A tax strategy that offers substantial advantages to affluent retirees is back. Taxpayers who are 70 or older can once again make a Qualified Charitable Deduction (QCD) as a way to offset the taxes incurred when they take required minimum distributions (RMD) from a defined benefit plan.
To understand the significance of the change, a bit of an explanation is in order.
Once an individual reaches the age of 72, the law requires them to take RMDs from their IRAs, 401(k)s and 403(b)s. The size of the RMD depends on the balance in an account and the age of the retiree.
QCDs offer considerable tax savings because they reduce a retiree’s taxable income by offsetting those RMDs.
For qualified retirees, QCDs are “as close to a free tax lunch as you can get these days,” according to Washington Post personal-finance columnist Allan Sloan.
Last year, however, the QCDs weren’t a valuable tax strategy because they weren’t necessary. The Cares Act of 2020 cancelled the minimum distribution requirement. But this year the RMD is back, returning QCDs to their premier spot in tax planning.
That’s good news for charitable organizations, affluent retirees, and the financial pros who advise them both.
"Not only is any QCD tax free, it also counts toward any annual RMD, saving federal (and sometimes state) income tax," Kenneth F. Robinson, JD, CFP®, founder and president of Practical Financial Planning in Rocky River, Ohio, said in a news release from the Alliance of Comprehensive Planners (ACP).
“QCDs save hundreds or thousands in tax liability and are clearly better for many taxpayers than taking the money out of the IRA and then writing a check to the charity."
