Do RMD Rules Have the Potential to Transform Charitable Donations into Long-Term Retirement Income?

Do RMD Rules Have the Potential to Transform Charitable Donations into Long-Term Retirement Income?

New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income

Investors who are irritated at having to take required minimum distributions (RMDs) have a new tool every year to help them reduce the tax burden of these withdrawals – and provide retirement income for life.

A Financial Advisor can help you manage your RMDs and tax obligations in retirement.

Among the many provisions of the new SECURE 2.0 Take Action is an option that allows IRA holders to combine qualified charitable distributions (QCD) with a little-known vehicle called a charitable gift annuity. The result? Your charitable donations can help fund your lifestyle by retirement. Here’s how it works.

How to turn a QCD into lifetime income

New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement IncomeNew RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income

New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income

Everyone who turns 73 this year must take a taxable required minimum distribution (RMD) from their IRA (rules and ages vary based on birthdates). Someone who celebrates their 73rd birthday with a IRA worth $500,000 at the end of 2022, $18,868 would need to be withdrawn by the end of the year. This money is taxed as ordinary income.

Contributions to qualified charities can be made directly from an IRA up to $100,000 per year, with this money being tax-exempt and counting toward the annual RMD amount. As of January 1, retirees aged 70 1/2 or older can donate up to $50,000 of that $100,000 in a single tax year to charity only. charitable annuity.

In exchange for the donation, the charity pays a fixed annual annuity to the donor for the remainder of their life or for the lives of the donor and their spouse. Payment must be 5% of the donation or more. Most charities set annuity payments using rates suggested by the American Council on Gift Annuities, according to the Wall Street Journal.

A recent article uses the example of a 70-year-old retiree who donated $25,000 from her IRA to her alma mater, which immediately reduced the taxable income of its required minimum distribution (RMD) of this amount. By directing the money to her college’s charitable annuity program, she has a fixed 7% annuity that will pay her $1,750 a year for the rest of her life. If she lives another 15 years, she will receive more from the annuity than the amount of her initial donation.

Taxes and other considerations

New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement IncomeNew RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income

New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income

Although this strategy can help reduce your tax bill In any given year, keep in mind that annuity payments are considered ordinary income, so you’ll owe taxes on the money. Additionally, any money left after the donors pass away goes to the charity.

Although the $50,000 contribution must be made in a single year, it can be divided into smaller amounts and distributed to different charities offering gift annuities.

However, the $100,000 limit for charitable donations and the $50,000 limit for charitable donations adjust for inflation after 2023. The annuity is guaranteed by the assets of the charity.

Gift annuities allow donors to make contributions to charities that they otherwise could not afford if they did not receive the annuity payments in return, because this provides income for the remainder of the donor’s life. donor.

Conclusion

Recent changes to laws regarding required minimum distributions (RMDs) from IRAs and other tax-deferred accounts have given retirees a little more flexibility on how to handle their withdrawals and the resulting taxes. Using RMD money to make a charitable donation reduces the amount of taxable income from the distribution. Donating from an IRA to a gift annuity charity provides a lifetime income to donors who otherwise could not afford to make a gift.

Retirement Planning Tips

  • Tax planning is an essential part of determining how to save and invest for retirement, and it becomes even more important when you start making withdrawals. A financial advisor can help answer your questions about RMDs and taxes. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

  • Social Security is a key part of most retirees’ income plans. Knowing how much you can expect to receive is essential to creating a financial plan in retirement that meets your needs. Smart assets Social Security Calculator can estimate your benefit amount and help you determine the best time to claim them.

Photo credit: ©iStock.com/FG Trade, ©iStock.com/donald_gruener, ©iStock.com/izusek

The post office New RMD Rules Allow You to Turn Charitable Donations into Lifetime Retirement Income appeared first on SmartAsset Blog.

Source Reference

Latest stories