by Burt Hutchinson, CPA, CFP®

We all know it's a good idea to regularly review your investment statements. Keeping track of your investments helps you stay informed about their performance, ensures that your portfolio aligns with your financial goals, and allows you to make any necessary adjustments. In 2023, the S&P 500—using Vanguard’s 500 Index Fund Admiral Shares (VFIAX) as our benchmark—generated a 26.24% return and, as of August 26, 2024, a 18.79% return for 20241. While we are all happy to have the stock market moving in a positive direction, if we don’t plan accordingly, we could face unexpected consequences.

For those who have reached the age of required minimum distributions (RMD), a rising market can also mean larger RMDs in the coming year. What is an RMD? This is the minimum amount that you have to withdraw from your qualified accounts, such as traditional IRAs, 401(k)s, and other retirement plans. The goal of RMDs is to ensure that you eventually pay taxes on the money you’ve saved in these accounts. Roth IRAs do not have RMDs. 

RMDs are calculated based on the balance of your retirement accounts at the end of the year and your life expectancy. This means that as you grow older, and as the market rises higher, the RMD for 2025 could be significantly higher than 2024. The higher income can lead to higher taxes, loss of deductions and higher Medicare premiums for those who don’t plan ahead.

One way to reduce the tax impact of an RMD is by making a Qualified Charitable Distribution (QCD). A QCD is a direct contribution to a qualified 501(c)(3) organization like your church, alma mater, or favorite charity. You can make a QCD of up to $100,000 per year. If you’re married and both you and your spouse are eligible, each of you can make separate QCDs of up to $100,000 from your respective IRAs.

Here’s how it works and why it might be beneficial:

• Qualified Charitable Distributions satisfy your RMD: If you’re subject to RMDs, a QCD can be used to satisfy some (or all) of your RMDs for the year. This means the distribution counts towards your RMD, but it isn’t taxed as income.

• QCDs can lower your tax bracket: By reducing your adjusted gross income (AGI), you might fall into a lower tax bracket, potentially decreasing your overall tax liability.

• A lower AGI can enhance other deductions: This includes certain tax credits and deductions that are based on AGI, such as medical deductions. 

• QCDs are not standard tax deductions: Unlike charitable contributions you might claim as itemized deductions on your tax return, a QCD directly reduces your AGI. For those who no longer itemize, this creates a tax benefit from your charitable gift.

• QCDs can lower your Medicare premiums: Reducing your AGI can also help if you're subject to income-based adjustments for Medicare premiums, potentially lowering your costs.

   

In essence, a QCD is a tool that helps you fulfill your charitable goals while potentially reducing your taxable income, making it a useful strategy for managing taxes and supporting causes you care about.

Disclaimer:

The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Past performance is no guarantee of future results.