How to Pay Tithing to a Church from Your Required Minimum Distributions (RMDs)

Making regular donations to your church or faith community is an important part of many peoples’ spiritual practice. For retirees who have saved in tax-deferred retirement accounts, there’s a strategic way to pay tithing while potentially saving on taxes in addition to your charitable contribution deduction.

When you reach age 73, the IRS requires you to start taking Required Minimum Distributions (RMDs) from your traditional IRA or 401k. This presents both an obligation and an opportunity when it comes to your charitable giving.

Understanding Required Minimum Distributions

Required Minimum Distributions, often called RMDs, are mandatory withdrawals you must take from your tax-deferred retirement accounts once you reach age 73. The IRS doesn’t let you keep that money growing tax-deferred forever.

“When you turn 73 years old, Uncle Sam’s gonna force you to start withdrawing money from these accounts and so this is when Uncle Sam finally gets his cut and believe me, Uncle Sam is gonna get his cut,” as financial experts often explain. You must make these withdrawals whether the stock market’s up or down, and whether you need the money or not.

These RMDs are considered ordinary income, which means they’ll be taxed at your income tax rate when withdrawn. This can significantly impact your tax situation in retirement.

The Challenge of RMDs and Taxes

Many retirees are surprised to learn that their tax burden in retirement can actually be higher than when they were working. This is especially true when RMDs begin.

When you add up money from your IRA and 401k withdrawals (including RMDs), your Social Security benefits, plus other investment income, you could find yourself paying more taxes than you expected. To make matters worse, you probably won’t have the same kind of deductions you had while working, such as paying a mortgage, running a business, or claiming dependents.

As one financial advisor put it, “Taxes could really end up being your largest expense in retirement.”

The QCD (Qualified Charitable Distribution): A Tax-Strategic Solution for Charitable Giving

If you’re charitably inclined and want to donate to your church or pay tithes, there’s a powerful tax strategy called a Qualified Charitable Distribution (QCD) that can help.

A QCD allows IRA owners who are age 70½ or older to make tax-free distributions or pay tithing from directly their IRA to qualified charitable organizations, including churches and religious organizations. These distributions can satisfy your RMD requirements.

Benefits of Using QCDs for Church Tithing

1. Reduce Your Taxable Income

The most significant benefit of QCDs is that they’re excluded from your taxable income. Unlike taking an RMD and then donating that money, a QCD never shows up as income on your tax return.

“The money that you’re counting on for retirement could wind up being a lot less than you thought it was gonna be,” financial experts warn about taxes on retirement distributions. QCDs help reduce this tax impact.

2. Potentially Lower Your Social Security Taxes

Up to 85% of your Social Security benefits may be taxable, depending on your income. By using QCDs for your church donations, you can keep your taxable income lower, potentially reducing the tax on your Social Security benefits.

“You could be paying taxes on as much as 85% of your Social Security benefits,” is a warning many financial planners give. QCDs can help mitigate this issue.

3. Avoid Medicare Premium Surcharges

Higher income can trigger premium surcharges for Medicare Part B and Part D. By reducing your taxable income through QCDs, you might avoid these surcharges, which can be substantial.

“How and when you withdraw your money from your IRA or 401k in retirement could have a huge impact on how much you’re paying taxes,” experts note. This includes potential impacts on your Medicare premiums.

4. Fulfill Your Tithing Commitment Efficiently

For those who regularly tithe a percentage of their income to their church, QCDs offer an efficient way to maintain this practice in retirement while optimizing your tax situation.

How to Set Up QCDs for Church Tithing

Step 1: Confirm Your Church’s Eligibility

Make sure your church qualifies as a 501(c)(3) organization that can receive tax-deductible contributions. Most established churches do qualify, but it’s always good to verify.

If you’re unsure, ask your church for its Employer Identification Number (EIN) and confirmation of its 501(c)(3) status.

Step 2: Calculate Your Desired Donation Amount

Determine how much you want to donate to your church. Remember that QCDs are limited to $105,000 per year per individual, but this is more than enough for most people’s tithing needs.

Depending on how your faith tradition approaches tithing, you can calculate your typical tithing amount based on your income or RMD amount.

Step 3: Contact Your IRA Custodian

Reach out to the financial institution that holds your IRA and tell them you want to make a Qualified Charitable Distribution. Each institution has its own process, but most have forms specifically for QCDs.

Some IRA custodians may require:

• A written letter of instruction
• Their specific QCD request form
• Information about the receiving church, including their EIN
• Your signature, which may need to be guaranteed in some cases

If B.O.S.S. Retirement Solutions is managing your IRA retirement plan(s) for you, please contact us, we’d be happy to help set this up for you.

Step 4: Direct the Distribution Properly

Make sure the check is made payable directly to the church, not to you. This is crucial for the transaction to qualify as a QCD.

You can request that the check be mailed directly to the church or sent to you to deliver to your church. If sent to you, do not deposit it – simply deliver the check to your church.

Step 5: Keep Good Records

Although QCDs don’t appear as income on your tax return, you should keep documentation for your records, including:

• Acknowledgment letters from your church
• IRA statements showing the distribution
• Any forms or letters you submitted to your IRA custodian

Step 6: Consider Setting Up Regular Distributions

If you tithe regularly, ask your IRA custodian if you can set up recurring QCDs to your church. Some institutions offer this service, allowing you to establish a regular giving schedule.

This can simplify your tithing and ensure you don’t forget to make distributions throughout the year.

Planning Considerations for Church Tithing via QCDs

Timing Your Distributions

Consider the timing of your QCDs carefully. Many people choose to make their donations early in the year to ensure they fulfill their RMD requirements well before the December 31 deadline.

Others prefer to spread their tithing throughout the year, making monthly or quarterly donations to support their church’s ongoing needs.

Coordinating with Your Overall Financial Plan

Your church tithing strategy should be part of your broader retirement income plan. “Everything’s connected. You shouldn’t file for Social Security without talking about taxes on your benefits. And you shouldn’t talk about taxes on your benefits without talking about your IRA and 401k withdrawals,” as financial experts often point out.

Work with a financial advisor who understands how to integrate QCDs into your overall retirement strategy, considering all aspects of your finances. B.O.S.S. Retirement Solutions can help you with that.

Considering Spousal Planning

If you’re married and both you and your spouse have IRAs, you can each make QCDs up to $105,000 annually. This can be particularly useful for couples who tithe together.

Coordinate your QCDs to maximize tax benefits while fulfilling your giving goals as a couple.

Real-Life Example: How QCDs for Tithing Can Make a Difference

Consider this example based on common scenarios:

John and Mary have been faithful tither payers to their church for decades, consistently giving 10% of their income. Now retired, they have a combined annual RMD of $50,000 from their IRAs. They also receive $36,000 in Social Security benefits.

Without QCDs, they would:

1. Take $50,000 in RMDs (taxable income)
2. Write checks to their church for $8,600 (10% of their total income)
3. Claim the charitable deduction, but only if they itemize deductions (which many retirees don’t after recent tax law changes)

With QCDs, they:

1. Directly transfer $8,600 from their IRAs to their church
2. Take only the remainder of the $41,400 in taxable income from their RMDs (note that the full $50,000 will be reported as their RMD to the government, so they will have met that obligation
3. Satisfy their tithing commitment

If they had a higher income they could also

1. Potentially reduce taxation of their Social Security benefits
2. Possibly avoid Medicare premium surcharges

This approach could save them thousands in taxes each year while maintaining their commitment to their church.

Common Questions About Church Tithing via QCDs

Can I make a QCD to any church?

Yes, as long as the church qualifies as a 501(c)(3) organization. This includes most established churches, synagogues, mosques, and other religious organizations.

What if my church doesn’t have a formal 501(c)(3) status?

Some smaller churches may operate under a group exemption through their denomination. Check with your church leadership to determine their exact status and eligibility to receive QCDs.

Can I get a receipt for tax purposes?

Yes, and you should. While the QCD won’t appear as income on your tax return, you should still get acknowledgment from your church for the donation. This helps document that the distribution was indeed made to a qualified charity.

What if I want to tithe more than my RMD amount?

You can make QCDs up to $105,000 annually, regardless of your RMD amount. However, if your tithing exceeds your RMD, you’ll need to consider whether that aligns with your overall financial strategy.

Can I make QCDs from a 401(k)?

No, QCDs can only be made from IRAs. If you have funds in a 401(k) that you’d like to use for tithing via QCDs, you would need to roll those funds into an IRA first.

Taking the Next Step

If you’re approaching or already taking RMDs and want to optimize your church tithing strategy, it’s wise to consult with a financial advisor who specializes in retirement tax planning.

The advisors at B.O.S.S. Retirement Solutions can help you create a customized strategy that integrates your tithing goals with your overall retirement plan. They understand how all the pieces of retirement planning fit together – from Social Security to tax planning to RMDs.

“Good information to good people, you can make great decisions,” as the team at B.O.S.S. Retirement Solutions often says. Their tax analysis can help you see exactly how a QCD strategy might benefit your overall financial picture.

By integrating your faith values with smart financial planning, you can support your church while being a good steward of your retirement resources.

Don’t leave tens of thousands of dollars in potential tax savings on the table. Learn how you could reduce your taxes in retirement with a free customized B.O.S.S. Tax Analysis.

Click here to get your free tax analysis

Remember, retiring successfully doesn’t happen by accident – it starts with a plan.