If you get a little confused reading about Required Minimum Distributions (RMDs) and Qualified Charitable Distributions (QCDs), you are not alone! Given the December 2022 passage of SECURE 2.0 legislation, changes to RMD rules are especially important to understand if you are involved in charitable giving and have reached the age of 70.5.

What is an RMD?

RMDs date back to 1974 when the Employee Retirement Income Security Act (ERISA) was created. This act served as pension reform, and offered a retirement savings vehicle to non-pensioned workers through vehicles referred to as “qualified retirement plans.” They are allowed to grow tax-free while assets are in the plan.

By requiring that a taxpayer start taking distributions from qualified retirement plans when the taxpayer reaches a certain age, the United States government is able to start collecting tax revenue on these “required minimum distributions” from assets that have grown tax-deferred for all those years and decades.

The distributed amount of the RMD is reported by the plan administrator on IRS Form 1099-R (but–and here is a nuance–not if the RMD was “satisfied” by a Qualified Charitable Contribution [QCD]—see below!). A taxpayer enters this amount on Line 4B of the Form 1040 federal income tax return, and the amount is included as taxable income for the year it was distributed. The net-net here is that RMDs add to taxable income but not in the case of direct transfers to qualifying charitable organizations (the QCD).

What types of accounts require RMDs?

For 2023, account owners aged 73 and older who participate in qualified retirement plans such as these are subject to RMDs:

  • Traditional IRA
  • Simplified Employee Pension (SEP)
  • Employer-sponsored 401(k), 430(b) or 457

Once started, RMDs occur annually until account depletion or the owner’s death. Distributions must also be taken from inherited IRA accounts, though under different rules.

How is the RMD amount calculated?

A qualified retirement account’s entire balance is considered for determining an RMD calculation, although only a fraction of the balance must be distributed each year. Unfortunately, the distribution amount is not easily or consistently determined. This contributes to some retirees' confusion about RMDs and the requirements. Online RMD calculators can be found here and here.

When do the RMDs start?

From 2023 to 2032, the start date is age 73. For example, an account owner born in 1955 would begin in 2028. Beginning in 2033, the start date will be age 75. Account holders born in 1960 enjoy a sort of “two-year extension,” given that they would turn 73 in 2033. However, since the age provision begins Jan. 1, 2033, their RMD begins in 2035.

For all account owners, the big benefit of the later RMDs comes from retaining account balances longer. Account holders avoid adding unnecessarily to their taxable income and therefore reduce the risk of bumping to a higher tax bracket. Prior to SECURE Act increases passed in 2019 and 2022, RMDs began at ages 70.5 and 72. Now, taxpayers can enjoy a few more years of tax-free investment growth.

How charitable taxpayers can check the RMD box with a QCD

Here is where the QCD comes in. QCDs can provide a huge benefit if you own IRAs. QCDs are truly taxpayer and charity-friendly vehicles.

For starters, you can start making QCDs at age 70.5, well before you have reached the age when you are required to take RMDs. A QCD happens when you direct a distribution from an IRA of up to $100,000 annually (or $200,000 if you file tax returns jointly). It must apply to one or more qualifying charitable organizations, including a designated, field-of-interest or unrestricted fund at KZCF. While the QCD itself is not tax deductible, the overall effect of the QCD is to lower your taxes since it counts toward your RMD. However, unlike an RMD, it is not included in your taxable income.

What is the bottom line? If you have reached the age of 70.5, own an IRA, care about charitable causes and do not need a full RMD income to cover your living expenses, reach out to our team here at KZCF. We can explore how a QCD could work beautifully for you.