MtM Financial Advisor, Alyssa Young, wrote this column for publication in the August 2021 Holy Cross Lutheran Church newsletter.
Learn How Helping Your Church Can Lower Your Income Taxes
The IRS requires retired folks to begin withdrawing money from their retirement accounts. These transactions are called required minimum distributions (RMDs). People who turned 70½ before Jan. 1, 2020, started taking out the minimum annual requirement when they reached that age. Now, you can wait until after your 72nd birthday. The amount of money you must withdraw is determined using an IRS table and worksheet, based on your age and the balance in your account as of Dec. 31 of the previous year.
You will pay income taxes on the money you withdraw from your retirement account, such as an IRA or a 401k. (Roth IRA withdrawals are tax-free.) So, for some who don’t need this money—or perhaps don’t require the full amount of the RMDs to pay their living expenses—the tax bill is a financial burden they’d like to avoid. There’s a way to comply with this IRS requirement while also helping your favorite charitable organization, such as your church, and reducing your income tax bill at the same time: It’s called a qualified charitable distribution (QCD).
QCDs allow you to send your RMDs, or a portion of them, to the charity of your choice. Money withdrawn from your retirement account that is paid directly to a charity satisfies the RMD requirement—but does not get counted in your gross income for the year. That means you don’t need to pay taxes on it! (Nor does the charity, as long as it’s a public organization that’s eligible for charitable contribution deductions under regular IRS rules.)
It’s easy to do. Your retirement account custodian can route the money straight to the church, or you can receive a check from the account custodian made payable to the church. Regardless of the amount of your RMD, the maximum amount each taxpayer can donate via QCDs is $100,000 per year.
Here’s how to report QCDs on your income tax return. When you receive the Form 1099-R that shows all of your distributions from your retirement account(s), it will include the money you donated to charity. On IRS Form 1040 Line 4a, you’ll enter the total distributions, but you should subtract the QCDs from that amount to provide the amount of taxable distributions on Line 4b.
If you have any questions about how to set up a QCD, MtM Financial Group is happy to help.
Alyssa Young, a Holy Cross member for more than 30 years, is a financial advisor at MtM Financial Group in Lower Nazareth Township. You can reach her at 610-746-7007 or by email at [email protected].
Securities offered through The Strategic Financial Alliance Inc. (SFA), Member FINRA, SIPC. Advisory and tax services offered through MtM Financial Group, LLC which is otherwise unaffiliated with SFA. 4505 Hanoverville Road, Bethlehem, PA 18020. SFA does not provide tax or legal advice. Supervising office 888-447-2444.