team is on it and will contact you with options if you have not yet satisfied your RMD.

A quick refresher on RMDs

A required minimum distribution (RMD) is a specific amount the IRS requires you to take from your tax-deferred retirement accounts each year. The RMD age is 73 for anyone born on January 1, 1951 through and including December 31, 1959 and age 75 for anyone born on January 1, 1960 or later. 

The deadline for taking your RMD is December 31 each year. For your first RMD, and only your first, you may delay taking a distribution until April 1 of the year after your RMD age. For example, if you turned 73 in June of this year, you have two choices: take your first RMD by December 31 this year or delay taking your first RMD until April 1 next year (the year after you turn 73).

How is the RMD calculated?

The IRS sets the formula for calculating RMDs. Your account balance as of December 31 of the prior year is divided by your life expectancy factor.

Inherited IRAS

An Inherited IRA, or a Beneficiary IRA, is an account opened when someone inherits an IRA or employer-sponsored retirement account after the original owner's death.

As a beneficiary, you can't make additional contributions. Still, the funds can remain tax-deferred, and you can withdraw money immediately without penalty. However, a designated beneficiary must generally liquidate the account by the end of the 10th year following the year of the IRA owner's death. 

There are some exceptions for certain eligible designated beneficiaries, but please remember there are tax implications if funds remain in the account after the 10-year mark. IRS guidelines have delayed the requirement to take inherited IRA assets until 2025.

Beneficiary IRAs can be more complicated, but your Charter Oak team is here to discuss the options and help you make the best choice for your unique situation.

Tax Implications

RMDs are taxed as ordinary income. However, to avoid additional income, you can gift the RMD through a Qualified Charitable Distribution (QCD) if you do not need the assets from the IRA. Failure to take the total RMD can result in hefty penalties (50% of the shortfall).

Qualified Charitable Distributions and Donor Advised Funds

If you’re 70½ or older and wish to make charitable donations, there's a beneficial strategy called a Qualified Charitable Distribution (QCD).

An individual can contribute up to $105,000 per year in QCDs if that individual is 70½ years old or older. For married couples, each spouse can make QCDs up to the $105,000 limit for a potential total of $210,000.

This counts towards your RMD and prevents you from recognizing the withdrawal as taxable income. This can be especially advantageous for those who don’t need the income and wish to support a cause they care about.

Here are some key benefits of using RMDs for charitable giving:

• 1. QCDs are not included in taxable income. By donating directly from an IRA, you can lower your taxable income, which could reduce your overall tax bill.

  2. This method allows you to give more effectively to organizations that matter to you, ensuring that your philanthropy aligns with your values. The charity must be a 501(c)(3) organization to qualify.

  3. QCDs are straightforward to execute. You can instruct your Charter Oak team to donate directly to the charity, simplifying the process and speeding up the transfer.

Utilizing RMDs for charitable giving can yield significant tax advantages and foster a sense of fulfillment by supporting meaningful causes. It's a win-win for both you and the organizations you care about.

Donor Advised Fund

Another way of giving is establishing and contributing to a Donor-Advised Fund (DAF). A DAF is a charitable giving account established at a financial services firm. It allows you to make a charitable contribution, receive an immediate tax deduction, and recommend grants to charities over time. Unfortunately, QCDs cannot be made to a donor-advised fund, but DAFs still have several benefits. 

When you contribute to a DAF, you receive an immediate tax deduction based on the value of your contribution. This can be especially beneficial for clients who itemize their taxes. Funds in a DAF can be invested, allowing for potential growth over time before being distributed to charities.

You can contribute cash, stocks, or other assets to the fund. You then can decide when and how much to distribute to charities.

It can also help foster great inter-generational family conversations around charitable giving. The holidays can be a great time to teach children and grandchildren about charitable giving!

DAFs are a popular option for those looking to simplify their charitable giving while maximizing tax benefits and controlling their philanthropic efforts.

Year-end Checklist

As we approach year-end and the holiday season, we know you have many items on your to-do list. Please know the Charter Oak team is on your financial checklist, and we will reach out to you if you have any RMDs and discuss the best ways to fulfill them, whether that be distributions before year-end, Qualified Charitable Distributions, or even the possibility of setting up a family Donor-Advised Fund. 

It is our pleasure to serve you, and we look forward to speaking with you before the end of the year.