required minimum distributions

Americans are notoriously generous when it comes to charitable giving. According to Giving USA, Americans gave $484.85 billion to charity in 2021, a 4 percent increase from 2020. The end of the year is the most popular time to give to charity, with 30 percent of annual giving occurring in the month of December, and a full 10 percent of donations made during the last three days of the year.

If you’re planning on making a charitable donation before the end of the year, it’s important to be aware of the following.

Cash isn’t always the most efficient option.

If you’re used to writing a check each year to your favorite charity, you may want to reconsider. Contributing appreciated securities, such as stocks, bonds, or mutual funds, can be a great way to both maximize your donation and lower your tax liabilities for the year. Selling stock to make a donation could trigger capital gains taxes, assuming the value of the stock has grown since you acquired it. On the other hand, if you transfer the appreciated stock in kind to the organization, you’d avoid triggering a taxable event, and the charity would receive the entire value of the stock. Because charitable organizations are tax-exempt, the charity could then sell the stock without triggering a taxable event. That’s a win-win for both you and your charity.

You may not want to give every year.

Following tax law changes that went into effect as part of the 2017 Tax Cuts and Jobs Act (TCJA), fewer taxpayers now have an incentive to itemize. And, because you must itemize in order to claim a charitable deduction, fewer individuals are eligible to receive end-of-year tax benefits for donating to charity.

So, how can you reap the benefits of donating to charity if you don’t currently itemize? One option is to use a bunching strategy. Instead of making a charitable donation every year, it may make sense to save up several years’ worth of donations and contribute them all at once.

For example, if you typically donate $4,000 per year to charities, it may make sense to instead “bunch up” those contributions and donate $20,000 every five years. The key is to make sure you donate an amount high enough that itemizing your taxes makes sense.

Your RMD can actually lower your tax liability for the year.

Many retirees dread taking required minimum distributions (RMDs) from their tax-deferred retirement accounts each year because RMDs are taxed as ordinary income. This increase in taxable income can cause you to fall into a higher tax bracket, increase your Medicare premiums, and even increase the taxable amount of your Social Security income benefits.

However, if you’re a charitably minded individual over age 70.5, you may be eligible to contribute up to $100,000 from your retirement account directly to a charity without increasing your taxable income. This type of distribution is called a qualified charitable distribution (QCD). As with many gifting strategies, there are specific requirements you must follow to ensure your RMD donation qualifies as a QCD, so consult your wealth manager for assistance.

You can make a charitable gift without designating an organization right away.

Ready to make a charitable donation but unsure what organization(s) you’d like to support? No problem. A donor-advised fund (DAF) is a great option for individuals seeking both tax benefits and control over future donations. A DAF is a 501(c)(3) charitable fund that can receive irrevocable charitable gifts from you (as the donor), and you retain control over both the timing of distributions and the organizations to which donations are made.

As with most financial planning strategies, the charitable giving strategy that’s right for you depends on multiple factors, including your age, your current financial situation, your taxable income, your goals for the future, and more.

Gene Gard, CFA, CFP, CFT-I, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

If you’re nearing or living in retirement, it’s likely you’re at least somewhat familiar with the rules surrounding required minimum distributions (RMDs). As a refresher, by April 1st following the year you reach age 73, you must start taking distributions from your tax-deferred retirement accounts, per IRS rules. Each year after that, you must continue taking RMDs or face severe penalties from the IRS.

Even if you’re already taking RMDs, you may not be familiar with all the rules surrounding them. Here, we highlight five lesser-known facts about RMDs.

RMD rules can differ for inherited IRAs.

If you inherit an IRA or another tax-deferred account from someone other than your spouse, you may be required to withdraw the full balance of the account within 10 years. This is a recent change from previous rules that allowed payments to be stretched out over the course of a beneficiary’s lifetime.

IRA RMDs can be aggregated.

If you own multiple traditional IRAs, you have the option to aggregate the RMD amount and take the total distribution from one or more accounts of your choice. This flexibility allows you to plan your withdrawal strategy in order to optimize your tax situation.

401ks and IRAs have slightly different RMD rules.

Unlike IRAs, the IRS doesn’t permit the aggregation of employer-sponsored plan RMDs. That means if you have multiple employer-sponsored retirement plans, such as 401ks and 403bs, you must take an RMD from each account based on the same life expectancy factor that applies to IRA distributions.

Another important difference between IRAs and 401ks is that if you’re still working at age 73 (and don’t own more than 5 percent of the company), you can choose to delay taking your first 401k RMD until the year in which you stop working. However, you must begin taking IRA distributions at age 73 whether or not you’re still working.

The tax withholding on RMDs is optional.

IRA providers typically withhold 10 percent of RMD distributions as a payment to the IRS. However, this payment is completely optional. If you prefer to have less or more than 10 percent withheld, simply notify your IRA provider. Your wealth manager may recommend modifying your withholding amount if it makes sense to do so based on your personal financial situation.

Regardless of the amount withheld at the time of your RMD, you’ll still be responsible for paying taxes on your distribution at your ordinary income tax rate.

The penalty for missing an RMD can be waived.

Most people know that if you fail to withdraw the required RMD amount, you’ll be assessed a 25 percent penalty on any amount you didn’t withdraw. However, did you know that penalty can be lowered or waived in certain situations?

If you take the necessary RMD by the end of the year following the year in which it was due, the penalty drops to 10 percent. The penalty may be waived completely if you’re able to establish that the missed distribution was due to reasonable error and that you’re taking steps to remedy the shortfall. In order to qualify for a waiver, you must file IRS Form 5329 and attach a letter of explanation.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.