Investing with Faith / James Maslar

Alphabet soup and maximizing your impact: IRA’s, RMD’s, and QCD’s

Ellen made a $5,000 annual tithe gift to her parish, $2,500 to her parish’s endowment, lowered her taxable income, avoided higher Medicare premiums and satisfied half of her required minimum distribution for the year—all in one fell swoop. And all without having to itemize.

“My late husband had told me about it, and I brought it up with my financial advisor a few years ago” Ellen, 79, shared. “We met to look at my required minimum distribution, review utilizing it for my giving for the year, and to discuss what charities I’d like to benefit with it. We do it every year now. It’s a no-brainer for me.”

Ellen utilized what’s called a qualified charitable distribution (QCD) from her individual retirement account (IRA), highlighting a powerful tool many Catholics over age 70 ½ can use to give more effectively. She simply filled out her IRA custodian’s QCD form to cut a check of $7,500 directly to her parish. She then sent an e-mail to the parish office to inform them of the incoming gift and how she wanted it allocated.

She enjoyed a meaningful gift to her parish (which she was wanting to do anyway) and saved thousands on taxes.

“I hope other people like me know about this,” Ellen said. “If I can help the Church by sharing my story, I want to do that.”

73 or older? Tax-smart(est) way to give

When it comes to charitable giving and including your favorite Catholic parish, school or ministry in your stewardship plans, one method is often the best place to start for those in their 70s, like Ellen—making a QCD from an eligible IRA account.

As you likely know, Uncle Sam comes knocking when a person turns 73 years old, requiring them to begin taking withdrawals from any tax-deferred retirement account (so it can be taxed as ordinary income, even if the person doesn’t need it). This is called someone’s required minimum distribution, or RMD. And while the required withdrawal percentage starts relatively small (4% at 73), it increases each year as you age.

The government, however, does allow a person to direct some or all of the RMD amounts of eligible IRAs directly to a charity tax-free (up to $108,000 per spouse). That portion of their RMD is then considered satisfied and does not count toward their taxable income.

Therefore, even if you take the standard deduction, utilizing QCDs for your annual giving can lower your taxable income and potentially keep it below thresholds that trigger increases to Medicare premiums or Social Security tax.

Know which type of retirement accounts you hold

When it comes to retirement accounts, it can feel like alphabet and number soup: IRA, TSP, SEP 401k, 403b, 457b, to name a few—not to mention RMDs and QCDs. It can be a little overwhelming keeping it all straight, especially if you have multiple accounts of different types.

On more than a few occasions through the years, I’ve spoken with donors who wanted to utilize this tax-smart way of supporting the Church, but did not know what type of retirement account or accounts they held, or thought they held one type, say, an IRA, which is QCD-eligible, when really it was another (a 401k, not QCD-eligible).

The only accounts eligible for QCDs are: traditional IRAs, inherited IRAs, inactive SEP IRAs, and inactive simple IRAs. The good news, however, is that simply rolling a 401(k), 403(b), 457(b), or TSP into a traditional IRA can then allow QCD-making.

If this QCD charitable strategy sounds intriguing to you, check with your retirement account custodian/advisor or consider a rollover option, if needed. A little effort in sorting through the alphabet soup of retirement plans can translate into a lasting impact for your favorite Catholic ministries and significant tax savings for you.
 

(Jim Maslar is a Catholic philanthropic advisor for the archdiocese’s Catholic Community Foundation [CCF]. Tax or legal information provided herein is not intended as tax or legal advice. Always consult with your legal, tax or financial advisors before implementing any gift plan.) †