Nonprofit Investment Management Blog

What is a Required Minimum Distribution (RMD) and How Can It Benefit Your Nonprofit?

Posted by Carnegie Investment Counsel on Mar 1, 2022 2:00:00 PM

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Imagine that one of your donors suddenly has a large sum of money in their account. They don’t have a plan for this money yet, and they remember connecting with you a few months ago. They decide to give a major gift to your organization that helps you serve your mission and take care of your staff.

What if we told you this happens every year to many Americans? People who are required by law to withdraw funds from their retirement account to avoid penalties, but don’t have an immediate need for it. Many of these people choose to make a qualified charitable distribution to benefit both the organization and themselves.

In this article, we will explain to you what Required Minimum Distributions are and how to ensure your organization takes advantage of these major gifts.

 

What Are Required Minimum Distributions (RMD)?

The government doesn’t allow individuals to keep retirement funds in their account indefinitely. After a certain age, you are required to withdraw a set amount from your holdings each year. This includes accounts such as IRA, SIMPLE IRA, SEP IRA, and other retirement plans. If the RMD is not met, the amount not withdrawn will be taxed at 50%.

This means that even if they don’t have a need or designated reason to spend that money, some taxpayers are required to withdraw money every year. And even though they are avoiding penalties by withdrawing the minimum amount, some people will endure an increased tax burden because the distribution increases their taxable income.

 

How Can a Required Minimum Distribution Increase the Taxpayer's Burden?

There are several reasons somebody may not want to claim their RMD.

  • Taking the RMD can push some retirees into a higher tax bracket, causing their taxes to increase dramatically
  • The RMD increases taxpayer’s modified adjusted gross income (MAGI), which could trigger an additional medicare surtax or increase in medicare premiums and costs substantially
  • The rise in taxable income could lead to an increase in taxes on Social Security Benefits

When individuals find themselves wanting to avoid additional tax burdens, or simply don’t have an immediate need for the withdrawal, many choose to make a qualified charitable distribution. In doing so, they get to make an impact on a mission they love and reap the tax rewards too!

 

What Is a Qualified Charitable Distribution (QCD)?

A qualified charitable distribution is a direct transfer of funds from an IRA account that is paid directly to the charity. This differs from a normal donation in the sense that it does not provide a charitable deduction for taxpayers. Instead, the donor is not required to report that money as taxable income, therefore lowering their tax burden. 

Even though it isn’t considered income by the IRS, a QCD does fulfill the RMD requirement. It can count as all or part of the required withdrawal amount, making it a great option for people who don’t want a rise in their taxable income.

 

5 Tips to Attract RMD Donations to Your Nonprofit This Year

1. Have the right donation processes in place.

Make sure you have the right donation processes in place before a donor comes to your doorstep. You want to look professional and be able to expedite a quick turnaround for your donor. From the language you have on your website, to knowing how to facilitate the transfer, to sending your thank you card, each step should be written out. That written process should be understood by all of your development and finance team.

The best way to do this is to work with your nonprofit investment advisor to make sure you are ready to guide your major donor through the donation process.

2. Let them know this option exists.

Many retirees don’t know they can make a donation directly from their IRA and receive great tax benefits. And if they never hear about it, they can never act on it! It’s important to educate your donors on all the different ways they can get involved and support your mission.

Ensure you have this option listed everywhere! Some good places to start are:

  • Remit Envelope
  • Website Donate Page
  • Printed program at a special event
  • Donor pamphlets or brochures
  • Donor welcome series
  • Footer of your email (bonus if it has a link to your landing page: read on for more on this tip!)
  • Community presentations and outreach events
  • Major donor communications
  • Monthly / recurring donor thank you’s

You can even write a special article about RMDs and QCDs and highlight it in your next supporter newsletter. Showcase how these major gifts have helped grow your endowment and impacted the mission you serve!

It’s important to create an easy to find and clear call to action. Let them know that this option is available to them, that it is an easy process, and who they can contact to make it happen. Plant the seed early and frequently so when they are ready to make a donation, your number is the first thing that comes to mind.

Bonus tip: Talk about all the unique ways to support your organization loud and often. You never know who will resonate with a particular channel. Your donors will need to hear it several times before they decide to act, so make sure it is communicated everywhere. 

3. Create a landing page.

We recommend creating a landing page for unique donations such as this. Donors will often have questions and sometimes feel more comfortable looking on the web before reaching out. Have a designated page on your website where you can direct people that have questions. You can make a QR code or friendly URL to showcase in brochures and printed materials.

We mentioned it earlier, but we’re going to say it again: remember to make the process easy and have a clear call to action. You don’t want to confuse the donor or make them waste any more mental energy than they have to. Have clear information on the landing page and direct them with simple steps. Make their donation process a positive and empowering experience so they tell their friends and do it again!

4. Segment your donors.

Take a look at your current donor base. Use your CRM to pull out a segment of individuals who are retirees or will be retiring in the next 10-15 years. Create an email campaign or mailer highlighting this opportunity. Emphasize the benefits for the taxpayer, but also how it will impact your organization and your mission. 

While you want to plant the seed in all your donor’s minds, this is the group of people who will be the most receptive to this message. These topics are already on their mind and your suggestion may trigger a longing in them to make a major gift! Make highlighting this option to this segment of donors a regular part of your communications plan.

You can also segment out your loyal donors: donors who have donated for several years that love you and are ready to increase their giving. This is a great list to periodically promote this message to. That way their brain recognizes this as an option if/when they find themselves in this situation in the future.

5. Foster relationships with local investment agencies.

Once you’ve created your processes, have communications in place, and reached out to your current eligible donor base, it’s time to build a referral network. 

Begin to build relationships with local investment advisors (you can start with yours!). Introduce yourself and let them know that you would like to give them information on your amazing organization, just in case any of their clients are in need of a charity to support. If an individual doesn’t have an organization they already love, they may ask their advisor for recommendations. Remember that year-end is a busy time, so plan ahead and start preparing late summer.

Engage with these advisors to foster a relationship and ensure your organization is always top of mind. Make sure they understand the basics of your mission and the huge impact major donations can have on your organization. They may turn into a donor themselves!

Create a brochure, packet, or cards they can keep and give out to prospective donors. Let them know your door is always open if they, or one of their clients, has any questions. Include them in your supporter communications (with their permission, of course), so they stay up to date on all the great work you are doing.

The RMD rule creates a unique situation for some taxpayers. They are required by law to withdraw a certain amount of funds from their retirement account. But either they don’t have an immediate need for the money or they want to avoid an additional tax burden.

By communicating with your supporters, working with your nonprofit investment advisor, and having the right processes in place, you can capitalize on these distributions and increase major gifts to your organization.

 

For up to date information on RMD, visit the IRS website

 

Looking for a Financial Advisor for Your Nonprofit?

If you are currently looking for help with financial planning, contact us. We are happy to schedule an introductory meeting at your convenience.

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Topics: Nonprofit

Carnegie Investment Counsel

Written by Carnegie Investment Counsel

Carnegie Investment Counsel is an Registered Investment Adviser (RIA) providing personalized financial guidance to help you preserve and grow your wealth, so you are freer to enjoy your life. As your fiduciary, we are obligated to place your investing success ahead of our returns.

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