(Legally) Skipping the IRS Toll Booth On Your RMDs

Leverage for an RMD you didn’t even want.


Bear with the nerd level on this post. It gets a little brainy.


A Required Minimum Distribution (RMD for short) is the IRS’s way of forcing older taxpayers to take money out of their IRAs and other qualified plans, generally beginning at age 72. Think of it like money that has been on a toll road and now there are no more roads ahead, just exits with toll booths. Manning the toll booth is your friendly local IRS agent, waiting for her and the government’s cut of your money.


One major hang-up with this whole RMD toll road (as any older person with wealth will tell you) is that you don’t always want to take the distribution. Sometimes you’d rather let the money grow. Maybe you’re still working. Or maybe income streams from Social Security and your small business are more than enough for your lifestyle. Sometimes, you’d just as soon pass this money on to a charity you love instead of a government that you tolerate.


Fortunately, your legislators have written into the tax code certain ways for you to do just that. One of them is called the Qualified Charitable Distribution (QCD). As the name implies, you can take your distribution in the form of a charitable gift, usually paid directly to the charity. When you send your RMD out as a QCD, you are not taxed on this income, your favorite charity gets a boost, and you just made your hard earned money go farther by legally removing an optional tax drag.


But it gets better. Charities need two kinds of money: Today money and Tomorrow money. If your favorite charity is doing ok keeping the lights on today but has big dreams for tomorrow, why not consider funding a life insurance policy on yourself by using your QCD? You’re the insured, they are the owner and payor, and they fund the life policy with dollars you just handed to them via your QCD. Then when you pass away, the gift just got bigger.


But it gets even better still. Dollar for dollar, the last of two lives is cheaper to insure than the first, so why not get a second-to-die policy on you and your spouse? The same dollars that bought a medium-sized policy on you might buy a larger policy on you both, and just like that, you’re leaving a significant asset to charity. And all it took was a functional understanding of your tax code and a general aversion to optional taxes.


None of this is a substitute for your good sense, nor for the opinion of your tax professional. But if you’re looking for ways to make a bigger impact in the lives of those you love, we might suggest allowing your government to pick up part of the tab for it.


I mean, as long as they’re offering.

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