IRA Cheat Sheet: How to Avoid RMD Penalties, Minimize Taxes Before Year-End

>6. Consider a QCD.

Clients can also take steps before year end to minimize the tax implications of RMDs. If the client is already obligated to take RMDs and doesn’t need the funds, they can instead transfer the RMD amount to a qualified charity and avoid paying taxes on the RMD amount.

Qualified charitable distributions can only be made from a traditional IRA or an inherited IRA. The client can transfer up to $100,000 in IRA funds per year to charity. The $100,000 cap is a per-person cap, so married taxpayers can direct up to $200,000 to charity each year so long as each spouse has their own IRA.

If a client is over age 70 ½, a transfer made directly (via a trustee-to-trustee transfer) from the client’s IRA to a qualified charity (generally, 501(c)(3) organizations, but not donor-advised funds, foundations or charitable gift annuities) will count toward the client’s RMD and is entirely nontaxable. Beneficiaries who are over age 70 ½ are also permitted to make QCDs, so long as the beneficiary also meets all other basic requirements for the transaction.

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