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Here’s the One-Word Secret to Lowering the Tax Hit on your IRA RMDs


Everybody hates being told what to do, and retirement investors hate it even more when being told what to do comes with a hefty tax bill – which brings us to the IRS rule known as required minimum withdrawals, or RMDs.

RMDs are the tax agency’s way of getting its hands on the money that’s been quietly growing tax-deferred in your Individual Retirement Account, as well as a number of workplace retirement accounts where your contributions are tax-free until you start taking money out. After you get to age 72 ( 70.5 if you were born before July 1, 1949), the tax man runs out of patience and demands that retirement savers start cashing in a certain percentage of their nest eggs to be taxed.

But wait, it gets worse: Besides the normally expected tax hit, an RMD can push you into a higher tax bracket, meaning you give up even more of what you withdraw. An RMD also can raise your taxable income to the point where your Social Security benefits become subject to tax, and can raise your Medicare premiums, as well.

RMDs were waived by the IRS for the 2020 tax year as part of pandemic relief, but they came back in 2021 and there’s no sign of them being put on hold for 2022.

If you’re feeling generous, however, there is one move you can make to keep your RMD from being taxed at all, as well as prevent the distribution from counting toward your total taxable income.

A financial advisor can help you strategize to your tax liabilities on retirement income. 

Using a QCD to Lower Your RMD Taxes

The one-word secret? Charity. By using a qualified charitable distribution, or QCD. you can contribute up to $100,000 to certain charities and pay 0% tax on your withdrawal. Besides avoiding income tax on your withdrawal, you also stretch your donations by giving pre-tax money to your charitable causes. Finally, a QCD can help lower your future RMDs, which are reduced every year based on your life expectancy.

The QCD also allows taxpayers using the increased standard deduction to receive a charitable deduction even though they aren’t itemizing. In fact, the QCD can be better than an itemized deduction because it can lower your adjusted gross income, which is a basis for other deductions and credits.

The QCD maneuver is only available through IRAs and IRA-based retirement plans, such as SEP accounts and Simple IRAs where the owner is no longer making contributions. You can’t make a contribution from a 401(k), 403(b) or other employer-sponsored retirement plans.

Because this is all handled by the IRS, there naturally are several limitations and requirements. Your QCD must come from taxable money in your IRA, which excludes any contributions from after-tax rollovers or nondeductible contributions. The contribution must be made directly to the charity from your account, and the money must go to an IRS-approved 501(c)(3) charity.

Another tax wrinkle to pay attention to is that the IRS counts the first IRA distributions in a tax year towards your RMD, so you want to make your QCDs early in the year if you get IRA distributions on a quarterly or monthly schedule. If you’ve taken an RMD, you can’t go back and claim it as a QCD or offset it with a QCD contribution. Only the directly contributed money counts.

Before taking a QCD, discuss your withdrawal plans with a tax professional.

Of course, you won’t need to pay any taxes on an RMD if your total taxable income remains below the IRS filing minimums, which range from $12,550 to $27,800, depending on your age and filing status.

The Bottom Line

Making a qualified charitable distribution, or QCD, from an IRA to a qualifying charity is one way to lower your tax bill. This is an even more impactful more than a direct tax-deductible contribution, because you don’t get credit for a charitable donation if you don’t itemize your deductions.

Be sure to make a note of your QCD on your income tax return. Simply add the amount you donated to the total amount of IRA distributions you took. Were all of your distributions QCDs? If so, you can just indicate that the taxable amount is zero and enter “QCD.”

Tax Tips

  • A financial advisor can help you with all tax issues. The SmartAsset matching tool can help you find a financial advisor to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
  • Filing your taxes each year can be a pain, but it helps to know what you might be looking at in terms of a return before you actually go to file.To see what your tax return might look like, use SmartAsset’s free tax return calculator.

Photo credit: © Dodonov, © Tabuchi