Charitable IRA Donations

If you have Philanthropic desires, and would like to be financially rewarded at the same time, then donating your IRA assets to a charity may solve both of these goals.

 

A retiree, age 70 ½ or older may donate up to $100,000 tax free to a charity from their IRA each year. The advantage of donating directly from your IRA, is it provides a tax-free distribution directly as opposed to taking the distribution first from your IRA which is treated as taxable income. When donating directly from your IRA to the charity, the assets are excluded from income.

 

Since the distribution is not included in your income, you avoid any potential negative consequences of a regular IRA withdrawal. These negative consequences may include taxes on social security benefits. In addition, you do not have to be concerned with the limitation percentage of a charitable contribution deduction made directly by the tax payer who may not be itemizing and instead taking the standard deduction.

 

As you may be aware, required minimum distributions (RMDs) must begin at age 70 ½ or older whether or not income is needed. As with all distributions from an IRA, the RMD is subject to ordinary income taxes. This may be avoided by making a charitable contribution directly from your IRA. By making the contribution directly, it also satisfies your RMD without having to report the additional income.

 

The attractiveness of donating money directly to the charity, as opposed to taking the RMD, is it allows those retirees who simply do not need the additional income, and are charitably inclined, to lower their income tax bill.

 

This strategy will benefit individuals in some of the following areas:

  1. Since charitable deductions are limited by a tax payers income, generally up to 60% of the modified adjusted gross income, by directly contributing your IRA distribution to a charity this restriction will be avoided.

  2. In order to claim a charitable deduction, one must itemize their tax return. For those retirees who no longer pay mortgage interest, their deductions may be too small to itemize thus the ability to donate directly from your IRA offers tax benefits that would no longer be available to the retiree not itemizing. Since the new tax law changes double the standard deduction, fewer tax payers will be itemizing their deductions, therefore claiming the standard deduction which does not allow them the benefit of charitable deductions.

  3. Reporting increased income on form 1040 may increase one’s Medicare part B premiums or could negatively affect the tax-ability of social security benefits. This scenario is alleviated by making the charitable contribution directly from one’s IRA.

  4. In some states residents are not allowed to deduct charitable contributions. However, making the donation directly from the IRA will provide a way to effectively claim a state tax deduction.

The following are some of the rules for donating directly from your IRA:

  • Eligibility: IRA owner must be age 70 ½ or older at the time of the IRA distribution.

  • Type of IRA: Only traditional, rollover, and Roth IRAs are allowed. SEPs and SIMPLE IRAs are generally excluded along with non-deductible IRA contributions.

  • Annual limitations: The charitable contribution must not exceed $100,000 per year and may include RMDs

  • Qualifications: Only qualifying charities are allowed. Private foundations and donor advised funds are not eligible.

  • Contribution: The contribution must be made directly to the charity from the IRA. The contribution may not pass through the IRA owner and transfer to the charity as that will not qualify.

As with any tax planning strategy it is important to consult your financial advisor in order to determine whether this particular tax provision is right for you.