Should RMDs really scare you?

[gerntz]

Quote:

Originally Posted by Brat DH and I are neck-deep in RMD world. This year RMDs are suspended. I am converting as much as I can while staying in the 22% bracket because I believe that income tax rates will increase in the foreseeable future. I pay income tax out of our checking account, not out of IRA money to maximize the benefit. Once RMDs kick back in I can convert only in excess of our RMDs. Ouch!

Which is why if you do QCD's, put them off till next year when you'll have RMD's that the QCD's can offset.

[gerntz]

" Quote:
Have any of you hit RMDs and having remorse for not taking a more aggressive approach before then?"

Well, tax rates were higher before 2017 such that RC's were not as advantageous, and by 2018 we were into SS which reduce our room a fair amount, and by 2019 we were also into RMD's, so not much of a window. I suppose we could have taken SS at an earlier age, but there was a security concern with that.

[Time2]

Trying to reduce expenditures by minimizing taxes and then doing QCDs isn't on the same playing field.

[harllee]

Quote:

Originally Posted by gerntz They're collectively quite humorous to me.

I still don't understand. DH and I do charitable giving to causes that are very important to us. Next year DH will be 70.5 so we will do those charitable gifts out of his IRA. We will probably increase our charitable giving since we will be able to use his IRA. This will reduce his RMD to a level that will not impact our taxable income very much. We have plenty of money to live on outside the IRA. Is there some reason we should not do it this way?

[Souschef]

Quote:

Originally Posted by DawgMan Do I understand this correctly. By example, if my RMD w/o setting up a QCD at say age 72 is $500K, then I pay taxes on the $500K. If I set up a $100K QCD, then I pay taxes on $400K? In both cases, $500K comes out of my account.

What you said is correct as far as it goes. If you take out $500K, and you are in the 22% bracket, you will pay $110K in taxes on it.
If you do a QCD for $100K you pay taxes in $400K, at 22% bracket, your tax will be $88K, saving you $22K in taxes.
Also, the higher the tax bracket, the more the savings.

[CRLLS]

Quote:

Originally Posted by Souschef What you said is correct as far as it goes. If you take out $500K, and you are in the 22% bracket, you will pay $110K in taxes on it. If you do a QCD for $100K you pay taxes in $400K, at 22% bracket, your tax will be $88K, saving you $22K in taxes. Also, the higher the tax bracket, the more the savings.

Wouldn't that 100K be normally taxed at the 32% or 35% tax bracket? I am assuming the top end of the $400K would force that tax bracket. If so, the tax savings would be much greater than $22K.

[Souschef]

Quote:

Originally Posted by CRLLS Wouldn't that 100K be normally taxed at the 32% or 35% tax bracket? I am assuming the top end of the $400K would force that tax bracket. If so, the tax savings would be much greater than $22K.

That is correct. Frankly, I was too lazy to look up the higher brackets. At 35% the savings would be $35K

[explanade]

You save money on taxes but you gave away $100k to get a large charitable deduction?

[SecondCor521]

Quote:

Originally Posted by explanade You save money on taxes but you gave away $100k to get a large charitable deduction?

Right. QCDs are only useful if you were going to give the money away anyways.

They are useful because the $100K gets excluded from AGI and thus does not impact any other AGI-dependent tax things (like IRMAA). I'm fairly certain that QCDs are also not subject to any limitations that might otherwise be imposed on Schedule A, such as Pease limitations and percent of AGI limitations for charitable contributions.

(ETA: Technically you don't even get a deduction; you just get to exclude it from AGI, which is sort of the same thing but not exactly, due to the above.)

[audreyh1]

Exclusion from AGI is super useful. It means that it doesn’t count towards NIIT or AMT as well as lowering regular taxes. Schedule A itemized deductions help with regular taxes and the charitable portion reduces AMT, but doesn’t help with NIIT, as well as being subject to various limitations.

But yeah, unless charitable gifting was already a priority, QCDs wouldn’t make sense. It’s just the best way to do gifting tax-wise with the possible exception of highly appreciated securities. The latter is still subject to certain limitations on Schedule A.

Also donation of highly appreciated securities has a benefit where they can be contributed to a DAF, where QCDs cannot. That’s more of a convenience thing.

[harllee]

Quote:

Originally Posted by explanade You save money on taxes but you gave away $100k to get a large charitable deduction?

True--if you are not charitably inclined then you probably would not want to do the charitable gift from the IRA just to save the taxes. It makes sense for me because I give a sizable amount to charity anyway. In fact I have made some additional pledges to charitable causes that are important to me with the caveat they have to wait until we are age 70.5 to receive them out of our IRAs. Supporting charities is an important part of our lives.

[audreyh1]

DH sees it as how much more we can give the charity if we do it as a QCD.

[misanman]

Quote:

if my RMD w/o setting up a QCD

Minor point - I don't think in terms of "setting up a QCD". You just make a QCD. My experience is with Fidelity but I believe others would be similar. Would take 5 minutes, 10 minutes max, to do it.

[RunningBum]

Quote:

Originally Posted by audreyh1 DH sees it as how much more we can give the charity if we do it as a QCD.

That makes a lot of sense. If you decide you don't need your RMD at all and will give it to charity, you have two choices. You could withdraw the money, pay the income tax, and give the remainder to the charity. Or you could give the whole amount to the charity. The latter results in a larger donation with no financial impact to you since you were going to give it away anyway.

[sanfanciscotreat]

Quote:

Originally Posted by gerntz I can make coffee with 2 minutes effort. Starbucks is at least 10 minutes. Starbucks is not worth 8 minutes of my life.

Eight minutes is the least cost. Driving there when it is only three miles, six miles round trip costs at least $3.

[explanade]

Quote:

Originally Posted by harllee True--if you are not charitably inclined then you probably would not want to do the charitable gift from the IRA just to save the taxes. It makes sense for me because I give a sizable amount to charity anyway. In fact I have made some additional pledges to charitable causes that are important to me with the caveat they have to wait until we are age 70.5 to receive them out of our IRAs. Supporting charities is an important part of our lives.

I mean the example discussed was very generous, 20% of an IRA balance and $100k.

Maybe it would make more sense in the "Blow that dough!" thread instead.

[audreyh1]

Quote:

Originally Posted by explanade I mean the example discussed was very generous, 20% of an IRA balance and $100k. Maybe it would make more sense in the "Blow that dough!" thread instead.

That was just using an extreme example to check his understanding.

[RunningBum]

Quote:

Originally Posted by gerntz Which is why if you do QCD's, put them off till next year when you'll have RMD's that the QCD's can offset.

QCD's are still allowed this year if you are at least 70.5, up to $100K.

[MarieIG]

Had never heard of this, before I read about it on this site. Now I see have to wait until I reach 70.5. Wish it was sooner.

[harllee]

Quote:

Originally Posted by MarieIG Had never heard of this, before I read about it on this site. Now I see have to wait until I reach 70.5. Wish it was sooner.

Yes, you have to wait until age 70.5 to make charitable gifts directly from an IRA. If you want to make charitable gifts anyway doing them from an IRA after 70.5 works out great in my opinion. My DH turns 70.5 soon and we have told several charities we have to put off our gifts to them until he hits that 70.5 mark.