An Idea to Make Your IRA RMD Save You Tax

Ok, you’re feeling pretty good about your long-term savings habit and now have a rather decent IRA balance.  You’re turning 73 or you’re already 73 or older.  Now Congress has set up a simple rule to force you to start reducing your IRA.  They just can’t stand the idea of letting you keep growing that IRA until some future date.  It’s called Required Minimum Distribution or RMD for short.

Basically, the RMD is computed by taking the fair market value (FMV) of all your IRAs at the end of the prior year (in this case December 31, 2025), dividing it by the IRS life expectancy table. 

Let’s say you have $1 million FMV in your IRA and you use Table I.  You are single and just now turned 73 years old.  The IRS Table I says your current life expectancy is 16.4 years.  Thus, your RMD for 2026 will be $60,976.  ($1,000,000 / 16.4) Let us further imagine that you have $30,000 of interest/dividend income as well as another $30,000 from net rental activities.  Let’s also say you have $70,000 in pension income and another $30,000 in taxable social security.  Thus, your total Modified Adjusted Gross Income (MAGI) is $160,000.  Up to now, you have been flying in under the dreaded Obamacare Net Investment Income Tax (NIIT) which kicks in when your MAGI hits $200,000.  But this coming year, your RMD, added to your other MAGI, will now push you to $220,976 of MAGI.  Making $20,976 of your passive income (interest, dividends, rentals) subject to the dreaded 3.8% NIIT.  That results in you paying a NIIT of $797.  That is on top of the extra Federal Income tax of $15,328 that your RMD has caused.  Thus, total tax on your $60,976 in RMD is $16,125.  (Basically 26.44% goes to tax!)

So, what if you were used to giving $15,000 every year to your church, but up to now, it hasn’t helped you since you take the standard deduction?

Congratulations, you have an option to choose!  You can have your IRA administrator pay your church directly the $15,000, reducing your taxable RMD by that amount.  That just saved you about $4,800 in federal income tax and NIIT combined, and you didn’t change anything to your net cash flow before tax.  You just arranged your affairs to reduce the amount of tax you pay!  And there is nothing the IRS can do about it.

This whole tax concept is called a “Qualified Charitable Distribution.”  Unfortunately, it is only for IRAs, not other types of retirement.  You can give up to $108,000 to a qualified charity if you are 70 ½ or older through your IRA RMD by December 31, 2026, to take advantage of this great tax saving concept.

So go out there and be charitable with your RMD and SAVE TAX while you’re at it!

Have you heard?  Proverbs 11:24 says, “One gives freely, yet grows all the richer; another withholds what he should give and only suffers want.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.