Contributing your RMD – (Q & A)

Oct 2015


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Q Dear Rick:

I have a tax question that I hope you can help me with. Last year was the first year that I was required to take a distribution from my IRA. As opposed to taking the distribution I was told that I could donate the amount to charity, which I did. I wanted to do the same thing this year; however, my IRA custodian told me that the law that allowed this was not extended for 2015. My custodian said that there is a strong possibility that it will be extended for this year but they can make no promises. My first question is what would happen if I had my distribution paid to the charity and the law is not extended; would I be penalized or anything of that nature? My second question is do you think it makes sense for people to do this or does it make sense just to write a check to the charity?

A Dear Amber:
Your custodian is correct in that the provision of the law that allows someone to donate their required minimum distribution to a charity has not yet been authorized for 2015. Unfortunately, this should not come as a surprise to anyone. What seems to happen year after year is that some time in mid to the end of December, the President and Congress re-authorize this provision. You would think that because required minimum distributions must be completed by the end of the calendar year, they would want to give taxpayers more time once the law is authorized, to complete the transaction. Unfortunately, the President and Congress don’t think that way. Personally, I believe that they will authorize this transaction; however, considering how dysfunctional Washington is, you never can be sure.

The first issue is the consequence if you do the transaction and Congress does not authorize the transfer. In that situation, you would be taxed on your minimum required distribution that went to the charity; at the same time, you would then be able to write your charitable contribution off your tax return. For example, if your required minimum distribution was $10,000 a year and you transferred that required minimum distribution to a charity, if the law was authorized for 2015, you would not have to include the $10,000 as ordinary income. Furthermore, because you’re not taxed on the distribution, there would be no charitable contribution for you. On the other hand, if the law was not authorized, you would be taxed on the $10,000 but you would be able to write off the $10,000 as a charitable contribution on your tax return.

For many people being able to donate their required minimum distribution directly to charity is potentially a great tax saver. Particularly, for people who are generous in nature and who make charitable contributions but because of their tax situation are unable to deduct their contribution, this strategy offers a substantial tax savings. In addition, even for people who itemize their deductions, this can also save you money in a number of different ways from a tax standpoint, including such things as how much your Medicare premium is and how much of your Social Security is subject to income tax.

If the President and Congress re-authorize the provision that allows people to donate their required minimum distribution, the key to the transaction is to make sure the money from your IRA goes directly to the charity. If the distribution is paid to you and then you take that money and pay it to the charity, unfortunately, you don’t get the benefit. The money must go directly from your IRA into the charity. Most IRA custodians are very familiar with this transaction and thus, it’s relatively easy to complete. The downside is that it must be completed by December 31st. Unfortunately, sometimes with the delay from Washington in re-authorizing this provision, it may be too late to complete the transaction. That is why many people are doing the transaction ahead of time hoping that the legislation will be authorized; but at the same time, willing to accept the consequences if it is not.

For those of you who are charitable in nature, contributing your required minimum distribution can be a significant tax savings. Therefore, it is something to consider and if you are considering it, it certainly pays to be proactive and make sure that if you decide to wait until the legislation is authorized, you have everything in place at that point in time so you can immediately react.

Good luck!
Rick is a fee-only financial advisor. His website is If you would like Rick to respond to your questions, please email Rick at