Mattson Financial Blog
My daughter, Tracy Dahms, is involved in the National FFA Organization and teaches agricultural sciences and biology with the Saranac School System. Here, she is pictured with me next to a sign recognizing the “Grand Champion of Giving” as part of the Feeding America program, a program that benefits local 4H and FFA programs as well as people in need all over the country.
This summer, we attended the Ionia Free Fair, and Mattson Financial Services as a whole bought and paid for a hog to go to the Feeding America program. Anyone who attends our annual gala knows just how committed we are to our local charities and how much we appreciate our communities.
Now, it’s time to bring this fact home to you for your benefit!
No, I won’t be dropping off a pound of pork sausage at each of your homes, but I do have a tax strategy to share that’s almost as good. With this strategy, you can donate your required minimum distributions (RMDs) to the charity of your choice and maximize the tax benefits of your RMDs at the same time.
We have a client who donates heavily to his church as well as to local animal shelters and a number of other charities he is passionate about. Because he gives back so much, we set up his RMDs in such a way that, during the first week of December, his contributions go straight from his IRA to the charity of his choice. The RMDs do not pass through his hands in any way, and all the donations go to exactly where he’s designated.
Here’s the great thing: Because the funds never went through his hands, this donation is a nontaxable event for him. When the RMDs are taken from the IRA, it doesn’t change his adjusted gross income, but he meets the yearly requirement that started at age 70 1/2.
This works out because he is in a position where he doesn’t need the RMD funds as he has other sources of income. This allowed him to support his favorite causes while avoiding tax liability and allowed us to take money from his IRA and convert it into his Roth IRA, paying state and federal taxes along the way.
If he had taken the RMDs and then given that money to the charities himself while still planning to do the IRA to Roth IRA conversion, this would have bumped him up to the 22% tax bracket, essentially leading to a tax time bomb.
However, since he was able to give directly to charity — no withdrawing on his part — he bypassed his tax reporting and made sure that money never became a taxable event. Even better, because the charities received these funds directly, they ended up getting more money because the money didn’t go through the IRS. It’s a win-win situation.
As you sit and read this, why not start making a list of charities you support? That way, when you start taking your RMDs, if you haven’t started already, you have another option for that money. You, too, can bypass the tax burden that comes with withdrawing RMDs from your IRA, all while maximizing the gift you give to the charities you know and love. It’s something we should all be thinking about as we enter this coming holiday season.