Q. Last year was my first year to take a required minimum distribution from my IRA, which I did on the advice of my broker in June. This year he wants me to take my required minimum distribution in June again, but I’d like to wait to see if Congress is going to allow the required minimum distribution to be made to a charity. I understand they allowed it for 2012 but didn’t let anybody know until late 2012 when most people had taken their required minimum distributions. Is there anything magic about taking my required minimum distribution in June and if not, is there any harm in waiting until the last day of the year? If they allow the charitable deduction from my IRA, how does this work and do I still get a charitable deduction for the amount donated?
The opportunity to make a charitable deduction from an IRA and have it count toward your required minimum distribution was extended for a two-year period. The extension was part of the American Taxpayer Relief Act of 2012 which was signed into law Jan. 2, 2013. Some provisions were included to allow individuals to take advantage of this extension for 2012 but action had to be taken in January, 2013 so I’m not going to discuss those; I doubt many taxpayers benefited from this extension in 2012.
You can go ahead and decide if you want to take advantage of this temporary opportunity for tax year 2013. The extension allows eligible IRA owners to make what is called a qualified charitable distribution. The qualified charitable distribution must be a transfer directly from an IRA to a qualified charity. The qualified charitable distribution will be excluded from your taxable income.
If you take an IRA distribution and subsequently write a check to the charity, the distribution will be included in your taxable income even if the amounts distributed and donated are the same. This provision is currently only available for tax year 2013. You won’t get a tax deduction on the amount donated but you won’t claim that amount as taxable income.
IRA owners who have attained age 70 ½ will be permitted to make qualified charitable distributions of up to $100,000. If you have attained this age and are committed to making future charitable gifts it may make sense to take advantage of this tax law and accelerate your future commitments. You should check with your financial or tax advisor to determine if the acceleration of charitable giving of up to $100,000 this year from your IRA will be of more benefit than leaving the money invested in your IRA. The amount of your future required minimum distributions, need for this money to meet expenses, your tax bracket with and without the distribution, anticipated rate of return in your IRA, whether your IRA contains any after-tax contributions and other issues need to be taken into consideration.
Normal required minimum distributions increase adjusted gross income which may cause you to lose some tax benefits such as: reduction of itemized deductions, reduction of passive loss deductions, increased Medicare premiums and/or causing a greater portion of your Security benefits to be taxed. By making a qualified charitable distribution, your AGI will not be increased and some of these tax benefits may not be lost.
Required minimum distributions may be taken at any time during the year and in any amounts as long as the total is distributed by Dec. 31. Several years ago a client passed away between Thanksgiving and the end of the year and I now suggest that required minimum distributions be taken before Nov. 15. Even after death, if the required minimum distribution is not taken, it is subject to the 50 percent IRS penalty. Coordinating the necessary paperwork with my client’s children who lived in multiple states and were the beneficiaries of her IRA while they were grieving and during the holiday season to make sure the required minimum distribution was satisfied was difficult.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624