The Tax Cuts and Jobs Act of 2017 doubled the standard deduction eliminating the need for many taxpayers to itemize their tax deductions. It also made permanent an IRA distribution strategy known as the Qualified Charitable Distribution or QCD.
If you are over 70 ½, own an IRA, and make financial contributions to qualified charitable organizations, the QCD may have a role in your IRA distribution plan.
First some basics…
Photo by Kat Yukawa on Unsplash
Americans are a generous bunch. According to Giving USA: The Annual Report on Philanthropy, Americans gave more than $400 billion to charity last year. 70% of that number was from individuals; people like you and me.
This year, however, that could change.
For the 2018 tax year the standard deduction rises from $12,000 for a married couple filing jointly, to $24,000. This is good news for many people, but it also means that you may not receive a tax deduction on your charitable donations if your itemized donations (which includes charitable gifts) total up to less than $24k.
But there may be a workaround.
Photo by rawpixel on Unsplash
Adding money to your IRA or retirement account is the relatively easy part of accumulating assets in tax-deferred retirement plans. The hard part comes later in life when money comes out of those accounts.
Get it right and you will enjoy (figuratively speaking anyway) the lowest possible tax bill. Get it wrong and the taxes and penalties can be hefty.
According to the IRS all IRA owners, and many 401k owners as well, must begin taking Required Minimum Distributions (or RMDs) by April 1 of the year afterthe year they turn 70 ½.
Failing to do so could result in a penalty of 50% of the RMD amount. This is in addition to any tax you may owe on that distribution and any interest you might have incurred by not taking your RMD when you should have.
Here is how it works:
Photo by rawpixel on Unsplash
For the past 40 years or more you have paid into the Social Security system with the promise that someday when you retire, you will receive a guaranteed monthly income for the rest of your life. Along the way, your employer has kicked in a matching contribution equal to 100% of your contribution.
At the end of your working life there should be a giant pile of cash with your name on it. And there is (figuratively speaking anyway). But it comes with a giant string attached.
In this case, the catch is that up to 85% of your monthly benefit is considered taxable income once it’s paid out to you. What’s more, depending on the state you live in, you may owe state income tax on those benefits as well. (Bad news fellow Minnesotans. We live in one of those states).
The following post will explain how much of your benefit is taxable and what, if anything, you can do about it.
IRA mistakes are expensive and often irreversible.
Imagine inheriting a large IRA and “rolling” it over into your own IRA only to find out that the IRS has a very specific protocol regarding inherited IRAs and that you got it ALL wrong.
Worse still, the financial advisor you worked with and got paid to help you, he got it wrong as well!
Oh and this mistake, it can’t be fixed.
Or how about these scenarios…