Does anyone have info on annuities and required minimum distributions starting at age 72? Can you save on taxes with an annuity ?

[jeffd]

Has anyone use some tax strategies to minimize their taxes on these required minimum distributions and do they work?

[NCperson]

@jeffd - there is 'no way' to avoid the distributions - meaning the RMDs.  If you take the RMD you will pay ordinary taxes on it, even if you use the proceeds to buy an annuity.... one strategy would be to begin taking distributions now (assuming you are over 59.5 and less than 72 so that you 'smooth' the distributions over more years and you may end up in a lower tax bracket over time - takes some financial planner help to figure out the best strategy, 

[dmertz · Accepted solution]

Except in the case where the annuity is an IRA annuity, there is nothing you can do to avoid including in income the taxable amount of the annuity distributions.

If the annuity is an IRA annuity and you are over age 70½ at the time of the distribution, you can have distributions (up to $100,000 annually) paid by the IRA custodian directly from the IRA annuity to charities as Qualified Charitable Distributions.  QCDs are not includible in income. 

[VolvoGirl]

@dmertz   I'm thinking about doing QCD from my IRA.  Does it have to be from a IRA Annuity or from any kind of Traditional IRA?  And it can be at 70 1/2?  I don't have to wait until 72 now?  

[dmertz]

You are required to have reached age 70½ before making a QCD.  A QCD does not require the distribution to be an RMD, so age 72 for beginning RMDs is not relevant.

A QCD can be made from any IRA, including inherited IRAs and Roth IRAs, but the QCD can be no more than the amount than would be taxable if all of the individual's traditional IRAs (if the QCD is from a traditional IRA) or the individual's Roth IRAs (if the distribution is from a Roth IRA) were fully distributed by year end.  This means that a qualified Roth IRA distribution cannot be a QCD, so for most people this means that a QCD cannot be made from a Roth IRA or at least makes no sense to be made from a Roth IRA since the individual's Roth IRAs will be qualified within 5 years.  For this reason, TurboTax does not support reporting QCDs made from Roth IRAs.  Also, TurboTax does no checking to see if the amount indicated as a QCD exceeds the taxable portion of an individual's traditional IRAs if the individual has basis in nondeductible traditional IRA contributions.

To complicate things, now that there is no age limit for making traditional IRA contributions Congress added an anti-abuse provision to the tax code whereby if one makes deductible contributions in or after the year that they reach age 70½, a QCD cannot be made from the individual's traditional IRAs until an amount of transfers to charity that would otherwise be QCDs equal to the amount of such contributions has been made from the individual's traditional IRAs.  (For this reason, if you plan on making QCDs it's probably best to not make deductible contributions to traditional IRAs in or after the year you reach age 70½.)

[VolvoGirl]

Thanks for the info.  I'll be 70 in Jan.   So next July.  One more question, can I do QCD from a 401K too?  I'm retired and not making any IRA or 401K contributions anymore.  Haven't worked since 2002.  Gee, 20 years.

[dmertz]

QCDs can only be made from IRAs.  If you want to make a QCD from funds that are presently in a 401(k), you'll need to roll those funds over to an IRA and then make the QCD from the IRA.  Once you reach the year that you reach age 72 you'll need to satisfy the RMD from the 401(k) before rolling any other amounts from the 401(k) over to an IRA.

[VolvoGirl]

Thanks again.   That's answers everything I wanted to know.  

[SweetieJean]

Some states do not recognize QCD's, so you may still owe state taxes on any distribution.