How Charitable Boomers Can Reduce the RMD Tax Pinch

At that level, they will leap into a higher tax bracket (going from 12% to about 22%), which will force them to pay about $5,800 in additional federal taxes — all despite not needing the money.

There is potentially another big problem with RMDs for a couple like this. If one of them were to pass away, the other’s Medicare premiums and federal tax rates could go up even further since their income would rise while deductions they could take as a single filer would go down. And because RMDs increase each year, this would be an ongoing issue for the surviving spouse.

Charity as the Possible Solution 

To avoid a situation like this, talk to clients about the potential benefits associated with converting a portion or even all their annual RMDs into qualified charitable distributions (QCDs), which are not taxable. These types of donations could help clients like this minimize their tax bill and are an approach that is consistent with the philanthropic instincts that are innate to many Americans.

Indeed, in 2017, 71% of baby boomers made charitable donations, which means many of your retiree clients are likely already supporting causes that are near and dear to their hearts. QCDs could be just a different, more tax-efficient way for them to do so.

Before pursuing this route, there are three things advisors need to keep in mind:

• Involve your client’s tax professional. Typically, an IRA account custodian will not report which portion of a client’s RMD is going to charity. It is, therefore, essential to work closely with your client’s tax professional (if you are not tax credentialed yourself) to ensure this strategy is executed correctly. At the same time, because this approach is highly situational, it could be possible that using RMDs this way may not produce a meaningful benefit — which further highlights the importance of always keeping an open line of communication with a client’s other service providers.
• Help clients select a charitable organization that will do the most good. Many older clients may not take the time nor do they know how to research whether a charity really lives up to its stated purpose. Does it spend money and devote resources to programs that make a difference? Or is it bogged down with high administrative and staffing costs? These are things you can investigate for them. Finding out is as simple as visiting a website such as CharityWatch, which evaluates and grades charities in part based on these criteria.
• Keep track of the money and gather the receipts. Pay special attention to which charitable organization got what. This may sound simple, but it can get complicated if a client decides they want to spread their money around to different causes. Also, encourage clients to both request and to keep receipts confirming their donations, and then to share them with whoever prepares their taxes.

As more and more baby boomers retire, an increasing number of advisors will have clients who must contend with the tax implications of having to take an RMD, even as they may not need the money. Qualified charitable distributions are one way to overcome this hurdle, while also tapping into a client’s philanthropic impulses.

​Corey Keltner is a practice development specialist at Securities Service Network LLC, a Knoxville, Tennessee-based subsidiary of Ladenburg Thalmann Financial Services.