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An IRA tax hack for retirees 70 and over

Ned Ehrbar
Producer

With the new tax law changes all but wiping out itemized deductions, filers are looking for any ways they can to catch a break. If you’re a retiree with an IRA or 401(k), there is one thing you can do.  

Account holders over the age of 70 1/2 are subject to RMDs — required minimum distributions — which is the amount they’re obligated to withdraw from their tax-deferred retirement accounts and pay taxes on. “The government wants its money back,” retirement expert Ed Slott tells Yahoo Finance. “It’s their way of saying, ‘We gave you this tax break all these years, but now time’s up, we want our money back and you have to start taking the money out.”

If you don’t satisfy the requirement, you’ll face a 50% penalty on the amount you were supposed to withdraw.

But, as Slott explains, there is a way to both satisfy your RMD and in effect receive a kind of tax deduction the new law eliminated.

“There’s a special tax break called QCDs — qualified charitable distributions — that are more popular than ever this year because of the new tax law,” Slott says. “You won’t be getting your charitable deductions, but there’s a special provision now where they could take their charitable deductions right out of their IRA. It’s excluded from income and it counts towards your required minimum distribution.”

By transferring the amount of your RMD directly from your account to a qualified charity, you will cancel out the tax burden of the RMD by making your disbursement tax-deductible.

For example, if you normally contribute $10,000 to charity each year, and the RMD for your IRA is also $10,000, your charitable contribution will in effect be a deduction because taking it from your IRA will exclude it from your income, so it won’t be taxed.

“Let’s say you’re in one of the new tax brackets like the 24% bracket,” Slott says. “You would save actually $2,400 in taxes giving the same amount but just doing it this way.”

Slott advises this approach only for IRA owners who were planning to donate to charity anyway.

“I never say to give money just for a deduction, because under that theory you should give everything away and then you’ll never have any taxes,” he says. “But if you’re a big giver anyway, do it that way and it will lower your IRA balance and it will lower the tax you pay on your RMDs. 

Follow Ned Ehrbar on Twitter.

This story was originally published on December 20, 2018. 

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