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Use your RMD to Make a Qualified Charitable Distribution

  |  By Chris Shanahan, CISP®

With just days left in 2015, Congress has finally acted to allow IRA holders to use their required minimum distribution (or RMD) to make qualified charitable distributions, which are otherwise known as IRA charitable rollovers.

Congress passed a bill that retroactively approves qualified charitable distributions (QCDs), which are tax-free charitable donations made using IRA funds, for all of 2015. However, in a change from previous years when Congress would approve the measure only one or two years at a time, lawmakers voted to make qualified charitable distributions permanent.

“Never again will you have to wait until mid-December to figure out whether or not you should be making a QCD,” wrote Jeffrey Levine, IRA specialist for Ed Slott & Co. “The extenders bill brings back QCDs permanently.”

RMDs, QCDs and IRAs

While talk of RMDs and QCDs can be confusing, an RMD is the minimum amount a traditional IRA owner must withdraw from their account each year starting at age 70½.

A qualified charitable distribution is also known as an IRA charitable rollover. A qualified charitable distribution allows IRA owners and beneficiaries who are 70½ or older to directly transfer up to $100,000 in IRA assets to an eligible charity without reporting the withdrawal as taxable income.

Qualified charitable distributions can be an important part of annual tax planning as many traditional IRA owners use QCDs to satisfy part or all of their yearly RMD.

According to Rick Rodgers of Rodgers & Associates, a qualified charitable distribution offers an important tax advantage for certain taxpayers.

“The provision allows IRA owners who are 70½ to give directly to a charity and avoid reporting the income on their tax return. Taxpayers who take the standard deduction receive no benefit from charitable deductions, unless it comes out of their IRA. A QCD lowers modified adjusted income (MAGI), which could lower or eliminate the taxation of Social Security benefits. Lower Medicare premiums are possible for those with higher income because MAGI is the trigger point that can be helped by a QCD.”

To qualify for tax-free treatment, IRA holders need to donate the money to a “public” charity and instruct their IRA’s custodian to transfer it directly from the IRA to the charity.

Congress established QCDs in 2006, but until now, the provision had only been extended one or two years at a time. For instance, the provision allowing QCDs expired at the end of 2013, but Congress acted in December of 2014 to extend the tax break retroactively for 2014.

PENSCO recommends that investors consult with a tax or financial advisor when deciding what, if any, action to take when it comes to IRA charitable rollovers.

If you want to make a qualified charitable distribution with you PENSCO IRA, the deadline is 12/31/15 and here are the steps you will need to follow:

  1. Fill out the following form: IRA Distribution Request Form (or the Beneficiary Distribution Request Form if you are making the request with an inherited IRA and as the beneficiary are over the age of 70 ½.)
  2. Along with your form, include a letter of instruction for the client service team to process your request. This letter should include the charities’ payee name(s), Tax ID(s) and contact information such as mailing address and phone number.
    • Note: The disbursement MUST be a direct payment from your IRA to the Charity (or charities) – we cannot provide you with the payment to forward to the charity personally.
  3. PENSCO must receive your request by 12/31/15 to process submissions in time; the IRS will not allow any extensions   
    • Remember: Clients who would like to make a charitable IRA rollover must be over 70 ½ years in age. Charitable IRA rollovers can be made from inherited IRAs as well, however the beneficiary of the IRA must also be over 70 ½.
  4. You can submit the form and letter of instruction to PENSCO two ways:

PENSCO recommends that investors consult with a tax or financial advisor when deciding what, if any, action to take when it comes to IRA charitable rollovers.

And if you are not sure which charities to support this holiday season (whether or not you are using IRA funds), here are a few resources that may be helpful:

No matter what you decide on charitable giving, IRA owners who are 70½ or older should remember to take their yearly required minimum distribution (RMD) if they have not already. If you are required to take an RMD and you fail to do so, you could face a 50% tax on the amount you should have withdrawn.

If you have any questions on qualified charitable distributions or required minimum distributions, you can give us a call at 1-800-962-4238.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

Editor’s Note: This is an updated version of a post we originally published in December 2014. We welcome new comments and questions below.