You Can Still Get Tax Benefits From an RMD, Just Not What You Thought!

By John Benedict

At J2 Capital Management, we place great importance on supporting our communities and adopting a generous approach to life. If you share this mindset, you’re like-minded with our clients. By contributing to charitable causes, you aim to make a positive impact in the world beyond your immediate circle.

We appreciate this goal, and our role is to help you achieve it in the most effective manner possible, which includes optimizing tax benefits. One effective strategy is to use a qualified charitable distribution (QCD) to redirect your required minimum distributions (RMDs) directly to a charity instead of receiving them in your bank account.

Benefits of Making a Qualified Charitable Distribution

While cutting out yourself as a middle man saves you a lot of time and administration, that’s not where the greatest benefit of a QCD lies. The greatest benefit is actually financial. You can save a lot of money on taxes by sending your RMD directly to a charity instead of taking it for yourself first.

When you make a QCD, it is excluded from your taxable income because the amount that you donate never shows up on your tax return. This leaves you with a lower taxable income and, therefore, a lower tax bill. And you don’t even have to itemize your deductions to get this tax break.

Are You Eligible to Make a Qualified Charitable Distribution?

Not all retirement accounts are eligible to use the funds as a QCD. It has to be an IRA that is a traditional, rollover, inherited, inactive SEP, or inactive SIMPLE plan. A SEP or SIMPLE is considered inactive if no employer contribution has been made during the plan year that ends during the tax year that the charitable contribution is made.

In addition to having the right kind of account, these other requirements must be met:

You must be age 70½ or older.
To count toward the RMD for the year, the funds must come out of the IRA account by the RMD deadline, which is usually December 31. Excess donations cannot count toward future-year RMDs.
QCDs cannot be greater than the amount that would otherwise be taxed as ordinary income (excluding non-deductible contributions).
Total QCDs cannot exceed $100,000 per calendar year per taxpayer, regardless of the number of charities donated to.
Funds must be distributed directly to the charity. If you take a distribution and then give it to charity, it does not count as a QCD.

Is Your Charity Eligible to Receive a Qualified Charitable Distribution?

After establishing your own eligibility, you need to make sure that your charity is also eligible to receive a QCD. First, it must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions.

On top of that, there are certain types of organizations that are not eligible to receive QCDs. They are:

Private foundations
Supporting organizations (charities that only exist to support other exempt organizations, usually public charities)
Donor-advised funds managed by public charities on behalf of individuals, families, or organizations

How Are Qualified Charitable Distributions Reported?

Unless it is an inherited IRA, QCDs are reported as normal distributions on Form 1099-R. For inherited IRAs, they are reported as death distributions. Though state rules vary, QCDs are not subject to federal tax withholding.

Because it is already tax-free, you may not claim the QCD as a charitable tax deduction. Even though you aren’t claiming it as a deduction, you need the same acknowledgment of the donation that you would need if you were. Keep this in your records in order to document the fact that the QCD was in fact qualified.

Partner With a Trusted Professional

We recognize that supporting charitable causes is important to you. Since you’re committed to giving anyway, why not do it in a way that’s most advantageous from a tax standpoint? Qualified charitable distributions (QCDs) offer an excellent opportunity for individuals who are required to take minimum distributions from their retirement accounts.

It’s important to note that there are several specific rules and requirements that must be met in order to qualify for exempt status. Therefore, it’s recommended to work with a seasoned financial professional to ensure you follow the correct procedure when making a QCD. If you’re curious to learn more about QCDs, J2 Capital Management is available to assist you. We pride ourselves on collaborating with clients to simplify financial management and help map out your future so you can focus on what matters most. Schedule a meeting online or reach out to us at info@j2cmonline.com or 248-641-4444 to learn more about our unique in-house services.

About John Benedict

John Benedict is CEO, investment advisor representative, and portfolio manager at J2 Capital Management, a boutique financial advisory firm specializing in in-house custom financial planning, tax, estate, and investment management. With over 20 years of experience, John is passionate about helping clients navigate uncertain markets, reduce risk, and plan for a sound future. John combined his talents and passion in statistics and technical analysis to create J2’s tactical strategies, managing them since the beginning of the organization. He is known for being a visionary and continually looking for ways to improve J2’s services and strategies to better serve his clients. John graduated from Central Michigan University with a degree in business administration and finance, and his thoughts on markets and technical analysis have appeared in The Wall Street Journal, Investment News, and on Moneyshow.com. He was also a contributor to the book The StockTwits Edge: 40 Actionable Trade Set-Ups from Real Market Pros.

When he’s not working, you can find John boating or participating in water sports and spending time with his wife, Janine, and his three children, Jack, Alexis, and Saraphina. To learn more about John, connect with him on LinkedIn. You can also register for his latest webinar on What Makes J2 Capital Management Different From Other Financial Advisors.