Replacing RMD with QCD

Written By Marianne Nolte

The SECURE Act 2.0, signed into law by President Biden in December of 2022, brought change to RMDs.  



RMD (Required Minimum Distribution) is the minimum amount investors must withdraw annually from their IRA, SEP, SIMPLE, or 403(b). Roth IRAs are not subject to RMDs.  



With SECURE Act 2.0, the beginning age for RMD was raised to 73. 



How RMDs are calculated 

The amount of an investor's annual Required Minimum Distributions is based on the closing value of the retirement account as of December 31, of the year before the RMD is due.  



Here is an example:

The hypothetical character Miranda turned age 73 on January 13, 2024. She has a Traditional IRA with a December 31, 2023 value of $122,007. In 2024, her RMD will be a little less than 4% of her Dec. 31 account value. The website Dinkytown.net has an easy-to-use online calculator for RMD calculations and more!



At the Dinkytown RMD calculator page, Miranda would enter the Year of RMD (2024), her birthdate (January 13, 1951), her December 31, IRA account value from the previous year ($122,007), and check the box if the sole beneficiary on the account is a spouse (for this example we are determining Miranda to be single therefore she has no spouse listed as beneficiary). Her 2024 annual RMD is instantly calculated to be $4,604.04.  



Remember, each year the RMD amount will change because it is based on the account ending value from the previous year.  



RMDs are Taxable

What is the purpose of RMDs? Required Minimum Distributions are taxable. The IRA, SEP, SIMPLE, or 403(b) accounts they are being pulled from have been growing tax-deferred since inception. Now Uncle Sam wants to get paid!



To avoid a tax whammy on April 15, investors need to check with their tax professional to determine how much Federal and State withholding is appropriate for their withdrawals. 



Let's revisit Miranda's RMD scenario. In 2024, she turned age 73. This is the first year she must take an RMD. However, there is a caveat for those entering their first RMD year. They are granted a grace period of one year to begin taking RMDs. However, if Miranda was to wait until 2025 to take her RMD, she would have to take both her 2024 and 2025 RMD in the same year. Think taxes! She may be pushed into a higher tax bracket with a larger withdrawal. Delaying the first-year RMD is not always the best strategy. Again, she would want to check with her tax professional before making this decision.  



Some investors are in a position where they do not wish to take RMDs. They don't need the extra cash and they don't want to run the risk of being pushed to a higher tax bracket. Is there a solution? Yes, QCDs!



QCDs   

A QCD (Qualified Charitable Distribution) can be used to replace required withdrawals imposed by RMDs.  



How QCDs work 

QCDs can fulfill an investor's RMD obligation. Instead of receiving the withdrawal of an RMD, the investor can elect to send the withdrawal directly to a charity of their choice. If the investor does not take possession of the funds, but instead re-routes the withdrawal to their charity, it is not a taxable event. Wow, does this sound like a win-win!



Back to Hypothetical Miranda. Instead of taking her 2024 RMD, she asks her financial advisor to make the withdrawal payable directly to her favorite charity. She has fulfilled the IRS's obligation to make a minimum withdrawal from her retirement account, but because it is paid to her charity, she instead is donating the funds. Miranda must get a receipt for her charitable donation from the charitable organization.



Benefit of a QCD vs RMD

QCD counts toward the Required Minimum Distribution (RMD). An RMD is taxable to the investor and a QCD is not. If the investor, Miranda, intends on making charitable donations in 2024, with the QCD she can make this giving event even more beneficial to both herself and the charity! Here is an example:



Miranda frequently attends church. In 2024, if she elects to donate her RMD amount, $4,604.04 to her church as a QCD she will not pay tax on the withdrawal. If she had taken the RMD, she would have paid tax. Let's assume her tax pro asked that she have 10% Fed and 1% State withheld from the RMD. She would have received $4097.60 {$4604.04 - 10% Fed ($460.40) - 1% State ($46.04)}. Throughout the year, this amount of money could be put toward her weekly tithing to her church. Let's assume she went every Sunday, $4097.60 ÷ 52 = $78.80 per week to her church. Instead, she elects the QCD and pays no tax. The church receives the full $4604.04 which broken down weekly would be $88.54. Tax-free, the church receives nearly $10 per week more! 



The IRS imposes a $100,000 per year maximum amount allowed for QCDs per person. Therefore, a couple could donate up to $200,000 per year (IRS, 2024).  



QCDs and RMDs can be split



Maybe hypothetically Miranda wishes to donate to her church but also put money toward other living expenses. She could elect to have a particular amount QCD'd to her church and she could receive the balance of her RMD amount to be distributed to herself and taxed. Miranda's financial advisor can help by making the calculations for her.



Conclusion

QCDs provide a great alternative to normal RMDs. They can improve an investor's taxable situation. They provide a tax-free method of giving to any qualified charitable organization of the investor's choosing.   



To learn more about RMDs and QCDs, contact Marianne Nolte, CFP®, of Imagine Financial Services.

 

About the Author

Marianne Martini Nolte, CFP®  provides tax-savvy wealth management for women.

Contact Imagine Financial Services to learn about the services provided and associated costs. 

References 

Qualified charitable distributions allow eligible IRA owners up to $100,000 in tax-free gifts to charity. Internal Revenue Service. (n.d.). https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity     

Marianne Nolte
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