Dear Rick:
Last year I finally retired. Income from my pension and Social Security covers my wife’s and my living expenses. I turned 70½ this year and I’ve been told that I don’t have to take a minimum required distribution this year; I can wait until next year. My feeling is since I don’t need the money, I should wait. My question is, is there any downside for me? My next question deals with charitable contributions. My wife and I have been generous to charities and give every year. Typically, we make our charitable contributions in October. Last year when we made our charitable contributions I noticed on our tax return that it made no difference because we took the standard deduction. My question is, is there anything that I can do with my charitable contribution that would give me more of a tax break?

Thanks,
Daniel

Dear Daniel:
First, congratulations on achieving the American Dream! I say you achieved the American Dream because you are retired and you have the economic means to maintain your quality of life. With regard to the minimum required distribution, you are allowed to delay the first year’s distribution until April 1st of the preceding year. Therefore, since 2017 is the year that you turned 70½ you can delay this distribution until April 1, 2018. However, there is an issue that you must consider.

When you withdraw money from an IRA it is taxed as ordinary income. Therefore, if you delayed your first distribution until 2018, in 2018 you will have two distributions. You will have the distribution that you delayed from 2017 and, in addition, you would still be required to take a 2018 distribution. As a result, taking two distributions in one year can throw you into a higher tax bracket and it could cause your Medicare B Premiums to increase. Therefore, before you decide to delay this year’s minimum required distribution, I would calculate what the impact on your taxes would be in 2018.

Since you do not itemize your deductions and take the standard deduction, you’re correct that charitable contributions will not impact your taxes. However, there is something you can do that will have a positive tax implication for you. You can donate all or a portion of your minimum required distribution. If you donate your minimum required distribution, even though you still cannot deduct it on your tax return, you also don’t have to include the income from the minimum required distribution. Therefore, in effect, you are getting a tax break for the charitable contribution.

For example, if you are going to make a $2,500 charitable contribution and your minimum required distribution was $2,500, if you just wrote a check to a charity you would still not be able to deduct the contribution and the $2,500 you receive from the minimum required distribution would be subject to tax. On the other hand, if you directly donate your minimum required distribution to charity, you would not have to include the $2,500 as income.

The key to the aforementioned transaction is to make sure the check is made payable to the charity. If they write a check to you and you sign the check over to the charity, that doesn’t qualify. The key is the check must be issued to the Charity from your IRA. This is a relatively simple transaction; however, it is important to dot the I’s and cross the T’s. My recommendation is that you contact your IRA custodian as soon as possible so they can get the necessary paperwork for you. Remember, this transaction must be completed by the end of the year. In addition, you don’t have to donate your entire distribution; you can donate any portion of it.

For those of you who are charitable in nature and who do make charitable contributions, by donating your required distribution, it can be a win-win situation in that the charity is getting the money and you are avoiding taxes on your minimum required distribution.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com