If you have established either a Traditional IRA or a Roth IRA as a part of your retirement plan, you should understand the tax advantages and consequences of distributions.
Roth IRA contributions were made with money that was already taxed. If you are 59 ½ years old and have had your Roth IRA for five years, any money that you withdraw is tax free and penalty free to the owner of the Roth IRA. If you have not had your Roth IRA for five years and/or have not yet reached 59 ½ there will be taxes and penalties for the withdrawal. There are some special exceptions to those taxes and penalties if the funds are used for medical, home purchase, or education expenses. The IRS does not require distribution of these funds, so there is no RMD required minimum distribution of Roth IRA funds unless you inherited the Roth account.
If you don’t need to use this money for your retirement expenses, you can leave your Roth account alone and let your contributions and earnings continue to grow. You can leave your Roth IRA to a beneficiary or multiple beneficiaries, tax-free. This makes the Roth IRA a fantastic wealth-transfer strategy, or an alternative to life insurance for your final expenses.
A Traditional IRA is a more complicated account. The funds contributed to the account were made with tax-deferred monies and so they have never been taxed. The year that you reach the age of 73 (in 2023 the new IRS age of mandatory distribution) you are required to draw money from your tax-deferred account/s each year as a Required Minimum Distribution (RMD). The IRS has a table for RMDs which uses actuary tables, your age, and the amount of money in your IRA account/s on December 31st of the previous year, to calculate the RMD to be made. The eventual aim is to distribute all those pre-tax funds before your death.
You can take your yearly RMD out of one account, or take bits from each one, so long as you withdraw the required minimum each year. AARP has an RMD calculator where you can see what is involved.
Money from an individual retirement account (IRA) can also be donated to charity as a qualified charitable donation (QCD). If you are 73 or older and you need to take the required minimum distributions (RMDs) from tax-deferred money in your traditional IRAs, you can avoid paying taxes on those distributions, and effectively lower your Adjusted Gross Income (AGI), by making your required distribution directly to a qualified 501(c)(3) organization in lieu of your usual contributions throughout the year. When you arrange for the distribution to charity be sure that the tax is not deducted from the donation. These QCD donations are exempt from Federal tax and most state tax.
This tax break was made permanent in 2015. If you are 70 and ½ years old (the previous age for RMDs) you can voluntarily make distributions to a qualified charity to reduce your Adjusted Gross Income. You may take your first Required Minimum Distribution by December 31 in the year you reach age 73, or you can defer it until April 1 of the following year. You may take your RMD amount as one lump sum at any point during the year or as multiple withdrawals throughout the year, provided the total withdrawn by the end of the year is at least the required amount. You are always allowed to withdraw more than the RMD amount.
If you choose to donate through your Traditional IRA to a registered charity, you must report the transfer to the IRS. Your IRA trustee must use IRS form 1099-R to report the Qualified Charitable Donation (QCD) on an account owner’s annual tax return. The IRA trustee, also called a custodian, is the institution that administers your IRA.
The IRA owner should also keep records of the direct charitable donation date, the account from which the donation came, the amount that was given, and the charity that received the donation.
Distributions must be made directly to the charity, not to the owner or a beneficiary of the IRA. All distribution checks must be made payable to the charity, or they will be considered by the IRS as taxable distributions.
Report the total IRA distribution on line 4a of your 1040 and on line 4b report any part of the distribution that you received. If all of the distribution was a QCD, then report $0 QCD on line 4b.
To validate the deduction, you will also need a receipt from the charity stating that the donor received no goods or services in exchange for the contribution. Otherwise, the amount of the donation is reduced by the value of any goods or services received in exchange, and that part of the donation will be taxable. Be aware that you cannot also claim the charitable donation as a tax deduction on your income taxes.
While there are other retirement accounts that also impose Required Minimum Distributions, the Traditional tax-deferred IRA is the only retirement account from which you can transfer up to $100,000 to charity tax-free each year.
As part of your estate planning, you can also list 501(c)3 organizations as full or partial beneficiaries to your IRAs, possibly saving your heirs income and/or estate tax.
As always, before making any financial decisions, you should consult with your tax-deferred account trustee, and financial or tax professional, for more information on these distributions to charities and other methods of reducing your retirement funds taxes.
If you would like to distribute money from your tax-deferred IRA to Poolesville Seniors, you will need this information:
NAME: Poolesville Area Senior Center Inc.
ADDRESS: P.O. Box 264, Poolesville, MD 20837
Tax ID: 81-2272507