For any tax-deferred retirement account (such as a Traditional IRA, 401(k), or 403(b)), the IRS requires account holders to take an annual distribution once they reach age 73. The formula for determining the amount of the distribution is based on the account holder’s age and account balance at the end of the previous year. Since the distribution is coming for a tax-deferred account, they are taxable in the year that the distribution is taken. In the event that an RMD is missed, the IRS imposes a steep penalty. Make sure to plan wisely for your RMD! If you’re in RMD phase and don’t need the income that you’re required to take, consider making a qualified charitable distribution (QCD). The IRS allows taxpayers over the age of 70.5 to make a QCD. The account holder can gift funds directly from his/her retirement account to their church or charity of choice. This satisfies the requirement to have the funds come out of their account, and the taxpayer doesn’t have to include the QCD as taxable income since he/she never took custody of the funds. It’s a highly efficient way to utilize the RMD. Everyone wins with a well-executed QCD! Make sure to discuss the strategy with your financial advisor and accountant to ensure that the process goes smoothly.
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