IRA Distributions and Qualified Distributions to Save Income Tax

SRC54

This is for the old codgers on here (like me). 😁

I have reached the age that I have to start taking the required distributions. I am not quite there yet, but getting there.

I did a couple of stupid things on some rollovers and ended up with three types of monies in my IRA. I had a very little that was already taxed and a larger chunk that the State had taxed. Most of it is subject to Federal Income Tax. It was going to be complicated to divide up and document. I was just going to eat the small already taxed part and pay taxes again, and the State of Alabama will let you take some $6K out per year and avoid state tax. But all of it would be taxed by the Feds. Unfortunately the Minimum Required Distribution was going to be more than $6K.

I stumbled onto Qualified Distributions, which allows you to directly send your distribution to a charity. Those distributions are tax-exempt. The main requirement is that you have to be at least 70.5 yo. Well, since my wife and I tithe and since we cannot deduct our tithe anyhow given the very high standard deduction we have, I decided starting in January to send my monthly tithe to the Church from my IRA. Fidelity makes this relatively easy to do.

In this way, I can save the tithe amount that is in my checking account putting it into savings that will already be taxed money and at the same time draw down on my IRA and not have to pay taxes on it. It will draw down slowly, of course, and so I will still have access to the money if I need it for other purposes later and also if I did first, my wife can continue to send her tithe the same way.

I have mentioned this to several of my friends and have found that about 50% of them did not know about QCDs. So I thought I would share.

SRC54

Here's a few more comments of interest to 65+ seniors.

The extra $6K exemption per person ($12K per couple) helps, but it in no way covers your social security. So we still end up paying taxes on that. Of course, many wanted to make SS exempt from taxes but Congress didn't have the votes, which is why we got the extra exemption, and it is only good through 2028 unless Congress extends it.

The Secretary of Treasury made a big deal about how this extra exemption would cover social security for most people. Well, that's only true if your sole income is Social Security (and there are some folks in that category unfortunately) AND you consider the full $46700 exemption to be for Social Security. But all taxpayers who file a joint return get $31500, so that is really not true. So you end up with only about $15K more exemption that doesn't even cover one year of one person's social security.

So I had to send in another big payment to the IRS. It's not hard to do since I have set up an account at IRS. Still I am considering having SSA withheld taxes from our checks starting in January. This is all complicated by the fact that IRS can charge you a penalty if you owe more than $1K when you file your return. They say they will waive it if you have had life changing events such as recent retirement. The problem is that we keep having them. I retired several years ago, my wife last year, and she started social security this year. Plus the changes in tax law.

I had to pay a penalty once many years ago when money was very tight, so I work always to avoid that. 😀