RMDs and the Tax Savings You Should Know About

If you are interested in reducing your tax liability and new to RMDs – those are Required Minimum Distributions taken from Qualified Retirement plans such as IRA and 401k plans – then we’re here to help. We’ve prepared a brief synopsis below. That said, we strongly advise you to consult with your financial advisor or accountant to see how an RMD can work well for you.

If you are over 73 and you have an IRA or 401k or similar Qualified Retirement Plan, you are required to withdraw a certain amount of money (“the Distribution”) every year. (Note: You may have already been withdrawing your RMD as the birth date deadline has only recently changed.) Why is that? Well, for much of your life, you contributed to those plans with an eye to generating income or support during your retirement years. The money probably accumulated nicely because it was invested wisely but also because taxes were deferred.

Alas, the IRS wasn’t going to let that happen forever – after all, the feds need to make up for all that lost revenue – and so it decreed that by the time you reached a certain age – now it is 73, you would have to withdraw a specific amount from your Qualified Retirement Plan every year. A minimum was set according to a formula, and it would be taxable and added to your gross income, that is, if you were planning to use those funds to pay for everyday expenses. But there were other options.

Do Well While You Are Doing Good

If, however, you want to directly donate the funds you withdraw to charity, well, that’s a different story. For sure, supporting charity is an essential value for many people. Donating your RMD to charity effectively reduces your income tax by lowering your adjusted gross income. The amount is capped at $100,000 annually per person and must be paid directly to an approved charity. It is not reported as taxable income and you don’t owe any taxes on it, even if you do not itemize deductions. Thus, when you donate your RMD to offset your tax liability, you’re also doing good. That’s a win-win for you.

But it’s also a win-win for a charity like Friends of Nathaniel Witherell, Inc., a 501 (c) (3), because your donation makes possible the cultural enrichment, music concerts, entertainment, summer barbecues, holiday parties, art programs, and guest lectures that enhance the quality of life for all those in the Witherell’s care.

How is the RMD calculated? The amount is determined by the fair market value of your IRA by December 31st of the prior year, factored by your age and life expectancy.

Our advice? Speak to your financial advisor, but also feel free to contact Meighan Corbett at the Friends by calling her at 203-618-4227 or by sending her an email at Meighan.corbett@witherell.org.  She is more than willing to answer your questions and help guide you to create a wonderful legacy.

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