This month I wanted to shift gears a bit from improving ourselves to considering helping improve the lives of others. Whether your charitable efforts involve donating time, talent, or resources to a cause that you are passionate about, they likely bring a deep sense of enrichment and joy to your life. Along with the personal and social benefits charitable giving offers, it can also impact your financial wellbeing. This includes using your IRA for tax-free charitable donations that will make the most of your philanthropic efforts.
The main topic is Qualified Charitable Distributions.
While most people donate to charities they care about with cash or check, QCDs provide a way to donate your money while also providing you with some tax relief.
Anyone 70 ½ years old or older can exclude up to $100,000 from gross income for donations paid directly from their IRA account to a charity of their choice rather than being forced to take out their required minimum distributions (RMDs.)
What does all this mean? Required Minimum Distributions are something that anyone with an IRA must do. An IRA is all PRE-TAX money. You must take a portion out annually (usually about 3-4%) to be added to your taxable income. You will have to pay taxes on that portion. BUT, if you donate those funds directly to a charity, you won’t have to take your RMD for that year, pay taxes, AND it will go to a charity you were probably going to contribute to anyway. So it reduces your taxable income and maximizes your donating strategy. It will bring the value of the IRA down, lowering your required distributions going forward.
QCDs are a viable option for those with a generous heart looking to offset the downsides of an IRA.
You can fulfill your RMD by making a direct transfer to one or more qualifying charities. QCDs can protect you from being put into a higher tax bracket or changing your tax-saving strategy.
Please talk with your advisor about making a QCD because it must come directly from your IRA to the qualified charity. Because your donation won’t qualify if you take the distribution as cash or a check made out to you and THEN donate. I highly recommend that you check that the organization you’re choosing to support is qualified to accept QCDs before donating.
Keep in mind this strategy isn’t for everyone.
If you have some highly appreciated stock, it makes more sense and a more significant tax benefit if you donate your securities to a charity of your choosing rather than using a QCD. Ultimately, talk with your financial advisor to help determine the best charitable contribution. Working with a professional can ensure that you’re minimizing your tax liability and maximizing the value of your gift.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
When using a QCD strategy, remember the amount excluded from gross income isn’t deductible. Donations from a Beneficiary Roth IRA and an inherited IRA are eligible if the beneficiary is at least age 70 1⁄2, while donations from an active SEP or SIMPLE IRAs are not eligible.
Married individuals filing a joint return may exclude up to $100,000 donated from each spouse’s own IRA ($200,000 total). Consult your tax advisor for guidance on your specific situation.