FAQ: What is a required minimum distribution (RMD) and how can I use it for charity?
Answers to our most frequently asked questions about using retirement funds to make a charitable gift to Duke
For many years, our office has had the pleasure of working with donors who use their required minimum distributions from Individual Retirement Accounts (IRAs) to make a gift to Duke. In December 2015, the charitable IRA rollover became a permanent fixture of the tax law. Due to this new provision, many more individuals have taken advantage of this unique giving technique.
Here are four of the most frequently asked questions we receive about RMDs:
1. What is a required minimum distribution?
A required minimum distribution (RMD) is the amount of money an individual must withdraw from certain types of retirement accounts (such as traditional IRAs and simplified employee pension (SEP) plans) in order to avoid tax penalties from the Internal Revenue Service. The required distributions take effect beginning April 1 in the year after the account owner turns 70 ½ years old.
2. How is a RMD amount calculated?
Each year, an individual’s mandatory RMD is calculated by dividing the account’s prior year-end value with a corresponding distribution period. But how does an individual determine their distribution period? The IRS has created what it calls a RMD worksheet which provides you with the distribution period to use based on your current age. The RMD worksheet can be found on the IRS website and must be checked annually.
3. What advantage is there to making a charitable gift with a RMD?
When a donor makes a charitable IRA rollover gift (up to $100,000), that gift counts toward the donor’s RMD. Additionally, the donor does not have to recognize the transfer as taxable income on his or her tax return. While the transfer will not be eligible as a charitable tax deduction, the donor may avoid being taxed at a higher tax bracket by not including the RMD in their adjusted gross income (AGI). This reduction in AGI may have other tax benefits and may also lower the taxpayer’s Medicare Part B premiums.
In addition to the personal tax benefits, a charitable IRA rollover to Duke can allow a donor to satisfy multi-year pledges to the Annual Fund or to make a gift during a reunion year. It also can allow a donor to create or add to a permanent endowment in his or her name or to honor a loved one.
4. What type of paperwork will I need to make a charitable IRA rollover gift?
To qualify as a charitable IRA rollover, the funds need to be directly transferred from the plan administer (a.k.a. custodian or trustee) of the IRA to the charity (Duke University). The donor should not accept any distributions of funds intended for a charitable IRA rollover.
You can download a sample letter (PDF) to send to your plan administrator to direct a qualified charitable distribution from an IRA to Duke University.
Please contact us if you would like to learn more. We would be happy to talk with you and your advisors about what may be the best choice for you.