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The ABCs Of Using Your Retirement Account For Charitable Giving

By:Kate Stalter - January 5, 2018


One of our firm’s clients is a husband and wife named Bonnie and Clyde. Really, those are their actual names.

Bonnie and Clyde - or B&C, for short -  are very generous people and recently came into the office to discuss charitable giving.  Part of that conversation revolved around a strategy for the couple’s Required Minimum Distributions, their RMDs, from their qualified retirement accounts.
 
As it happens, there are ways to use what’s called a Qualified Charitable Deduction (QCD) to lower Adjusted Gross Income (AGI). Kim Laughton, President of Schwab Charitable, says that retirees over the age of 70-and-a-half who “don't need that distribution, if they have means outside of their IRA to be funding their life and don't want to take the distribution and be taxed on it … have the option of donating up to $100,000 of that distribution to a charity.”
 
The rules regarding an RMD out of an Individual Retirement Account (IRA) were established in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA).  ERISA defined penalty-free distributions as going into effect the year a taxpayer reached age 70-and-a-half.  The specific rules regarding penalty-free distributions and RMDs have been tweaked in a number of tax bills since then.  And, the IRS rule that allows a taxpayer to use his or her IRA to make a QCD dates back to 2006 when it was included as a temporary provision that kept getting extended.  The QCD became a permanent part of the tax code in 2015.
 
The owners of IRAs who reach the age when they are required to take mandatory distributions can now give the money to a charity. That means those RMDs would be excluded from the taxpayer’s adjusted gross income.
 
So, that’s a brief history of the QCD and the RMD.  Now, let’s talk about the opportunity for seniors who, like B&C, have eleemosynary intent.  B&C are in their mid-70s.  They are both retired professionals.  Each receives Social Security, so they are automatically eligible for Medicare, which they opt into.
 
Both have IRA Rollovers from previous employers and Clyde has a pension from former employer’s Profit Sharing Plan.  Their taxable investment portfolio produces both interest and dividend income for them.  Here’s a snapshot of what that looks like for 2017.
 
Using the formula shown in the image below provided by the IRS, and assuming no other variables, B&C’s 2017 income tax bill would come to $51,695.81 based on their combined AGI of $231,468.97.  The reality is that B&C would likely be able to mitigate some of that tax burden, but we’ll use this number just for illustrative purposes.
 
Also, there are a couple of other issues that B&C will face based on that AGI.
 
The first is that the Social Security Administration tells us that 85% of B&C’s Social Security benefits will be taxable to them.  The second is that they will also face a surcharge on their Medicare Part B and Medicare Part D premiums.
 
Now in fairness, B&C can lower their AGI if they make a charitable contribution with after-tax dollars.  They could, for example, write a check to a charity or donate appreciated assets from their taxable investment portfolio to a qualified 501(c)3 organization.
 
According to Laughton, “Donating publicly traded stock, real estate and other appreciated assets that have been held a year or more is the most tax effective way to give.  In addition to allowing donors to take a current year tax deduction, they can generally avoid paying capital gains tax on the sale of the asset.  This can allow them to give up to 20% more to their favorite charities and pay less in taxes.”
 
 
Article Source: Forbes