Oh, the acronyms we now use these days. So many! As we ring in the New Year, I was reminded the other day by someone I admire and respect, if you are required to take a Required Minimum Distribution (RMD), this is something that shouldn’t be left to year-end decision-making. Rather, for those who must take an RMD, there should be a plan starting each January. I couldn’t agree with him more.
When planning for retirement, most of us can give ourselves a large pat on our back for having scrimped and saved and sticking to a solid plan. From this plan, amounts accumulated in our retirement accounts were meant to last 20-25 years. Peace of mind, right? Well, yes, EXCEPT for if you’re on a slow pace withdrawing from your retirement funds. The IRS sets a minimum percentage that you are required to take out of most types of retirement accounts when you reach a certain age. What is the most annoying thing people say about this requirement? The RMD amount counts as your having received taxable, ordinary income. Some folks will say, OK, well, I’m just paying a little more in taxes. However, in some cases, taking the distributions puts a person or a couple in a higher income bracket and Medicare will charge more for premiums.
Certain opportunities and advantages can soften the ‘required’ part, turning the narrative into something else entirely. Good deeds. Community support. Impactful changes and important improvements. Sounds a whole lot more positive and far less annoying, right? When an RMD is withdrawn from most all types of retirement accounts including traditional IRAs and designated as a charitable gift, it becomes a Qualified Charitable Distribution (QCD) which is not counted as ordinary income. Planning for inevitable RMD financial impact throughout the year can feel a whole lot better and a whole lot less painful than adjustments quickly made at year-end.
One solution: setting up your own endowment fund with a community foundation such as Legacy Endowment which allows RMD’s to be received as qualified charitable gifts into your endowment fund where its takes on a new charitable life. What is actually even better, you may still be able to take the standard IRS charitable deduction amount in addition to turning the RMD into a QCD (we always recommend a tax preparer is consulted for your own particular circumstance). So, here’s a win-win-win scenario. You were going to make charitable contributions anyway and you can continue to deduct them on your taxes. PLUS, making your RMD work as a QCD within an endowment fund means you avoid taking the amount as part of your adjusted gross income, AND you now have an endowment fund that grows over time, providing future annual grants to organizations and causes that already have meaning and importance to you. These are just a few excellent reasons to use a community foundation las the receiver of your RMDs or any other charitable contributions. So, just as you did when creating your financial plan for retirement, sharpen your pencils and give some thought to creating your RMD/QCD plan at the beginning of each year. You’ll be glad you did.
This is a reprint of Jean Larsen’s article in the Village News on January 2, 2025.
This is part of a series of articles written to share important information about charitable giving and the various ways you can easily support your favorite charities and community.