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Question

I am approaching 70 years old and I would like to access my retirement funds without paying income tax on them (not a Roth account). I would like to have a check sent directly to my church to pay my tithe by the year instead of monthly, as I now do. I understand that is possible and avoids any federal income tax, but the age requirement is what I'm not sure about.

What are the requirements for this process or is this all wrong? I don't have much in my account, about $40,000 so it wouldn't take too long to exhaust all of my funds, but it would go a lot further if there is no tax.

Answer

The tax-free withdrawal you are probably thinking about is a qualified charitable distribution (QCD) from your IRA, says Holly Donaldson, CFP®, chief financial planner at Holly Donaldson Financial Planning, LLC. “This is an excellent way to access your funds without paying taxes, but there are several rules and procedural considerations,” she adds.

“First,” Donaldson explains, “QCDs are available beginning on the day you turn 70 1/2 and not one day before.”

Second, the distribution must be made out directly to a public charity. “It's likely that your church is a public charity, but you might ask them to be sure,” she says.

“To accomplish the QCD,” Donaldson explains, “you might have to call the company that holds your IRA (called the "custodian") to issue a check to the church, but some custodians actually issue checkbooks for IRAs. (I encourage labeling this checkbook the "Charity Checkbook" so it doesn't accidentally cause a taxable withdrawal.) Some custodians may be able to accomplish an electronic transfer. Doing an annual distribution as you describe will usually be a lot easier than monthly.”

Third, regardless of the method, don't wait until too late in the year to request the distribution. “It must clear the account in order to count for the year in which you are trying to avoid taxes on the withdrawal,” she notes.

“Finally, when your IRA custodian issues the year-end 1099, it will say that you took a taxable distribution. It is up to you to report separately that the distribution was a Qualified Charitable Distribution” Donaldson says. “The custodian does not do that for you.”

Once you turn 72, you will have a required minimum distribution (RMD) to take from your IRA, she adds. “The custodian will calculate this amount for you and send you a notice about it after the first of the year. If you distribute at least that amount in the form of a QCD, then you will have accomplished a tax-free RMD.”

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Question

I am approaching 70 years old and I would like to access my retirement funds without paying income tax on them (not a Roth account). I would like to have a check sent directly to my church to pay my tithe by the year instead of monthly, as I now do. I understand that is possible and avoids any federal income tax, but the age requirement is what I'm not sure about.

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