The Charitable IRA Transfer

 

If you are age 70½ or older and charitably minded, you may wish to consider tapping your individual retirement account (IRA). The qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate up to $100,000 per year to qualified charities. A QCD can be made tax free, can help minimize your taxable estate, and can help fulfill your philanthropic desires -- all while satisfying your annual required minimum distribution (RMD).

Benefits of a QCD

Without this provision, withdrawals from traditional IRAs and certain Roth IRAs (including those held for less than five years) would be taxed as income, even if they were directed immediately to a charity. While the donor would receive a tax deduction for his or her donation, various other federal and state tax rules could prevent the deduction from fully offsetting this taxable income. As a result, many donors have chosen not to use IRA assets for lifetime gifts. Now, the QCD permanently eliminates this problem. While there is no tax deduction allowed for the donated assets, they don't count as income either.

 

You may benefit most from implementing the QCD strategy if you:

• Do not need all of the income from your RMD.

• Want to avoid being taxed on your RMDs.

• Have significant assets in your IRA.

• Make charitable gifts but don't itemize deductions. Generally, only taxpayers who itemize get federal income-tax-saving benefits from charitable donations.

• Make a gift that is large, relative to your income. A QCD is not included in taxable income; therefore, it does not count against the usual percentage limitations on using charitable deductions. In addition, by lowering your income, a QCD may potentially help you to lower your tax bracket and avoid higher taxes on Social Security benefits or tax surcharges such as the 3.8% net investment income tax.

Limitations of a QCD

There are limitations to making a QCD from your IRA, including the following:

• You must be at least 70½ years of age when the gift is transferred.

• Total gifts cannot exceed $100,000 per year, per IRA owner or beneficiary. Married taxpayers with separate IRAs can give up to $200,000 total, but no more than $100,000 may be distributed from each spouse's IRA.

• Gifts must be made directly from your IRA to a public charity. Supporting organizations, donor-advised funds, and most private foundations are not eligible. You also cannot use the distribution to establish a charitable gift annuity or fund a charitable remainder trust.

• You can only make a donation from your traditional or Roth IRA. They cannot come from other employer-sponsored accounts, such as 401(k)s, 403(b)s, or active SEP-IRAs and SIMPLE IRAs to which employer contributions are made. You can, however, roll over funds from your 401(k) or 403(b) to an IRA to contribute to a charity.

This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.

 


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