As the year 2022 rolls out, it is important to review your IRA accounts and determine if they are structured to avoid potential pitfalls due to the Secure Act of 2020.  Also, there are specific opportunities to help you lower your overall income tax based on IRA Required Minimum Distributions (RMDs).

The first concern would be if you have named a trust as a beneficiary of your IRA accounts.  If you have done so, please reach out to your financial advisor and/or the attorney that drafted your trust documents.  Due to the IRA changes introduced by the Secure Act which mandates the entire balance of an IRA must be drained by the end of the 10th year starting the year after death of the account holder, using a trust may no longer suit your original estate plan. (https://www.forbes.com/sites/juliejason/2021/12/14/confused-by-the-new-secure-acts--10-year-rule-for-inherited-iras/?sh=4d7650fb5d04, n.d.)  It is best to review this to ensure that you are helping maximize the benefits to your heirs.

If you are, or will become, age 72 this year, this will be your first year of RMDs from your IRA account(s).  A little side bar, IRA actually means Individual Retirement Arrangement.  Many people think the “A” is for account, not so.

Here is a tax planning suggestion.  Please keep in mind that before taking any action you should discuss this with your CPA or CERTIFIED FINANCIAL PLANNER™ Professional that focuses on tax planning opportunities, especially when dealing with IRA accounts.

If you are charitably minded and have been taking your RMD then contributing to a charity, consider a Qualified Charitable Distribution (QCD).  A QCD is paid directly from the IRA account to the charity.  The charity must be an official charity under the IRS tax code.  Your charity will know if they are or are not, so check with them first.  (The age rule for QCDs remains at 70 ½ even though the RMD age changed to 72.) (https://www.irs.gov/newsroom/how-the-cares-act-changes-deducting-charitable-contributions, n.d.)

The beauty of using the QCD, especially in the early part of the tax year, is that the QCD satisfies a portion, or all, of your RMD for that tax year.  Here is an example.  Let’s say that your RMD is $20,000 for this tax year.  You have been generous with your favorite charity by donating $10,000 throughout the tax year to them.  By contributing this way, you technically are claiming the entire $20,000 as taxable income, then taking a $10,000 deduction.  One of the downsides of this is that your adjusted gross income is $10,000 higher than if you contributed that $10,000 directly from your IRA to the charity via a Qualified Charitable Distribution.  QCDs are income tax free distributions from your IRA account.

Additionally, based on your entire tax situation, if your itemized deductions are not greater than the standard deduction, you are losing out on some, or all, of that charitable donation.  There is a charitable cash contribution that an individual can take, which is $300 and a married couple filing jointly can deduct $600 even while using the standard deduction.  However, by utilizing the QCD, it serves to keep your adjusted income lower, which may have other benefits, such as avoiding the Medicare Part B surtax if your income reaches a certain level.  In 2022 that income amount is $91,000 for a single tax filer and $182,000 for a married couple filing jointly. (https://www.irs.gov/newsroom/how-the-cares-act-changes-deducting-charitable-contributions, n.d.)

If your income isn’t at that level, then there are other potential benefits of reducing your income via a QCD, such as potentially lowering the amount of your Social Security income that is taxable.

Back to the RMD issue.  If your RMD is $5,000 and you donate that $5,000 directly to a charity via the QCD, then your RMD, in essence, becomes tax free as the QCD dollars count towards the RMD.  The QCD in this example must be paid to the charity prior to any other distribution.

Here is an important rule to consider.  According to the IRS rules, the first dollars out of your IRA go towards satisfying your RMD.  Here is how NOT to do this.  If you were to take $5,000 out of your IRA (assuming that is your RMD), then later in the year, you decide to use the QCD

 to contribute to your favorite charity, the initial $5,000 distribution is fully taxable as your RMD.  You would have lost the opportunity to reduce your income tax while satisfying the RMD.

I realize that this can be a bit confusing and technical.  If you are unsure if these tax ideas are right for you, please call to meet with one of the advisors on our team, the meeting will be complimentary.

Hypothetical examples are provided for illustrative purposes only; it does not represent a real life scenario and should not be construed as advice designed to meet the particular needs of an individual’s situation. Massey & Associates, Inc is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Massey & Associates, Inc are not affiliated companies. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 1194701 – 1/22