One of the Best Tax Strategies for Retirees – Charitable Gifts from your IRA

Key Points:

  • At age 70-½ you are required to start taking taxable distributions from your IRA
  • Higher Standard Deductions with 2018 tax law may eliminate any tax benefit from charitable gifts
  • You can make charitable gifts directly from your IRA to lower your income taxes and possibly save on Medicare costs

About the Required Minimum Distribution (RMD)

IRA rules can be tricky and understanding them allows you to take full advantage of the benefits. For example, you can start taking IRA withdrawals without penalty after you reach age 59-½, yet it is often a good strategy to allow your IRA money to grow tax free as long as possible. When you reach age 70-½, you are forced to take money out through Required Minimum Distributions (RMD).  Like any withdrawal from an IRA, the RMD is taxable income to you. Annual distribution amounts are based on a percentage of the IRA value at the prior year-end and increases with age. Your first RMD is 3.65% of the account balance, taken in the year you turn 70-½. The RMD percentage increases every year and when you are in your 90s, you are required to take over 10% of the account balance out each year.  To put into dollars, if your IRA balance is $500,000 when you turn 70-½, you would be required to withdrawal and pay tax on $18,250. A 95-year-old IRA holder with a $500,000 IRA would have an RMD of $58,140.

In retirement, we strive to minimize income taxes. The addition of taxable income from the RMD can push you into higher income tax bracket and may increase your Medicare costs, which are income-based. Instead of taking a taxable RMD, consider using the money to make your annual charitable contributions. You can dedicate a small portion of your RMD as a charitable gift, split it among different charities or send the full amount to a qualified charity of your choice. In our view, this is one of best tax-saving tips available to our clients.

If you make charitable gifts annually to your church or favorite non-profit organizations, there is no reason to miss the tax saving opportunity of funding it with your RMD.

 

Talk to a financial advisor before you make any decision that could effect your future finances. Contact Lucas Capital Management to see how we can help.

 

The 2018 Tax Code Revisions Made This Tax-Saving Technique Even Better

The increase in Standard Deduction to $24,000 for married couples combined with the $10,000 limitation on State and Local tax deductions means that many of us can no longer itemize deductions. If you are not itemizing, there is no tax benefit for making a charitable gift. By funding your charitable gifts directly from your IRA, you are taking a non-deductible gift and reducing your taxable income by the amount of the gift.  In many ways, this is better than a tax deduction because it directly reduces income.

Save on Medicare Costs

Part B Medicare costs are dependent upon income. From the Medicare website, 2019 costs for Part B vary from $135.50 per month to $460.50 for high income earners. By using your RMD to make charitable gifts, you are actually reducing your income so that you may fall into a lower income bracket for Medicare.

The Charitable Gift Must Be Paid Directly to the Charity

Qualified Charitable Contribution (QCD) is the term defined by the IRS meaning a transfer of funds from an IRA payable directly to a charity. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and can also be excluded from your taxable income. Be careful because you need to make the charitable gift directly to the charity from your IRA. If you take a regular withdrawal from an IRA then make the charitable gift in the same amount, you would be taxed on the distribution.

Make the Most of Your Charitable Giving

Supporting worthy causes is a core value at Lucas Capital and we are always happy to work with our clients as they plan to achieve their charitable goals. There are many avenues to consider when thinking about your charitable giving. At Lucas Capital, we have helped our clients structure longer-term giving plans through Donor Advised Funds with Community Foundation of NJ and lifetime giving strategies.

Charitable giving and retirement income are two of our focus areas at Lucas Capital. Please contact us if we can be helpful to you. If you are too young to take advantage of this strategy, please pass this note along to your parents or friends over 70 who could benefit from one of the best tax saving strategies available.