New RMD rules let you turn charitable donations into retirement income for life

Investors who chafe at having to take Required Minimum Distributions (RMDs) each year have a new tool to help them reduce the tax burden of those 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 law is an option that allows IRA holders to combine qualified charitable distributions (QCDs) with a little-known vehicle called a charitable annuity. The result? Your charitable donations can help fund your retirement lifestyle. Here’s how it works.

How to convert a QCD into a lifetime income

Anyone turning 73 this year is required to take a taxable minimum required distribution (RMD) out of their IRA (rules and ages vary by date of birth). Someone who turns 73 with an IRA worth $500,000 at the end of 2022 should withdraw $18,868 by the end of the year. This money is taxed as ordinary income.

Contributions to qualified charities can be made directly from an IRA of up to $100,000 per year, with that money tax-free and counting toward the annual RMD amount. As of Jan. 1, retirees age 70½ or older can donate up to $50,000 of that $100,000 in a single tax year just to a charitable annuity.

In exchange for the gift, the charity pays a fixed annual annuity to the donor for the rest of his life or for the life of the donor and his spouse. The 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 her Required Minimum Distribution (RMD) taxable income by that amount. By contributing 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 of the annuity than the amount of her original gift.

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Taxes and other considerations

While this strategy can help lower your tax bill in any given year, keep in mind that annuity payments are considered ordinary income, so you will have to pay taxes on this money. Also, any money left over after the donors pass away goes to the charity.

Although the $50,000 contribution must be paid in a single year, it can be divided into smaller amounts and distributed to different charities that provide charitable annuities.

However, the $100,000 limit for charitable donations and the $50,000 limit for charitable annuities adjust for inflation after 2023. The annuity is secured 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 annuity payments in return, as this provides income for the rest of the life of the donor. donor.

Conclusion

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

Retirement Planning Tips

• Tax planning is an essential part of determining how to save and invest for retirement, and 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. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one is right for you. If you’re 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 key to creating a retirement financial plan that meets your needs. SmartAsset’s Social Security Calculator can estimate how much your benefits will be and help you determine the best time to claim them.

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