By John R. Berry
Large pre-tax retirement balances can be a tax bomb.
By April 1 of the year after turning 72, clients must withdraw a portion of their pre-tax retirement balances so they are forced to pay income tax on the money. The required withdrawal on a $1,500,000 Traditional IRA or 401(k) balance, for example, is nearly $55,000.
By age 72, many clients have been living for several years without making withdrawals from their accounts, other than for the occasional splurge.
As the magic year approaches, you have a couple of options that may help lower your tax bill. Today I’m going to focus on qualified charitable distributions (QCDs).
Quite a few of our clients give regularly to churches and other charitable organizations. In the year you turn 70 ½, you may have your IRA custodian send a check of up to $100,000 directly to your favorite 501(c)3 organization.
The withdrawal from your IRA is not taxed at all, and you don’t have to itemize.
This way of giving may serve both your charitable goals and help lower the balance that is subject to required minimum distributions (RMDs) at age 72. If you are a consistent giver year after year, it can also help bolster your budget as you enter your 70s by allowing you to spend more of your income on other priorities.
If you are married, your spouse—so long as they are also 70 1/2--may also give up to $100,000 to a charity this way.
A quick example. Let’s assume that Sheila and John both turned 70 ½ in July 2022. Under current law, their first RMDs will have to be taken by April 1, 2025. So for 3 years, 2022-2024, they could make QCDs to a local child services organization without having to worry about their RMDs at all. If they each give $50,000 per year, they will have given $300,000 as a couple totally tax free.
Once 2025 rolls around, they may continue to QCDs if they choose. It’s just that withdrawals are now required.
Why the weird age of 70 ½? If you recall, that was the old RMD start age. It changed a couple of years ago, but lawmakers left it as the charitable distribution start date. I encourage you take advantage of this tax minimization strategy if it makes sense for you!
If you have both charitable intent and RMDs that you don’t expect to need, consult with your tax professional about this type of charitable gifting.
Source and more info: IRS Publication 590-B
John R. Berry is a Certified Financial PlannerTM professional and owner of Corner Post Financial Planning.
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