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required minimum distributions

Q&A: Yes, you can donate IRA money with a check–but should you?

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Dear Liz: Please have another go with respect to answering a recent question about making qualified charitable distributions from an IRA using a debit card, which is something we have also wondered about. Several of the large mutual fund companies tell their customers that checks from their IRA account going to qualifying charities will qualify as QCDs, whether the checks are written by the company to the charity or by the individual to the charity. Hence, it would seem to be functionally equivalent whether one writes a check or uses a debit card. But your answer to the reader’s question seems to suggest something else.

Answer: You’re right that my answer fell short in explaining the problem.

The original letter writer wanted to be able to use a debit card to make qualified charitable distributions from her IRA to small art organizations that accept online donations, but apparently not paper checks. Qualified charitable distributions allow people to donate money from their IRAs to charity without the money being taxed.

Since IRA custodians typically don’t issue debit cards, the letter writer would have to first have the donation amount sent to her bank account or another account that offers such a card. But this transfer would make the distribution taxable, since qualified charitable distributions must be made directly to the charity without the money passing through the IRA account holder’s hands.

Checks drawn from an IRA account and made out to the charity, either by the account holder or the IRA custodian, are considered qualified charitable distributions as long as other rules are met. For example, the donation must be from a traditional IRA, the account holder must be at least 70-½ and the annual donation limit is $108,000 in 2025.

That said, sending checks through the mail is a risky way to transfer funds. Mail theft and related check fraud are soaring. Electronic payments are a far more secure way to send money, whether you’re paying bills or charities.

If you must send checks, use gel-based pens since their ink is harder to alter and go to your local post office, rather than leaving checks in an unsecured mailbox. Monitor every check you send and report any missing checks promptly to your bank or IRA custodian so they can stop payment.

Q&A: Maxing out retirement contributions? Beware of future tax issues

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Dear Liz: I work for a local government and am trying to decide when to retire. I will receive a pension and have put away as much money as I could afford in my 457 deferred compensation plan. I invested it in a Standard & Poor’s 500 index fund that has performed well and is now worth $1.3 million. I also have a non-sheltered brokerage account of seven figures and no debt. Last year, I contributed vacation time and money to maximize my 457 contribution of $46,000. This year (and next unless I retire), I am likewise maximizing my contribution and contributing $46,000 each year. But periodically our monthly expenditures have exceeded my monthly income after the contribution and I have had to dip into the brokerage account to make up the difference. Does that make financial sense to do if needed or should I consider scaling back my contribution?

Answer: When you’re behind on saving for retirement, maximizing your contributions to tax-deferred plans in your final working years can be a smart move.

You, however, have a large amount of savings as well as a pension, so you may face a different problem: higher future taxes. Diligent savers can find themselves pushed into a higher tax bracket when required minimum distributions (RMDs) kick in. RMDs used to begin at age 70-½, but now start at age 73 for those born between 1951 through 1959 and will rise to 75 for those born in 1960 and later.

Many people with large tax-deferred retirement accounts can reduce their lifetime tax bills by converting at least some of the funds to a Roth IRA. Conversions are taxable, but Roths don’t have required minimum distributions and future withdrawals from Roths can be tax free. Conversions can affect other aspects of your retirement, such as Medicare premiums, so you’ll want sound tax advice before moving forward. You also may want to consult a fee-only financial planner who can review your overall financial situation and help you shape your retirement income plan.

Q&A: Required withdrawals could change Social Security taxation

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Dear Liz: Is it true that when you start your required minimum distributions from 401(k) and 403(b) plans, you give up your monthly Social Security payment? I plan to start RMDs next year at age 71 thinking I will get less money for more years.

Answer: Your withdrawals from retirement plans won’t reduce your Social Security directly. The additional income could, however, make more of your Social Security payment taxable.

Taxes on Social Security are based on something called “combined income,” which is your adjusted gross income plus any nontaxable interest you earned plus half of your Social Security income. If you’re single and your combined income is between $25,000 and $34,000, then up to half of your Social Security payment may be taxable. If combined income is over $34,000, up to 85% may be taxable. For people who are married filing jointly, the bracket for up to 50% taxation is $32,000 and $44,000 while combined income over $44,000 can trigger up to 85% taxation.

To be clear, this does not mean that 50% or more of your benefit goes to taxes. It means that 50% or more of your benefit may be subject to your income tax bracket.

Q&A: How to reduce the tax penalty from an IRA distribution goof

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Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty. You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account. Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t. Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said. You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.

No earned income? No IRA contribution

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Dear Liz: In recent columns you’ve been discussing mandatory withdrawals from IRAs. Since these minimum required distributions are treated as income for tax purposes, can I use that money as the income necessary to make an IRA contribution this year? I am retired and lucky enough not to need the funds for current expenses.

Answer: Sorry. You need earned income, not just income, to make IRA contributions. For the purposes of an IRA, earned income includes wages, salaries, commissions, self-employment income, alimony and separate maintenance and nontaxable combat pay. It does not include earnings and profits from property or income from interest, dividends, pensions, annuities, deferred compensation plans or required minimum distributions from IRAs.