Over 70½ and have an IRA? You should read this!
by Rick Adkins, CFP®
For several years, you’ve been able to donate up to $100,000 from your IRA each year directly to charities and satisfy your Required Minimum Distribution (RMD). This provision is known as a Qualified Charitable Deduction (QCD). Initially, the law was temporary and we didn’t know from year-to-year if it would be available. It was finally made permanent, allowing for better planning.
This provision was primarily used by individuals with large IRA balances which caused very large RMDs. Times have changed.
The new tax law has made this provision more important to most retired taxpayers. With the increase of the Standard Deduction to $24,000 for couples and $12,000 for individuals, many taxpayers will no longer benefit from itemizing, when you consider 1.) the deduction for state and local taxes is now limited to a maximum of $10,000 and 2.) the fact that most retirees have little or no mortgage interest. This makes Charitable Contributions no longer deductible for most taxpayers, As a result, they find themselves paying income tax on their IRA distributions but aren’t able to deduct their charitable contributions.
Here’s where the QCD can help. Let’s say you are taking $4,000 per month from your IRA and you are donating $500 per month to a charity. With your Social Security payments and other income, you are probably in a 22% federal and 6% state tax bracket. That means you are paying about $1,120 per month in taxes on your IRA Distributions. So you’re netting $2,880 per month. When you subtract your charitable gifts, you really only have $2,380.
Instead, if you send the $500 directly to charities, you will pay taxes of approximately $980 on your IRA distribution, leaving you with $2,520. That’s an increase of $140 per month or $1,680 per year. That’s a nice addition to your discretionary spending and it cost you nothing!
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Arkansas Financial Group, Inc.-“AFG”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from AFG. Please remember that if you are a AFG client, it remains your responsibility to advise AFG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. AFG is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the AFG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: AFG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to AFG’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.