Kelly Bullis
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 already 73 or older. Now Congress 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 as of the end of the prior year (in this case Dec. 31, 2024), dividing it by the IRS life expectancy table. Can you imagine there are two different tables? Of course, even in coming up with a life expectancy, the IRS has to make it complicated. Either you use the table I as a single individual and/or your spouse is less than 10 years younger than you, or you use Table II if you are married and your spouse is more than 10 years younger than you.
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 2025 will be $60,976 ($1 million / 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 year, your RMD, added to your other MAGI, now pushes you to $220,976 of MAGI. Making $20,976 of your passive income (interest, dividends, rentals) subject to the 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 gave $15,000 every year to your church, but up to now, it hasn’t helped you since you take the standard deduction?
Congratulations, you are a winner! You can have your IRA administrator pay your church directly the $15,000, reducing your taxable RMD by that amount. That just saved you $4,864 in tax 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.
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. On the web at BullisAndCo.com. Also on Facebook.