BROWN ON GREEN | The "Alphabet Soup" of Retirement Distribution

When it comes to retirement distributions, many acronyms are used. RMD or Required Minimum Distributions describes the percentage of money an individual is required by law to withdraw every year according to age.

For instance, someone born before July 1, 1949, must make distributions at 70½ years old; but for someone born after July 1, 1949, but before December 31, 1950, the age is 72. Someone born after January 1, 1951, but before December 31, 1959, must make RMDs at age 73. You must begin distributions at 75 for anyone born after January 1, 1960. Exciting stuff, right?

It can be. The penalty for not taking the proper amount of an RMD is 25% of whatever amount you are short of your RMD. Obviously, this makes it important to take your RMD every year. The amount required is based on the government’s life expectancy tables, and the amount you must withdraw will rise slowly over your lifetime.

For instance, anyone required to withdraw from retirement starting at age 72 will divide the IRA by 27.4 (projected life expectancy) or withdraw 3.65% of the balance at the ending balance of the year he or she turns 72. When that money is withdrawn from a regular IRA, all of it will be considered taxable income.

The minimum distribution goes up dramatically through the years. For instance, the same 72-year-old today will be required to withdraw 5.41% at 82, almost 7% at 87, and 9.26% at 92. The system is designed to gradually reduce the principal.

That brings us to more alphabet soup regarding retirement accounts: Qualified Charitable Distribution or QCDs. As previously discussed, we all must pay taxes on Required Minimum Distributions. However, we can use a QCD and direct our RMD be given to a qualified charitable organization, which includes churches, colleges, missionary organizations, and other ministries.

While you do not receive a tax deduction for a QCD, the amount gifted also doesn’t count as taxable income. Many retired people do not have enough to itemize their deduction on their income tax return anyway. For these people, using a QCD may be the best way to give to a church or ministry. Even though they don’t receive a charitable tax deduction, they do avoid having to report RMD as income. The QCD must be distributed from your IRA trustee directly to the ministry to avoid tax, but the church or ministry will be aware it came from your IRA.

If you “like the taste” of this financial “alphabet soup,” contact Free Will Baptist Foundation for assistance in making a Qualified Charitable Distribution.

About the Columnist: David Brown, CPA, is director of Free Will Baptist Foundation. To learn more, visit www.fwbgifts.com.