As people transition to retirement, we get many questions from them about being able to support their ideal lifestyle without running out of money. Good financial planning helps people to understand the likelihood of enjoying the retirement they deserve, but until someone has spent a few years as a retiree, they may always feel some uncertainty about whether their projections can become reality.
However, retirees often find that not only do they have plenty of money to fund their lifestyle, but their investments continue to grow. Once it becomes clear that you have enough retirement income, you start realizing that you will become subject to Required Minimum Distributions (RMDs) in coming years.
RMDs are necessary for any dollars that are in certain retirement plans and never had the contributions or earnings taxed on these dollars. These annual calculations are based on a person’s age and the balance in the accounts that have never been taxed. It can be a disconcerting conversation when you realize that you only need $6,000 per year from your account, but you need to take out (and pay tax on) $20,000 per year.
As financial advisors, our team at TruStone Wealth Management often talks about tax diversification strategies to stretch your dollars further, including Qualified Charitable Distributions (QCDs). Through this strategy, donors who are at least 72 years old can use extra money invested in a Traditional IRA account to donate to charitable causes. This allows you to make an impact on 501(c)(3) non-profit organizations while benefiting the bottom line on your tax returns.
We want to illustrate how this might work in relation to a planned giving campaign, funding an endowment, or making annual contributions to your charity by using hypothetical clients Kristoff and Anna Kjirkegaard as an example.
In this scenario, the Kjirkegaards haven’t had to use their Traditional IRA dollars at all, due to a combination of income from their Social Security benefits and proceeds from their Ice Business and Rental company. They have $500,000 in Kristoff’s Traditional IRA on December 31, 2023, and he turns 72 on January 1, 2024, with the expectation of having his account grow 6% annually.
In their case, they need to add a significant amount of taxable income that they aren’t using for their monthly spending. However, if there was a local 501(c)(3) hospital doing a capital campaign to build an addition, they could utilize Qualified Charitable Distributions (QCDs) to potentially reduce their tax burden and impact the local community.
The chart shown illustrates the effect of required minimum distributions and any additional amounts indicated on the account balance.
Year Age Life Expectancy Balance Distribution Total Distributions
2024 72 27.4 $500,000.00 $18,248.18 $18,248.18
2025 73 26.5 $510,656.93 $19,270.07 $37,518.25
2026 74 25.5 $520,870.07 $20,426.28 $57,944.53
2027 75 24.6 $530,470.42 $21,563.84 $79,508.37
2028 76 23.7 $539,440.97 $22,761.22 $102,269.59
2029 77 22.9 $547,680.54 $23,916.18 $126,185.77
2030 78 22.0 $555,190.22 $25,235.92 $151,421.69
2031 79 21.1 $561,751.56 $26,623.30 $178,044.99
2032 80 20.2 $567,235.96 $28,080.99 $206,125.98
2033 81 19.4 $571,504.27 $29,458.98 $235,584.96
These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here.
Perhaps they could pledge $100,000 over five years to have the community room at the hospital named in their honor, or provide scholarships to the local art and music school by funding an endowment account. This endowment account would then pay out income annually to reduce tuition or provide scholarships to students, while providing tax incentives to the Kjirkegaards.
There are many ways to utilize QCDs to help local nonprofits live out their missions for years to come. If you are eligible, our financial advisors at TruStone Wealth Management can help incorporate a QCD into your financial plan to boost your year-end giving and support a cause that matters most to you. Keep in mind that if you are a North Dakota resident, there may be additional state tax credits available that would meaningfully reduce the “net cost” of the contribution. Schedule an appointment with our team today to learn more.
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