Required minimum distributions, or RMDs, can be confusing for many people with retirement plans. Knowing exactly what they are and how they affect your finances over a certain age will help you prepare and handle them in the best way for your unique situation.

If you are over age 70 1/2, you may have received a letter from the administrator of your retirement account telling you the amount of RMDs you are required to take in 2020. Know that these distributions are taxable income, you may be looking for a way to reduce your income tax burden. When you are receiving social security benefits and using Medicare for your health benefits, your other income plays a big part in determining how much of your social security benefits are taxed. It can also have an effect on your Medicare premiums.

Some years ago, Congress changed the tax law to allow folks who are subject to required minimum distributions to have a portion of those distributions paid directly to a qualified charity. These qualified charitable donations are not included in the donor’s taxable income. With the increase in the standard deduction making it more difficult for many taxpayers to itemize, this provision provides a way for charitably-minded taxpayers to reduce their taxable income without having to itemize.

To help explain this provision, let’s look at an example. A single person over the age of 70 1/2 has required minimum distributions of $15,000 per year, receives $25,000 in Social Security benefits, and has $10,000 of W-2 income. If this taxpayer routinely gives $5,000 to charity, he could direct the administrator of his retirement account to send $5,000 directly to the charity and the remaining $10,000 to the taxpayer. This action would reduce the taxpayer’s taxable income in two ways:

  • The $5,000 given directly to the qualified charity would not be included in the taxpayer’s income.
  • The reduced income would also reduce the amount of taxable Social Security benefits.

This is just one example of a way a financial professional can help you manage your RMDs so you can live the best lifestyle and achieve your financial goals. Have questions? Please reach out to us if you would like to learn more about this tax provision or would like to discuss any other financial matters.

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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