By Peter Wechsler
President & Co-Founder, Franklin Retirement Solutions
[email protected]
First, and most important this week, I’m wishing all the mother’s out there a great Mother’s Day weekend. This year Jeremy is having all the clan over to his place for a day-early celebration on Saturday afternoon. I’m looking forward to celebrating with Shelley (favorite and only ex-wife), Cindy (favorite and only ex-sister-in-law) and favorite cousin Linda as 3 great moms!
I’ll skip talking about the markets as they are defying events around the world, most notably the Middle East. Instead let’s talk about something very exciting: Qualified Charitable Distributions (QCDs). Here’s the backdrop…in the year you turn 73 folks need to start taking Required Minimum Distributions (RMDs) from their IRA, 401(k), 403(b), 457 plans and TSPs. At 73, you need to pull out about 3.8% of the funds you have in the above accounts. Each year the percentage goes higher so buy age 80 it’s 4.95% per year required distributions.
The big thing is that this money has never been taxed. We call it TAX-DEFERRED, but when you reach 73 (75 if born in 1960 or later) some of that deferral (RMDs) goes away every year. Worst part is that you owe taxes on these distributions, based on ordinary income tax rates.
Charitably inclined? Give money to the church, mosque, hall, or synagogue each year? Organizations like St. Judes, the Red Cross or the American Cancer Society? If you are over 70 ½ you can use your IRA money to funds your charitable gifts, and not pay taxes on that portion of the money going out of your tax-deferred retirement accounts. Yes, I said 70 ½ as it appears that when Congress raised the RMD age from 70 ½ to 73, they forgot to change the time when you can begin QCDs.
As an example, you are 73 and your RMD this year is $22,000. Annually you give $4,000 to the church, maybe giving $300 a month or so. This would be money coming out of your checking account after RMDs went into your checking account AFTER TAXES. By doing a QCD and sending the church the money directly from your IRA, the $4,000 goes out of your IRA account tax-free as part of your $22,000 RMD. Bottom line: you only paid taxes on $18,000 of IRA RMDs.
Confused? Want more info on how this works? Give us a call and we will walk you through the process.
Enjoy Mother’s Day Weekend and go Flyers and 76ers…
Peter