Kitces : Strategies to reduce or delay RMD obligations

[Independent]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

Interesting. We routinely donate to charities, but I assumed a QMD wouldn't do us any good. QMDs would give us a lower gross income and equally lower itemized deductions, for the same taxable income. I wasn't aware of anything that made gross income important to us.

But, that's when we itemized deductions. We've just slipped below that line. If the standard deduction goes up by another $8,000, we'll be solidly below.

In this situation, it seems that the QMD could save us some tax dollars.

Am I getting this right?

 

[Souschef]

There are a number of factors involved. If you use the standard deduction, using the QCD will lower your taxable income. It may also impact the taxable amount of Social Security.
However, if you itemize, the impact using the QCD is to lower your AGI for medical deduction calculations.

 

[Hermit]

Does a Donor Advised Fund qualify as a Qualified Charitable Distribution?

https://www.vanguardcharitable.org/news/thinking-of-using-your-rmd-for-charitable-giving
https://www.fidelitycharitable.org/philanthropy/donating-retirement-assets-to-charity.shtml

Apparently this is not an option. It looks like you can donated directly from your IRA to 501(c)(3) organizations to meet your RMD requirements. So this may create an opportunity to use a DAF to bunch deductions prior to 70.5, then go directly from the account that requires RMDs after age 70.5.

Now to figure out is I can go direct from my inherited IRA (which has RMDs immediately) to a Qualified Charitable Deduction.

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

Looks like that is a no-go. It looks like the path to go directly from an IRA to a QCD only exists after age 70.5.

No DAF for QCDs and the 70.5 is a hard date. Send money prior to reaching 70.5 and it does not count as a QCD. It will be taxed if I am not mistaken.

 

[gerntz]

If I or DW don't need the money, Qualified Charitable Distributions may be the way to go.

I didn't realize this:

"One important caveat of using a QCD to satisfy an RMD obligation, though, is that an RMD is presumed to be satisfied by the first distribution that comes out of the IRA for the year."

I.e., once you take RMD vs. QCD, QCD isn't possible beyond the total RMD amount for the year. Net, take/do the QCD first, then balance of RMD as RMD, if any.

I do take that if RMD for a year is say $10K & you take $5K out first that $5K still is available for QCD.

 

[gerntz]

Yes, good point. Tax brackets and the Medicare MAGI brackets have to both be considered. I've been careful about that since missing the MAGI once and landing in a higher IRMAA category for a year. Now I have them both in my spending projections spreadsheet and they turn colors if they go over the limit.

Agree.

This:

"It’s also important to recognize that for those who are making more substantial gifts, it is often even more tax-efficient to donate appreciated investments (e.g., stocks, mutual funds, or ETFs with embedded gains) instead, and use the charitable donation deduction to offset the income tax consequences of taking a (separate) RMD. The reason is that while a QCD is a perfect pre-tax deduction that avoids the tax consequences of an RMD, donating investments with embedded capital gains obtains a charitable deduction to offset the tax consequences of the RMD and also permanently avoids the capital gains taxes on the investment itself!"

seems to miss that added issue.

And the cap gains taxes can be missed to a degree by gifting to peoples in the 0% LTCG brackets and by holding appreciated assets thru death.

 

[gerntz]

No DAF for QCDs and the 70.5 is a hard date. Send money prior to reaching 70.5 and it does not count as a QCD. It will be taxed if I am not mistaken.

Important in first RMD year that the QCD can't occur till after actual age of 70.5+. But I believe the RMD can be taken at any time of first RMD calendar year (and till next Apr. 15/filing date), not just after age 70.5.

 

[kramer]

I may purchase a QLAC (Qualified Longevity Annuity Contract) in my IRA in my late 60's if they are cost competitive at that time ... and I wouldn't start receiving payments until I am say, 80 years old. They offer a huge mortality credit bonus.

Since the IRS only clarified their use in IRAs around 3 years ago, these are probably just coming up as possibilities for many people and the products are probably not well developed yet.

My question is: Any idea if QLACs are cost-competitive yet? (e.g., anywhere close to actuarily neutral)

 

[street]

RMD will be a concern for but I have to realize I have delayed taxes for years. Bottom line we will have to pay taxes on that money one way or another. That article was a great read but was a lot for me to take in.

I wish I didn't have to take RMD but no way around it. LOL

 

[Souschef]

I may purchase a QLAC (Qualified Longevity Annuity Contract) in my IRA in my late 60's if they are cost competitive at that time ... and I wouldn't start receiving payments until I am say, 80 years old. They offer a huge mortality credit bonus.

Since the IRS only clarified their use in IRAs around 3 years ago, these are probably just coming up as possibilities for many people and the products are probably not well developed yet.

My question is: Any idea if QLACs are cost-competitive yet? (e.g., anywhere close to actuarily neutral)

Do not purchase a QLAC. My broker tried to get me to buy one.
Here is a link to Kitces comment:
https://www.kitces.com/blog/why-a-q...required-minimum-distribution-rmd-obligation/

 

[kramer]

Do not purchase a QLAC. My broker tried to get me to buy one.
Here is a link to Kitces comment:
https://www.kitces.com/blog/why-a-q...required-minimum-distribution-rmd-obligation/

Actually, I have found this article to be widely misinterpreted. He is addressing people who are buying a QLAC strictly to defer RMDs who wouldn't otherwise buy such an annuity. In other words, people who don't plan to spend their IRA during their lifetime.

But for people who want to purchase a longevity annuity and who don't have a legacy plan for their traditional IRA, they can be great, if you get actuarial value. In fact, quoting from this often misinterpreted article:

Ultimately, then, the key point is that if a longevity annuity is appealing to buy for retirement income and longevity hedging purposes – especially as a fixed income alternative – and the available dollars to buy it are within an IRA or other retirement account, there’s nothing wrong with using those retirement dollars and buying a QLAC, and getting the RMD deferral along the way. But if the goal is to defer RMDs in the first place, the value proposition of the QLAC isn’t very compelling

And, as he said in the article that this thread is about, if you are going to buy a deferred annuity, your traditional IRA is the place to do it.

The real question is if QLAC's are developing into competitively priced products ... if they are, they can be a great longevity hedge due to the double decker mortality credits.