Investing in traditional style 401(k)s and deductible traditional IRAs is the most efficient way to build a substantial retirement nest egg. Thanks to tax deductions on the money you contribute and tax-deferred growth, you can put more of your money to work, and it can work harder for you during your working years.
The downside of those traditional style qualified retirement plans comes when you retire. Once you reach age 73 (increasing to 75 by 2033), you are required to take money out of your traditional retirement plans, based on your age and account balance. Those required minimum distributions are generally treated and taxed as ordinary income, which can create a surprising number of tax and cost headaches for retirees.
Fortunately for seniors who find themselves in that situation, there's a way to reduce your RMD by as much as $105,000 in 2024. That method is something known as a qualified charitable distribution. By using that approach, you can substantially reduce the additional costs you would otherwise face by being forced to remove money from your traditional retirement accounts.
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What is a qualified charitable distribution?
In essence, if you're at least age 70 and a half, you can donate money directly to a recognized charity from your IRA and have it count as a qualified charitable distribution. That type of contribution directly reduces your RMD amount, dollar-for-dollar, up to that $105,000 limit in 2024. In addition, QCD-donated money up to that limit is not included in your adjusted gross income for the year.
That combination can go a long way toward helping charitably minded high net worth seniors keep their taxes and related costs down in retirement.
Why it matters to the donor
The most obvious reason why this matters to you as a donor is because by keeping the money out of your adjusted gross income, you won't get taxed on the money you donate this way. Yet it's the add-on effects, above and beyond that basic treatment, that make QCDs so powerful for seniors.
For instance, your Social Security benefit may be taxed, and whether or not it's taxed depends on something known as your "combined income." That combined income is your adjusted gross income, plus any non-taxable interest income you earn, plus half of your Social Security benefit.
Those taxes start at combined income levels as low as $25,000 for singles, or $32,000 for those who are married filing joint returns. As much as 85% of your Social Security benefit can be taxed if your combined income is above $34,000 if you're single, or $44,000 if you're married filing a joint return. If you're married filing a separate return, your Social Security is likely taxed regardless of your combined income.
In addition to those taxes on your Social Security benefits, your Medicare Part B and Part D premiums are also based on your income level. Medicare uses a lookback window for those premium adjustments, so your 2024 premiums are based on your 2022 income. Those adjustments start when your adjusted gross income is as low as $103,000 for those filing returns as singles, or $206,000 for those filing joint returns.
The adjustment starts at an additional $69.90 per month for Part B and $12.90 per month for Part D. For singles and those married filing jointly, it can get as high as $412.10 per month for Part B and $81.00 per month for Part D. If you're married filing separately, the maximum adjustment is $419.30 for Part B and $81.00 for Part D.
Get started now
As 2024 gets started, it brings with it a whole new year of income, taxes, and related costs. If you'll be 73 or older in the year, it also brings with it a new obligation to take a required minimum distribution from any traditional retirement accounts you may have.
The earlier in the year you plan for things, the easier it is to put a qualified charitable distribution in place to help ease what could otherwise turn into a substantial cost and tax burden for you. So make today the day you get your plan in place to make the most of what 2024 has to offer you.
