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Make the RMD from Your Traditional IRA Tax-Free

Once you turn age 70 1/2, the tax code mandates that you withdraw a tax code–defined required minimum distribution (RMD) from your traditional IRA.

But by using the RMD or other IRA distribution with a qualified charitable distribution (QCD), you can eliminate the RMD tax bite, possibly reduce your Medicare premiums and income taxes on your Social Security benefits, and more.

After you reach age 70 1/2, the tax code allows you to donate directly from your IRA account up to $100,000 per year in QCDs.

  • The QCD-donated money escapes income taxes and also does not count as adjusted gross income (AGI).
  • The QCDs can satisfy all or part of your RMD requirement.
  • The QCD doesn’t bump up against the 50-percent-of-AGI ceiling that applies to cash donations.

You likely will want to use the QCD if you donate money to your church, a school, or some other 501(c)(3) organization, such as the Red Cross or American Cancer Society.

Rule 1. You must make your QCD donation to a qualifying 501(c)(3) organization, such as your church, a school, or the Red Cross. Your QCD cannot go to a private foundation, a donor-advised fund, or a charitable supporting organization.

Rule 2. Don’t touch the money. The trustee must make the check or transfer payable to the charity (not to you).

Double dip. You get a double-dip benefit when you don’t itemize deductions and you contribute directly from your IRA to a charity.

  • First, you get the benefit of the standard deduction.
  • Second, you get the benefit of the direct charitable contribution deduction because it cancels your RMD income, making the RMD tax-free.

To put this another way, with the IRA-to-charity contribution, you (the non-itemizing taxpayer) create a deduction where none existed before. And because of the Tax Cuts and Jobs Act, you are less likely to itemize these days.

Save on Medicare premiums. The government bases the Medicare premiums that you pay on the AGI reported on your tax returns two years ago (e.g., your 2019 payments are based on your 2017 tax return). To see how you can save, consider this:

  • If you take the IRA money directly, it adds to your AGI, which can increase your Medicare premium costs in 2019.
  • If you use the QCD method, you add nothing to your AGI.

Pay less tax on your Social Security benefits. Before 1984, you paid no income taxes on your Social Security benefits. Today, you have to add together your AGI, your tax-exempt income, and half of your Social Security benefits, and then pay taxes at your regular tax rate on:

  • 50 percent of the Social Security benefit on the computed amount if that computed amount is between $25,000 and $34,000 ($32,000 and $44,000 on joint returns), and
  • 85 percent of the Social Security benefit on the computed amount that exceeds $34,000 ($44,000 for joint returns).

The taxable RMD adds to your AGI and can make more of your Social Security benefits taxable.

Solution. Avoid the RMD taxable income inclusion with the direct IRA-to-charity donation, and that, in turn, can cut the taxes you are paying on your Social Security benefits.

Shrink the net investment income tax (NIIT). You pay the 3.8 percent NIIT on investment income when your modified AGI is greater than $200,000 ($250,000 for joint returns).

Would your required IRA RMD make you subject to this tax? If so, consider making the RMD disappear with the direct IRA-to-charity strategy.

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