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Understanding Your Responsibilities and Options 

During your working years, you likely saved pre-tax dollars in a retirement account, such as an IRA or 401(k), which grew tax-free. As you've transitioned into retirement, it’s important to understand how these accounts can be utilized to meet your goals while managing the responsibilities that come with them. 

With an IRA, you have several options: supplement your income, leave a legacy to your heirs, or support charitable causes. However, there are certain responsibilities that come with IRAs.

One of the most important is taking a Required Minimum Distribution (RMD) each year. Legislation in 2022 called the SECURE Act 2.0 pushed back the RMD age to 73.

The government requires these withdrawals to ensure you eventually pay taxes on the money that was set aside tax-free. These required withdrawals are taxed as ordinary income, which could increase your tax burden.

Lowering your Taxable income with QDCs 

One way to reduce your taxable income is by making a Qualified Charitable Distribution (QCD) from your IRA. That’s because a QCD counts toward your annual RMD.

For example, if you’re required to withdraw $10,000 this year, you could donate $6,000 to a nonprofit through a QCD. The remaining $4,000 would count as taxable income, significantly lowering your tax bill. 

How QCDs Work 

Here’s how you can use QCDs to make a meaningful impact: 

• Eligibility: You’re eligible to make a QCD if you’re at least 70½ years old at the time of the distribution, even if you’re not yet 73 and required to take RMDs.
• Direct Transfer Required: The funds must go directly from your IRA to a qualified nonprofit. You can’t withdraw the money first, then donate and exclude it from your income. 
• Eligible Accounts: QCDs can only be made from IRAs, not a 401(k) or 403(b). Most commonly, QCDs withdrawn from traditional IRAs offer the greatest tax benefit.
• Tax Benefits: A QCD excludes the donated amount from your taxable income, which reduces your Adjusted Gross Income (AGI). The tax benefits that come from reducing AGI, can have far-reaching effects for different aspects of your tax situation. This could include a lower amount of Social Security benefits being taxed and the reduction of income-based Medicare premiums.
• Counts Toward RMD: The QCD can satisfy your entire RMD requirement for the year, if it is equal to, or greater than what you’re required to withdraw. This means your mandatory distribution could be entirely excluded from your taxable income.
• Qualified Charities: The donation must go to a 501(c)(3) nonprofit organization. Donor-advised funds and private foundations generally don’t qualify. 

Making an Impact in Your Community and Taxable Income

QCDs offer several potential advantages for IRA owners who want to do good. Is it right for you? It depends. Consider the following:

• Do you have to withdraw a required amount but don’t need the funds to cover normal expenses?
• Would taking the RMD increase your taxable income?
• Should you reduce your IRA balance to lower future RMD amounts to optimize your tax situation? If so, are you at least 70 ½?
• Will you make donations directly to a charity instead of a foundation or donor advised fund?
• What does your tax professional, or CPA recommend?

How to Make a QCD 

At Baker Boyer Wealth Management and Trust, we make it easy to direct your funds to the charities you care about: 

1. Choose Your Charity: Use the IRS Tax Exempt Organization Search Tool to confirm the nonprofit is a qualified 501(c)(3) organization. 
2. Direct the Transfer: We’ll send the check directly to the nonprofit on your behalf or make it payable to the charity for you to deliver. If Wealth Management provides the check to the nonprofit, a letter explaining the reason for the donation will be mailed with it.
3. Keep Documentation: You’ll receive a copy of the letter we send with the check to the charity. Additionally, you should get a receipt once your donation is processed. If you don’t, it’s essential to contact the nonprofit and request one. Keeping these items with your other tax documents is important.
4. Coordinate with Your CPA: We can work with your tax professional to integrate QCDs into your broader tax strategy. 

The Choice Is Yours

Baker Boyer Wealth Management can simplify the complexity of retirement accounts and their required withdrawals. Balancing your unique financial needs and generosity, we can assist you in supporting charitable causes while potentially lowering your tax burden – making your retirement savings work smarter for you and your community.