The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) became law on December 20, 2019. The Secure Act made major changes to the Required Minimum Distribution (RMD) rules. If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.
Understanding the RMD rules and calculation
People who have met these age qualifications are required to take what is known as a Required Minimum Distribution from their IRA each year. When money goes into an IRA the owner receives a tax deduction. All the years after the contribution, the IRA account enjoys tax deferral. That means that the transactions within the account do not affect the owner’s tax. Upon withdrawal, income tax is paid on the amount withdrawn.
To take an RMD, you must remove a percentage of your IRA from the account and pay income (not capital gain) tax on the amount that is removed. The percentage is based on your life expectancy. It increases each year and is calculated using the December 31st balance of the previous year.
The Impact of the Standard Deduction on Charitable Giving and RMDs
Separately, the government increased the standard deduction when you file your taxes. Under United States tax law, the standard deduction is a dollar amount you may subtract from your income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction but usually choose whichever results in the lesser amount of tax payable. The standard deduction for a married couple is $24,000. If you don’t have more than $24,000 in deductions, you will take the standard deduction. That means that substantially fewer people will take itemized deductions.
Strategies for Maximizing Charitable Giving Through RMDs
If you give money to your church or a charity AND take the standard deduction AND are taking IRA Required Minimum Distributions, you are not getting the deduction for your donation. The IRS is taking the tax on it. If you want to give smarter, you can give your required minimum distribution in part or in whole to your favorite non-profit organization(s). They do not pay taxes.
If your IRA distribution is $10,000 and your top tax rate is 22%, you receive $7,800 and $2,200 goes to the IRS. If you donate that same amount from your IRA, the non-profit organization gets the full $10,000 and the IRS gets none of it. If you take itemized deductions, you can still deduct your charitable donations. Make sure to ask your accountant if you are taking itemized deductions or the standard deduction. If you need help beyond that, please get in touch with our team.