With $10,000 a month in Social Security and pensions, should we donate our RMDs?


Dear MarketWatch, 

My wife and I are both 72. We have around $460,000 in IRAs that we have not had to touch. We have $300,000 in savings. Our Social Security and pensions come to about $10,000 a month, of which $3,800 is VA disability and thus nontaxable. Our house is paid off and because I am a disabled veteran, we pay no property tax. Next year we have to start taking required minimum distributions from our IRAs. Should we donate the RMDs from our IRAs next year to charity to avoid higher income tax? 

See: I’m in my 60s with almost $1 million. My home is paid off. I’d like to move but am afraid of the high prices elsewhere: ‘Will I be OK?’

Dear reader, 

The answer to your question really depends on your level of financial comfort. If you need to take required minimum distributions and truly don’t need the money, then yes, donating to a qualified charity makes sense since you would be able to avoid a higher income tax. 

But before you go and do that, I would get clear about how much you need to take for your distribution, and if you truly don’t need it. You mentioned your account balances and income from Social Security and pensions, but try and estimate what your expenses will be in the future, not just the present. For example, you seem to be fine since you’re not touching any of your IRAs, but will your expenses change in the foreseeable future? Is any of the money in those accounts earmarked specifically for emergency situations — say, a roof repair, an unexpected surgery or a new car? 

You just don’t want to be in a predicament where you’ve dwindled your assets to avoid taxes, but you end up needing some of that cash.

For readers who may not know, retirement-account holders must begin taking a certain amount of money out of their accounts beginning at age 73, calculated using factors such as life expectancy, current age and account balance. Failure to withdraw an RMD could result in big fines: The penalty is 50% of whatever was required to distribute. For example, a missed RMD of $2,000 would incur a $1,000 fine. 

If you’re going to go the donation route after all, first check that the charity you’re planning to give this money to is qualified according to the Internal Revenue Service; otherwise, your plan won’t work. Calculate how much your RMD amounts to, decide which accounts you’ll take the withdrawal from and be sure to organize your tax documents, Charity Navigator says. 

Also see: I’ll be 60, have $95,000 in cash and no debts — I think I can retire, but financial seminars ‘say otherwise’

For anyone unfamiliar, qualified charitable donations allow individuals to give away their required minimum distributions from their IRAs — not 401(k) plans — and they don’t have to pay the tax on that money, as one would if she were to take a distribution from her typical traditional retirement account. Account holders can donate up to $100,000 of an RMD under the QCD rules, but must make the donation directly from the account to the charity. They then deduct that donation from their taxable income come tax time. 

If you decided to keep some of the RMD, you’d simply donate a portion of the amount you need to distribute and then pay taxes on what you’ve kept. You could even start that now, since QCDs are allowable beginning at 70½ years old. 

It’s great that you are so aware of your RMD and the rules around it. Just be sure you’re helping yourself first, before you so kindly help others! 

Readers: Do you have suggestions for this reader? Add them in the comments below.

Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com.

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