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Avoid Taxes While Bringing the Charitable Spirit

Starting off the New Year right while still enjoying the holiday spirit makes it a good time to think about charitable donations. For those 70.5 or older who must take their Required Minimum Distributions (RMD’s) from their IRA’s, thinking about charities close to your heart may be a good alternative to incurring the tax bill for your newest source of income. While some don’t mind taking the extra income, others don’t want the added income tax pain of their RMD. Utilizing Qualified Charitable Distributions (QCD’s) can help not just the account owner, but also the charity(ies) of their choice!

QCD’s are distributions sent from one’s IRA directly to a qualified charity. The distribution is not made out to the account owner, it goes directly to charity of the account owners choosing. Thus, the owner pays no income tax on the amount transferred yet may still satisfy their RMD.

There are a couple key components to remember when considering a QCD. First and foremost, the QCD portion technically needs to be the first amount distributed from your IRA. Meaning, should you choose to take out your RMD in the early part of the year and have the funds go to your bank account, come the holiday time of year, you cannot retroactively change the earlier distribution to a QCD. Also, the QCD must be directly distributed to a qualified public charity, not a Private Foundation or Donor Advised Fund. Those types of “supporting organizations” do not qualify for the QCD tax break. Furthermore, the maximum amount of QCD’s allowed per IRA owner is $100,000 in 2019. You’re allowed to make QCD’s to multiple charities if all donations stay under the $100,000 limit. Lastly, should it happen that you do not have to satisfy your Required Minimum Distribution until April 1st, 2021, you cannot elect to do QCD’s in the early part of 2021 to count towards the previous year. QCDs must be distributed in the tax year you intend.

To illustrate, here is a made-up example:

Maker Bayfield is 75 years old. He has an IRS mandated RMD of $25,000 for 2020, but he only wants to take out $15,000.  He completes paperwork to send $5,000 QCD’s to his two favorite charities, OH WOW! Children’s Science Center and Northeast Ohio Adoption Services. His IRA custodian first sends $5,000 each to the charities, then distributes the remaining $15,000 to Maker Bayfield. He only owes income tax on $15,000 and satisfies his RMD for 2020.

Remember, processing investment transactions can take some time. Connect with your financial professional sooner rather than later if you want to make a QCD!

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. 

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. 

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