If you’re wondering why this year’s required minimum distribution (RMDs) amount just got smaller, there’s a reason for that. In 2020, the IRS updated the table used to calculate required minimum distributions (RMDs) for those age 72 or older with assets in certain qualified retirement plans. The new Uniform Lifetime Table that went into effect on January 1, 2022, expands the number of distribution periods for retirees reflecting IRS assumptions of longer life expectancies. Interestingly, this work was completed prior to the subsequent 1.8 year drop in life expectancy due to COVID-19.
The increase in distribution periods effectively lowers your annual RMD amount and, accordingly, the amount of taxes you may owe on these distributions. This expansion in the number of distribution periods is designed to make sure that RMDs won’t prematurely drain the value of older Americans’ retirement savings.
Who is subject to RMDs?
Required minimum distribution rules apply to participants in employer sponsored retirement plans, including profit-sharing, 401(k), 403(b), and 457 plans. The rules also apply to traditional individual retirement accounts (IRAs), as well as SEP, SARSEP and SIMPLE IRAs for business owners and self-employed individuals. Generally, the IRS requires account owners to start receiving distributions from their retirement plans by April 1 of the year following the year in which they reach age 72.
What if you don’t need the income?
Most retirees with money invested in qualified retirement plans rely on those assets to supplement income received from Social Security, a pension or other sources to maintain their desired lifestyles in retirement. However, those who do not need the income to support their current lifestyle may want to consider ways to use those funds to support other goals, such as charitable giving. A qualified charitable distribution (QCD) can help those subject to RMDs meet their charitable goals while eliminating the need to pay taxes on required distributions.
How does a QCD work?
Often referred to as an “IRA to charity,” QCDs allow you to donate $100,000 per taxpayer ($200,000 for a married couple filing jointly) per year to a charity directly from your IRA if you’re over age 70½. The benefit here is that you don’t have to pay income tax on that amount while also satisfying your RMD. The QCD essentially functions as an above-the-line deduction and a dollar-for-dollar reduction in income, allowing you to expand your charitable reach while managing taxes in retirement.
However, you must adhere to certain requirements when executing a QCD for it to count toward your current year RMD, as noted below.
- You must be at least 70½ years old at the time you request a QCD. If the QCD is processed prior to reaching age 70½, it will be treated as taxable income.
- The funds must come out of your IRA by your RMD deadline, which is generally December 31 each year. If the assets subject to RMDS are currently in an employer plan, such as a 401(k), you must rollover the funds to an IRA before initiating a QCD. QCDs can be made from traditional and inherited IRAs.
- This one is really important: The funds must be transferred directly from your IRA custodian to the qualified charity. If you take your distribution and then decide to send all or a part of it to a charity later, the distribution will not qualify as a QCD and will be treated as taxable income.
- While you can direct the funds to multiple charities, total donations cannot exceed the maximum annual distribution amount to qualify for a QCD, which is $100,000 per taxpayer ($200,000 for a married couple filing jointly).
- The charitable organizations you donate to must be eligible under IRS guidelines. Donor-advised funds, private foundations, and supporting organizations are not eligible to receive QCDs.
- If you’re still contributing to an IRA, that could result in a reduction of the QCD amount you can deduct.
QCDs can be a great choice for charitable-minded individuals seeking to make an impact by supporting the causes and organizations they’re passionate about during their lifetime. However, QCDs can be complex, so it’s really important to consult with your professional tax and financial advisors before choosing to make a QCD or taking any actions that may impact your income or taxes in retirement.
To learn more about strategies to help your money last longer and go further in retirement, download our whitepaper, Making Sense of RMDs.
