For most people, the end of the year means holiday planning, New Year’s resolutions and time with family. For financial professionals like me, the end of year means something else too: Required Minimum Distributions or RMDs.
What Are RMDS?
The IRS requires those over age 70.5 to withdraw a certain amount from their IRAs each year. If you are still working and contributing to a 401(k), this amount is not required to be withdrawn. All of the following accounts have required minimum distributions:
When And How Much Do You Withdraw?
The amount that you are required to take is based on your age and how much you have in your IRA or other qualified account. The IRS uses the Uniform Lifetime Table to determine the amount required to withdraw; the older you get, the more you are required to take out. You can find an RMD calculator at www.tools.finra.org/rmd.
RMDs begin the year you turn 70.5. You can wait until April 1 of the following year that you turn 70.5 to make your first withdrawal, but in all other subsequent years, you are required to take your amount by December 31 of that year. Penalties for not taking these required minimum distributions are 50 percent of the required withdrawal amount.
What Do You Do With The Money?
Most of my clients use this money on monthly bills or extra special splurges for the grandkids, but others don’t know what to do with it. As we enter the holiday season, consider donating a portion of or your full RMD withdrawal to charity. Donating your RMD to charity mitigates your tax implication of these withdrawals, and the IRS has extended this privilege to us the past few years.
How Do You Set Up An RMD To Go To Charity?
People who are age 70.5 or older can contribute up to $100,000 from their IRA directly to a charity and avoid paying income taxes on the distribution. However, many people don’t know how to request their RMDs, much less set it up for their payments to go to charity. While you can certainly contact the financial institutions holding your IRA assets, you can also ask your retirement planner to do it for you. If you withdraw the money from your IRA and later donate it, it won't qualify as a tax-free qualified charitable distribution, so you need to ensure that you set up a direct transfer that will send the check directly to a 501(c)(3) organization. The charity needs to have that designation to receive tax-free IRA charitable contributions.
Most Retirees Donate To Charity
According to a study published by Merrill Lynch in October 2015, baby boomers are set to give $8 trillion to charity over the next two decades in the form of money and volunteer hours. The study also found that 80 percent of Americans age 65 and older say they give money or goods to charity and that contributions by retirees will account for half of all giving by 2025.
If you are one of the retirees already donating to nonprofits and charities, why not give from your IRA funds that you have to take from anyway? Start by finding a qualifying charitable organization at www.charities.org, which lists 140 high-impact nonprofits with the 501(c)(3) designation. Speak to your financial professional about setting up a direct transfer of your RMD to your chosen charity, and feel good that you have made the world a bit brighter as we begin this season of thanksgiving.
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Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC. The firm is located at 115 West Street, Suite 400, in Annapolis.