Donations through your IRA

Starting at age 73, the IRS mandates IRA owners to take annual income withdrawals, known as Required Minimum Distributions (RMDs). Retirement-age individuals and couples may not want to take an RMD for a variety of reasons. For example, they may have other sufficient sources of income for certain years. Additionally, the withdrawal, which is subject to ordinary income tax, may push individuals or couples into a higher tax bracket, which can have adverse impacts on Social Security payments and Medicare benefits.

Individuals and couples over age 70 and a half years old can take advantage of a qualified charitable distribution (QCD). The QCD allows a donor to instruct an IRA administrator to send up to $100,000 per year, which could be all or part of a person’s annual RMD, to one or more qualifying charities. Couples who submit tax returns with married filing jointly status each qualify for annual QCDs of up to $100,000, for a potential total of $200,000. It should be noted that 401(k), 403(b), and ongoing SEP or SIMPLE plans do not qualify for the QCD gift option, but assets from these accounts may be rolled over into a traditional IRA and thereafter gifted to charity using a QCD.

What does this law permit you to do? If you are an IRA owner over age 70 and a half years old, you can direct that gifts be made from your IRAs of up to $100,000 to a religious organization or charity of your choice. This is done by directing your IRA plan administrator to make a direct distribution to the charity (you do not want to withdraw that money into your own name, and then make the gift because this would disqualify the favorable tax treatment).

What economic benefit do you get from taking advantage of this law? Although the gift from the IRA cannot be claimed by you as a charitable deduction, the IRA payout does not increase your taxable income as would normally be the case. For families with higher income, this means you avoid raising your adjusted gross income in a way that could trigger higher Medicare premiums or taxes on your Social Security benefits.

Who should consider taking advantage of this tax break? Only families who wish to make fairly large gifts to charity, and have substantial annual taxable income really benefit from this tax break.