Boiling down the alphabet soup: What are RMDs, and how do they relate to QCDs?

Posted on September 07, 2023


If you get cross-eyed when you start reading about Required Minimum Distributions (RMDs) and Qualified Charitable Distributions (QCDs), you are not alone! And, given the passage of SECURE 2.0 legislation, changes to RMD rules are especially important to understand if you are involved in charitable giving and have reached the age of 70 1/2.

What is an RMD in the first place?

A little history may help here. RMDs date back to 1974 when the Employee Retirement Income Security Act (ERISA) was enacted to provide for pension reform and to offer a retirement savings vehicle to non-pensioned workers through vehicles referred to as "qualified retirement plans" that are allowed to grow tax-free while assets are in the plan.

By requiring that a taxpayer start taking distributions from qualified retirement plans when the taxpayer reaches a certain age, the United States government can start collecting tax revenue on these "required minimum distributions" from assets that have grown tax-deferred for all those years and decades. 

Now here is where we get into the weeds. The distributed amount of the RMD is reported by the plan administrator on IRS Form 1099-R (but–and here's a nuance–not if the RMD was "satisfied" by a Qualified Charitable Contribution [QCD]—see below). A taxpayer enters this amount on Line 4B of the Form 1040 Federal income tax return, and, of course, the amount is included as taxable income for the year it was distributed. So, the net-net here is that RMDs add to taxable income but not in the case of direct transfers to qualifying charitable organizations (the QCD).

What types of accounts require RMDs?

For 2023, account owners aged 73 and older who participate in qualified retirement the following plans are subject to RMDs: Traditional IRA, Simplified Employee Pension (SEP), SIMPLE IRA, Employer-sponsored 401(k), 430(b) or 457.

Once begun, RMDs occur annually until account depletion or the owner's death. (Note that distributions must also be taken from inherited IRA accounts, though under different rules.)

How is the RMD amount calculated?

A qualified retirement account's entire balance is considered for calculating an RMD calculation, although only a fraction of the balance must be distributed each year. Unfortunately, the distribution amount is not quickly or consistently determined. This situation contributes to some retirees' confusion about RMDs and their requirements. Online RMD calculators are helpful, and your retirement account administrator can provide guidance. 

When do the RMDs start?

That's tricky, too. Through the year 2032, the start date is the calendar year the account owner turns 73. For example, a 1955-born account owner would begin in 2028. Starting in 2033, it's the calendar year the account owner turns 75. 

For all account owners, the big benefit of the now-later RMDs comes from retaining account balances longer. You avoid unnecessarily adding to your taxable income and reduce the risk of bumping into a higher tax bracket. 

How charitable taxpayers can check the RMD box with a QCD 

Here's where the QCD comes in. Now, armed with an understanding of how the RMD rules apply to your situation, you can see how the QCD can provide a massive benefit if you own IRAs. QCDs are indeed taxpayer and charity-friendly vehicles.

For starters, you can start making QCDs at age 70 ½–well before you've reached the age when you're required to take RMDs. A QCD happens when you direct a distribution from an IRA of up to $100,000 annually (or $200,000 if you file tax returns jointly) to one or more qualifying charitable organizations, including a fund at SCF (donor advised funds are excluded). While the QCD is itself not tax-deductible per se, the overall effect of the QCD is to lower your taxes because the QCD counts toward your RMD, but unlike an RMD, it is not included in your taxable income. 

The bottom line? If you have reached the age of 70 ½, own an IRA, care about charitable causes, and don't need a full RMD income to cover your living expenses, reach out to Stark Community Foundation to learn how a QCD could work for you.  

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