The IRS requires you to take a minimum amount from your IRAs and Employer Sponsored Plans once you turn 70½ (Roth IRAs are not included). These required withdrawals are called Required Minimum Distributions (RMD) and are taxable in the year that they are withdrawn from your retirement account. For several years, taxpayers have been able to direct all or a portion of their RMD from an IRA account to a qualified charity up to a maximum of $100,000 per year. The ability to utilize this strategy, known as a qualified charitable contribution (QCD), was made permanent in 2015.

How does it work?

The RMD is taxable at ordinary tax rates in the year it is withdrawn from your retirement account. In certain years, the RMD can even be significant enough to push you into a higher tax bracket than previous years. When the RMD is directed to a charitable organization, it is not added to your taxable income and is not taxed at ordinary tax rates. You may choose to direct your RMD to any public 501(c) (3) charity other than a donor-advised fund, private foundation, and split-interest charitable trusts. An important detail to note is that qualified charitable distributions only work with Traditional or Inherited IRA accounts, not employer sponsored plans such as 401(k)s.

By utilizing this strategy, you:

• Satisfy your RMD requirement without increasing your taxable income or tax.

• Help manage your income below certain thresholds to avoid Medicare premium surcharges.

• May lower the amount of your social security income that is subject to taxation.

• Can manage your tax bracket, standard deduction availability and/or itemized deduction phaseout limitations.

What is the process?

The strategy must be put in place before the RMD is distributed or the RMD will still be included in taxable income. To make the QCD, you will contact your IRA administrator regarding what charity you would like to support and request the distribution to be made directly from the IRA to the charity. No tax withholding should be taken on the distribution. The charity will provide you with a contribution acknowledgment that shows receipt of the distribution; this acknowledgment receipt is required to make the Qualified Charitable Distribution valid.

When is this strategy most beneficial?

This strategy is most beneficial if you are charitably inclined and you do not need the RMD to live on. It is better in years when your RMD may push you into a higher tax bracket or increase limitations on your cash donations. It may be completed at any time during the year, but should be completed early enough to allowed the charity ample time to receive the distribution by Dec. 31 to guarantee credit in the proper year.

• Emily Harper, CPA, is with DHJJ Financial Advisors in Naperville. If you want more information on how a Qualified Charitable Distribution strategy may benefit you, please contact DHJJ Financial Advisors at (630) 420-1360 or email Emily at eharper@dhjj.com.

This article does not constitute personal investment advice, please view important disclosure information at www.dhjjfinancial.com.