Once you hit the mark at 70 ½, it’s time to start taking the RMDs from retirement accounts. This can send you into a higher income level. One way to manage this: make a tax-free transfer from an IRA to charity and have that count as the RMD. We know what your first question is going to be: why don’t I just take the money out and make a charitable donation? There’s more to it than you might think.
According to a recent Kiplinger article, “The Advantages of a Tax-Free Transfer From an IRA to Charity,” if you itemize, the tax deduction will appear to be identical. But let’s take a closer look.
The transfer is deemed to be a qualified charitable distribution, which keeps your required minimum distribution outside of your adjusted gross income. This can help you remain under the income cut-off for some other taxes and charges. In addition, for those who don't itemize their deductions, making the tax-free transfer can benefit from their charitable gift.
If you are required to take large RMDs from your retirement savings, you could be lifted into a higher premium level for Medicare. However, making a tax-free transfer of that RMD to charity keeps that sum out of the Medicare premiums calculation. If your AGI plus tax-exempt interest income is more than $85,000 for singles or $170,000 if married filing jointly, you'll have to pay higher Medicare Part B premiums. That could be a substantial difference: the monthly premiums of about $109 per month for most people who have their premiums deducted from their Social Security payments or $134 for new Medicare enrollees. Those subject to the high-income surcharge must pay from $187 to $428 per month for Medicare Part B in 2017, depending on their income—plus an extra $13 to $76 added to their premiums for their Part D prescription-drug coverage.
A lower AGI can also help you lower taxes on your Social Security benefits. You need to look at your provisional income, which is your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits. If your "provisional income" is less than $25,000 and you file taxes as single or head of household—or less than $32,000 if you file a joint return—you won't owe taxes on your Social Security.
If you’re single and your provisional income is between $25,000 and $34,000—or between $32,000 and $44,000 if married filing jointly—up to 50% of your benefits may be taxable. If it’s more than $34,000 if single or more than $44,000 if married filing jointly, 85% of your Social Security benefits could be taxable. Keeping your RMD out of your AGI can help reduce your provisional income.
Here’s a key point to keep in mind: if you are over 70 ½, you are permitted to transfer as much as $100,000 tax free from your IRA to a non-profit. But—and this is very important—the funds must be transferred directly from your IRA to the non-profit, if they are to stay out of your AGI.
As with all planning of this type, please be sure to consult with your accountant and estate planning attorney as there are rules that must be specifically followed in order to obtain these tax benefits.
For more information on how this could affect your retirement and estate planning, explore our website and contact us to schedule your consultation today!
Reference: Kiplinger (May 12, 2017) “The Advantages of a Tax-Free Transfer From an IRA to Charity”