Year-end Financial To-Do: Take Your RMDs; Consider QCDs

Nov 17, 2022

By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning

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I regularly see countdown calendars on social media reminding me of how little time remains before the new year begins. I admit it causes a little panic, at times, since I still have a long list of projects I had hoped to accomplish this year around my house. Having my list helps me focus on what needs to be done, but if they don’t get done, there are no real consequences if they carry over into the new year.

The same cannot be said of certain tax and financial deadlines. December 31 matters if you need to take care of many financial strategies that will impact your 2022 income tax return. Over the next six weeks, between now and the end of the year, we will be sharing with you our list of “Financial To-Dos” – reminders of important strategies you may want to consider before the year is over. Our first in this series addresses required minimum distributions (RMDs) and qualified charitable distributions (QCDs).

RMDs Generally Start at Age 72, But Exceptions Apply
For traditional IRAs, SEPs, and SIMPLE IRAs, anyone age 72 or older is required to take distributions each year. If this is your first distribution year, your RMD can be taken any time in 2022, but no later than April 1, 2023.Otherwise, your 2022 RMD deadline is December 31, 2022.

The same general rules apply to your workplace retirement accounts, such as 401(k), 403(b), or 457(b) plans, with a few exceptions. If you are still working for the employer that provides the retirement plan, RMDs don’t usually have to begin at age 72.  Instead, they begin in the year you separate from service or retire.  However, if you are still employed and own 5% or more of the business or if you are no longer working for the employer offering the retirement plan, you’ll need to make sure you take your RMD by year end.

For inherited IRAs, the rules are a bit trickier. If you inherited an IRA or retirement plan from someone who died in 2019 or earlier, you are generally required to take an annual RMD from the inherited retirement account. However, if the original retirement account owner died in 2020 or later, annual RMDs may not apply because of the 10-year rule.

The 10-year rule requires a beneficiary to completely distribute the inherited retirement account by the end of the 10th year following the account owner’s death. It impacts most non-spouse beneficiaries. According to proposed regulations issued earlier this year, certain non-spouse beneficiaries must take annual RMDs in addition to depleting the account by the end of the 10th year, while others are not required to take any distributions until year ten. Because these Treasury regulations have not been finalized, it is important for you to consult with your tax professional for guidance on what action you should take this year.

The 10-year rule does not apply to a surviving spouse, or to non-spouse beneficiaries who are disabled, chronically ill, less than ten years younger than the account owner or to minor children of the account owner. For these “eligible” designated beneficiaries, annual RMDs must begin in the year following the year of death.

Qualified Charitable Distributions Are Available at Age 70½
RMDs are typically included in your taxable income. However, if your IRA distribution meets the requirements to be a qualified charitable distribution (QCD), then the distribution is tax free. A QCD is a direct gift out of your IRA to a qualified charity in amounts up to $100,000 a year. It will not increase your taxable income and therefore does not increase your adjusted gross income and can be a tax-efficient strategy even if you do not itemize. A QCD must be completed by the end of the year to impact your 2022 tax return.

A QCD can only be made from traditional IRAs – not from 401(k) or other employer-sponsored retirement plans, including SEPs and SIMPLE IRAs. And you must be at least age 70½ (6 months past your 70th birthday) at the time you make the gift. You do not have to limit the amount of the QCD to your RMD if it is less than $100,000. Check with your tax advisor or the charity before you take the distribution from the IRA to make sure it qualifies.

Additional year-end financial to-dos will be coming to you over the next few weeks. The clock is ticking so make sure you talk to your financial advisor soon if you would like more information about our year-end planning strategies.