6 Ways IRAs, RMDs, and QCDs Can Bless Your Church
By Ken Sloane
Alright, I admit a United Methodist general agency employee is the last person who should be making jokes about acronyms. Someone from GBOD poking fun at such things could be reported to GCFA, GBHEM, CT, and COB or my AC—and they might try to remove my MDIV and my DMIN! (Okay, I got that out of my system).
Seriously, let’s talk about Individual Retirement Accounts (IRAs) and the associated required minimum distributions (RMD). Here are six things churches (and their donors) ought to know:
1. INDIVIDUAL RETIREMENT ACCOUNTS HAVE COME OF AGE (MIDDLE-AGE)
IRAs have been around since 1974, though in the beginning, they were only for folks who didn’t have any other pension coverage. A bill in 1981 made all workers and their spouses eligible for these accounts. That’s a solid 40+ years that people have been putting money away, without having to pay federal taxes on it (that part is important).
2. YOU CAN’T TAKE IT WITH YOU, OR LEAVE YOUR MONEY THERE FOREVER
The understanding was that those folks could access that money without a penalty as early as when they turned 59½, but when they reached 70½, they were required to start taking at least a minimum amount out each year— “required minimum distributions” or RMDs. At the outset of the coronavirus pandemic, the age for these RMDs was raised to 72. Since participants didn’t pay tax on the money when they put it in their IRAs, they are required to pay tax on it when it comes out. RMDs can push some people into a higher tax bracket.
3. GIVE IT TO THE CHURCH, AVOID PAYING THE TAXES
In 2006, pension protection legislation allowed for tax-free use of RMDs for charitable contributions, saving the tax that people would have had to pay when they took this money out of their IRA accounts. These are called “qualified charitable distributions” (QCDs). Here’s an important distinction: these are NOT tax deductions. They do not provide a charitable deduction regardless of whether you itemize deductions. The tax benefit is the ability to exclude the distribution from taxable income.
4. FROM IRA TO 'MY UMC' – NEVER IN MY POCKET!
With a qualified charitable distribution (QCD), a check goes directly from your IRA to your church or the charity you select. Many people who are facing RMDs that will have tax implications could pay all their annual tithe or offering at one time, hopefully early in the year, through their QCD and never have to show it as income.
5. DON’T HAVE TO WAIT FOR 72 TO DO THE QCD!
While Congress recently raised the age for RMDs to 72, QCDs can happen for anyone who has reached the age of 70½. Retirees who are over that age and want to continue to be generous to their local church should consider a qualified charitable distribution.
6. MOST TAXPAYERS NO LONGER GET A TAX BREAK FOR CHARITABLE GIVING
The Tax Cuts and Jobs Act that went into effect in 2019 and 2020 included an increase in the standard deduction—it nearly doubled. That standard deduction is the threshold that your itemized deductions have to exceed to make itemizing worthwhile. It left many people better off, but with 90 percent of taxpayers taking the standard deduction (which does not require any evidence of charitable giving), it eliminated a tax-incentive regarding charitable donations for most of us (not to say that this is the main reason people give to the church). Inviting your retirees in the 70+ group (who use the standard deduction) to consider using qualifying charitable distribution may reduce or eliminate the tax that they might have to pay on an RMDs. Yet many will not know of this option unless your church makes the invitation!
Ken Sloane is the Director of Stewardship & Generosity for Discipleship Ministries of The United Methodist Church.