Seventy is one of those “zero year” birthdays that sneaks up and surprises! Many find 70 a freeing age with more time to focus on cherished life goals such as family, friends, pursuing passions, and supporting causes that inspire us. Yet, while life in the “silver lane” can be grand, for many it is downright irritating to discover that IRA assets must start to be distributed once one reaches the age of 70 1/2. It is one thing to choose to withdraw IRA assets, pay the income tax and use the remainder to enjoy life. It is a rude awakening to be denied choice as a result of a birthday. Some present!
Still, for the charitably inclined, there is a silver lining of sorts. IRA owners who have reached the age of 70 ½ can give qualified charities their annual required minimum distribution (RMD) up to an annual limit of $100,000 without recognizing the IRA distribution as income. This direct gifting of one’s RMD is called a qualified charitable distribution (QCD), and it is a big deal. For example, let’s assume fictional Irene has just turned 70 ½. She has an IRA rollover account, and must take a RMD of $35,000. Until this year, she only withdrew $20,000 annually from her IRA. Now the law requires her to withdraw $35,000. If she places the entire RMD amount in her checking account, it will be taxed as ordinary income. Assuming Irene is charitably inclined, she may instead make a direct distribution(s) to charity of all or part of the $15,000 that exceeded her customary withdrawal without recognizing it as income.
Why is this a big deal? For most, it is now the only way to make a tax advantaged gift to charity. While charitable deductions technically survived the 2017 year-end tax act, for most taxpayers, itemized deductions will be of limited or no benefit. Let’s assume Irene is married to Joe. They file a joint tax return; and for 2018, they will receive a standard deduction of $24,000. In Maine, itemized deductions have largely been comprised of state and local taxes. Under the new tax law, state and local property and income taxes are deductible only up to a $10,000 ceiling. Consequently, many taxpayers, especially married taxpayers, will never accumulate enough itemized deductions to surpass the standard deduction of $24,000.
While many studies show that people will continue to give to the causes they hold close to heart regardless of the tax benefit, it is always nice to be rewarded for doing good. For those who rankle at RMD rules that force them to take IRA distributions simply because they have reached a certain age, the QCD is welcome relief. By exercising a QCD, the power of social impact is returned directly to the hands of the donor with no bureaucratic intermediary. Thus, for many who give, 70 may be the new coming of age after all.
—Jean M. Deighan, Co-Founder and CEO, Deighan Wealth Advisors