As we journey through life, many of us look for ways to give back to the community and support the causes we care about. For those who have reached the age of 70½, there’s a powerful tool available: the Qualified Charitable Distribution (QCD). Not only does this strategy allow you to contribute to charitable organizations, but it also offers a unique financial benefit—minimizing your taxable income.

Understanding Qualified Charitable Distributions

A QCD is a direct transfer of funds from your Individual Retirement Account (IRA) to a qualified charitable organization. This isn’t just a generous act; it’s a savvy financial move. When you reach a certain age, you must start taking Required Minimum Distributions (RMDs) from your IRA, which are typically subject to income tax. However, by opting for a QCD, the amount donated is excluded from your taxable income. This can significantly reduce your tax burden, especially if you’re already receiving Social Security benefits or paying Medicare premiums.

Who Can Benefit from QCDs?

To qualify for a QCD, you need to be at least 70½ years old. This isn’t just a random age—it marks a point in life where individuals often reassess their financial plans and charitable giving. You can make QCDs from various types of IRAs, including Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only) IRAs. While Roth IRAs aren’t typically used for QCDs because they aren’t subject to RMDs, under specific circumstances, they can be considered.

The beauty of QCDs lies in their simplicity and generosity. You can donate up to $105,000 per year (adjusted for inflation), and if you’re married and file jointly, your spouse can also make a QCD of up to the same amount. This means a couple could potentially exclude up to $210,000 from their taxable income annually.

The Tax Perks of QCDs

One of the most appealing aspects of QCDs is the tax advantage. Unlike other charitable contributions, QCDs do not require you to itemize deductions, making them accessible even if you take the standard deduction. This is particularly useful given the recent tax law changes, which increased the standard deduction and made itemizing less common.

Moreover, by reducing your taxable income, QCDs can help lower the amount of Social Security benefits subject to tax and even reduce Medicare premiums. This dual benefit of giving back while keeping more of your income can be a compelling reason to explore this option.

Navigating the Rules and Requirements

To ensure your QCD qualifies for the tax benefits, the funds must be transferred directly from your IRA to the charity. This means you can’t withdraw the money and then donate it—it has to go straight to the organization. The receiving charity must be a 501(c)(3) organization eligible to receive tax-deductible contributions. Unfortunately, not all organizations qualify, so it’s essential to verify that the charity you’re supporting meets the criteria.

When you make a QCD, it will be reported as a normal distribution on IRS Form 1099-R, but remember, the amount isn’t taxed. However, since the donated amount is excluded from income, you can’t claim it as a charitable deduction. Proper documentation and acknowledgment from the charity are crucial for compliance and peace of mind.

Strategic Charitable Giving

For those who don’t need their full RMDs for living expenses, QCDs offer a way to fulfill their RMD obligations while supporting worthy causes. This is especially beneficial for individuals who prefer not to see their income tax bill rise due to mandatory distributions.

Recent legislative changes have also expanded the possibilities for QCDs. Starting in 2023, you can use QCDs to fund certain types of charitable trusts and annuities, up to a one-time maximum of $50,000. This addition provides more flexibility in how you can structure your charitable giving.

Getting Started with QCDs

If you’re considering a QCD, the first step is to contact your IRA custodian. They will guide you through the process, including any specific forms or procedures required. Each financial institution might have slightly different requirements, so it’s important to follow their instructions carefully to ensure everything is set up correctly.

Consulting with a tax advisor is also highly recommended. The rules around QCDs can be complex, and a professional can help you navigate the specifics, ensuring that both your IRA and the charity meet all the necessary qualifications. They can also assist in optimizing your giving strategy to align with your financial and philanthropic goals.

A Legacy of Giving

Qualified Charitable Distributions offer a unique opportunity to make a difference in the world while managing your financial future. By understanding the benefits and rules, you can use this strategy to reduce your taxable income, support causes close to your heart, and leave a legacy of generosity. Whether you’re looking to minimize your tax liability or simply wish to give back in a meaningful way, QCDs are a valuable tool in your charitable giving arsenal.

Contact Us

As you consider the benefits of Qualified Charitable Distributions and how they can enhance your charitable giving strategy, remember that thoughtful planning can make a significant impact. If you’re curious about how QCDs can fit into your financial and philanthropic goals, or if you have any other questions, don’t hesitate to reach out. Let’s connect and explore the best ways to maximize your giving potential while securing your financial future. Feel free to contact us  for a personalized consultation or to share your thoughts and experiences with charitable giving. Together, we can make a difference and save on tax.

About Matt

Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals.

Matt’s Corner

The post Making a Difference with Your IRA: The Power of Qualified Charitable Distributions appeared first on New Century Investments.

If you’ve been named a beneficiary or inherited an IRA, you’re likely facing some tough questions ⁠— what are the next steps, and what happens now? Governing bodies like the IRS and recent legislation such as the SECURE Act have outlined important rules regarding an inherited IRA, such as how much you may owe in taxes as well as whether you will need to begin taking required minimum distributions. These can depend on several factors, such as your relationship to the deceased, whether the IRA inherited is Roth or traditional, and more.

When a transition such as this takes place, especially when it happens suddenly or unexpectedly, you’re more than likely not focused on taxes or laws. But receiving your inherited IRA in a tax-efficient and meaningful way can depend on making well-informed decisions and working with a trusted financial professional.

Alternatively, making uninformed choices regarding your inherited IRA could cost you a portion of your inheritance in taxes or IRS penalties. In circumstances such as these, it is critical to understand the rules surrounding an inherited IRA.

Distribution Factors

Those who inherit IRAs often have questions pertaining to how and when they’re able to withdraw money from the account involved. IRS rules regarding distributions take into account a number of factors including age and account type.

Age

A factor that influences required minimum distribution (RMD) payments, potential penalties, and other details of inherited IRAs is age. For instance, if the account holder died before or after the age of 72 in 2022 (at which time the IRS requires you to take minimum withdrawals from a traditional IRA) there are implications involved for beneficiaries of inherited IRAs. The age of 59½ is also important, especially for surviving spouses who decide to transfer the account balance into their own IRA accounts and subsequently withdraw the funds.

Account Type

Whether you inherit a traditional or Roth IRA is another deciding factor that influences distribution details. With an inherited IRA, you are required to withdraw the entirety of the account within 10 years, if you are a non-spousal beneficiary, according to the SECURE Act passed in December 2019. If you inherit a Roth IRA, you don’t pay taxes on distributions, but if you inherit a traditional IRA, you’ll generally pay taxes on the distributions you take in excess of the deceased account holder’s basis. This will depend on whether the deceased’s contributions were deductible or non-deductible.

Spouse Beneficiary of an IRA

If you are the surviving spouse you will be faced with three options when inheriting an IRA.

Option #1:

The first option is to remove the money from the account and spend or invest it as you see fit. Depending on the size of the account, inherits going this route may possibly incur some steep penalties from the IRS.

Option #2:

Alternatively, you may consider remaining the beneficiary of the existing IRA or transferring the assets to a retirement account under your name. This is often seen as a simpler option, so many people choose to move the inherited amount into an IRA in their own name. If you’re interested in combining these assets with an existing retirement account, you may have the funds transferred. It is important to note that if you transfer any distributed money to a new account in your name, you must do so within 60 days. This will allow you to avoid taxation on any withdrawals, allowing the amount to continue to grow tax-deferred.

Option #3:

It may also make sense to leave the inherited money in the original account and use the funds as needed as a beneficiary. For example, when you are under 59½ years old and transfer the inherited IRA to your own retirement account, you will not be able to access the money without a penalty. Until you reach 59½, the withdrawals will be taxable and will also incur an additional 10% IRS penalty.

Non-Spousal Beneficiary of an IRA

When you are inheriting an IRA from someone other than your spouse, the details typically become more complicated. Unlike an IRA that is inherited from a spouse, you will not be able to move this money into your own retirement account. In order to keep the tax benefits of the account, you will need to set up a new Inherited IRA for Benefit of your name. Once the account is created, you may transfer assets from the original account to your beneficiary IRA. While this may seem confusing, a trusted financial advisor can guide you through the process.

It is also important to note that you will not be able to make new contributions to an Inherited IRA. Regardless of your age, you will need to begin taking required minimum distribution payments from the new account by December 31st of the year following the original owner’s death.

With the SECURE Act passing, non-spousal beneficiaries are now required to withdraw the entirety of the account within a 10-year period if the deceased passed on or after January 1, 2020. This can create a significant difference in your future tax obligations, as previous law allowed for the IRA amount to be withdrawn over the beneficiary’s remaining life expectancy. Exceptions to this new law include those who are:

Disabled or chronically ill, Minors, Less than 10 years of age younger than the deceased

Whether you’re a spouse or non-spouse beneficiary inheriting an IRA, there are a few key details to keep in mind. In any of these instances, the IRS does not allow you to transfer the money from an inherited IRA into an existing account of yours. Instead, you will have to transfer your portion of the assets into a new IRA that is set up and formally named as an inherited IRA. Additionally, no contributions are allowed in the new, inherited IRA account.

Familiarizing yourself with these changes in legislature and tax obligations of inheriting an IRA now can help you and your loved ones better prepare to receive your inheritance. If you find yourself wondering if you’re making the most effective decision for you and your family, you may want to work with a trusted financial professional who is familiar with the tax obligation and changing regulations regarding the inheritance of an IRA.

*This article was written prior to the most recent legislature, the SECURE Act 2.0, and some rules may have changed. Please contact us or your qualified advisor if you have any questions about your individual situation.

817-238-6300

Matt.Ward@newcenturyinvestments.com

About Matt

Matt Ward is a financial advisor and the president of New Century Investments, an independent investment advisory firm serving business owners, pre-retirees, and retirees in the Dallas-Fort Worth area and beyond. Matt is passionate about integrating investing, planning, and tax management into a holistic approach. Matt’s breadth of knowledge and experience in both taxes and investment management sets him apart, giving him the ability to design, advise on, and manage business strategies, tax efficiency, and retirement planning. He is known for his care and attention to detail and works hard to develop personal relationships with each of his clients so they can benefit from his customized service and guidance. He loves walking with his clients through their financial journey, supporting them and celebrating with them as they reach their goals. 

Matt’s Corner

The post You’ve Inherited an IRA. Now What? appeared first on New Century Investments.

1. Roll over the assets into a new or existing IRA in your own name.
2. Transfer the assets to an inherited IRA.
3. Roll over the IRA assets into a new or existing IRA and convert the assets to a Roth IRA.
4. Disclaim (decline to inherit) all or part of the assets.

1. Roll over the assets into a new or existing IRA in your own name

As a surviving spouse, you have one option that nobody else has: rolling over inherited IRA assets into an IRA in your name and treating those assets as if they were your own. If you have not reached age 70½ but your spouse had, this option enables you to delay taking distributions until you reach age 70½, rather than continuing your spouse’s RMDs.

Keep in mind that if your spouse was age 70½ or older at the time of death, you will need to determine whether they met the RMD for the year in which they passed away. If your spouse did not meet the RMD, you must take an RMD for that calendar year by December 31.

2. Transfer the assets to an inherited IRA

Transferring assets to an inherited IRA may make the most sense if you are under age 59½ and need to access some or all of your spouse’s IRA assets now, or before you attain the age of 59½. Why? Because you won’t be subject to a 10% penalty when you take withdrawals from an inherited IRA prior to age 59½ as you would be if you were withdrawing assets from a non-inherited IRA you may own.

Spouse inheritors also have additional rules regarding the timing of RMDs for inherited IRAs. You can begin taking RMDs in the year after the year of death, or you can delay beginning RMDs until your spouse would have turned age 70½.

Another option is to invoke the 5-year rule. As long as your spouse was under age 70½ when they died, you have 5 years during which you can withdraw inherited assets from an inherited IRA at any time, in any amount, as long as all the assets are withdrawn by December 31 of the 5^th year following your spouse’s death. However, keep in mind that these larger distributions could push you into a higher tax bracket.

If you inherit a Roth IRA and transfer the assets to an inherited Roth IRA, your RMDs will always be treated as if your spouse were under age 70½. Unlike Roth IRAs owned by the original owner, inherited Roth IRAs do require annual RMDs, and you must begin RMDs by December 31 of the year following your spouse’s death. These RMDs will be based on the Single Life Expectancy Table. Or you may elect to take distributions under the 5-year rule. Withdrawals from inherited Roth IRAs are normally tax-free as long as the original Roth IRA was funded for 5 years or more.

3. Roll over the IRA assets into a new or existing IRA and convert the assets to a Roth IRA

If you don’t anticipate needing to rely on RMDs from your spouse’s IRA to pay your living expenses, you may want to consider rolling over the assets into an IRA in your name (option 1, above) and then converting the assets into a Roth IRA. This assumes that the IRA you inherited is a traditional IRA and not already a Roth IRA.

With a Roth IRA, contributions are not tax deductible, but you pay no tax when you withdraw assets, provided certain conditions are met.

4. Disclaim (decline to inherit) all or part of the assets

If you choose this option, the IRA assets will pass to your spouse’s contingent beneficiaries. This could be your children or grandchildren, another relative, a trust, or a charity.

When assets pass directly to the IRA owner’s children or grandchildren, the potential for tax-deferred (or tax-free) growth will be stretched out over a much longer period. Though the children or grandchildren will need to begin taking RMDs in the year after the IRA owner’s death, RMD calculations will be based on the longer life expectancies of these younger inheritors.

In some cases, disclaiming IRA assets can be a smart estate-planning move, especially if your spouse’s estate was not structured properly. While assets you inherit from your spouse are generally not subject to estate taxes, they do become part of your estate when you die. Be sure to consult a tax professional or attorney.

Here is a great article from Fidelity that explains the different options you have for inheriting your spouse’s IRA.  See this chart below for a visual understanding of the rules around inherited IRAs.

Article summarized by Matt Ward

*This article was written prior to both the SECURE Act & 2.0 Act passing. Please contact us or your qualified advisor for information on your individual situation.

817-238-6300

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