Making a donation to charity directly from your IRA is a financial step that doesn’t always get a lot of publicity, but a U.S. News and World Report article, How to Donate to Charity From Your IRA*, shows why it may be a good option for some people.
A qualified charitable distribution is an IRA withdrawal that’s paid directly from your IRA to your chosen qualified charity.
The first step is to make sure you meet the qualified charitable distribution requirements. You must be at least 70 ½ to make a tax-free charitable contribution. Those who meet that requirement are allowed to transfer up to $100,000 each year from an IRA to a qualified charity without paying income taxes on that transaction.
However, if you file a joint tax return, your spouse may also contribute as much as $100,000, which means a couple may exclude up to $200,000 of their retirement savings from their income taxes if they donate it to a qualified charity.
If you contribute more than the maximum amount allowed, it will be viewed as income and will be subject to income taxes. Qualified charitable distributions must be made by Dec. 31 each year for that amount to be excluded from your taxable income.
Money Can Go To Organizations You Already Support
The next factor to weigh is that a qualified IRA charitable contributions meets that annual minimum distribution requirement for your IRA. Also, you may dedicate part of your required distribution to charity and then withdraw that remainder as retirement if you meet the minimum distribution requirement before the years ends.
If you’re already making annual donations to charities and organizations you care about, why not consider making those donations out of your IRA with money you’re required to take out anyway?
Don’t Have To Make A Big Donation
Determining your qualified charitable distribution tax break is the next step you may want to contemplate. As the article explains, a $100,000 charitable contribution from your IRA may ultimately save you tens of thousands of dollars in taxes, depending on your tax rate.
But you don’t have to make a big donation to utilize this tax break. Here’s an example.
An older person in the 24% bracket who makes a $5,000 charitable contribution may be able to shrink their tax bill by $1,200. And even a $1,000 donation may still save that same person $240 on their taxes. The possible tax benefits of charitable contributions from an IRA are even bigger the higher your tax bracket.
Set Up A Direct Transfer
Next, you may want to set up a direct transfer to the charity of your choice. This is another step a financial services professional would be able to help you with. To qualify for the tax break, your money must be moved directly from your IRA to a qualified charity by the IRA trustee. If you take money out of your IRA and later choose to donate it, it won’t qualify as a taxfree qualified charitable donation.
Like so many other parts of your financial strategy, it all comes down to timing.
You Can Support More Than One Charity
In terms of choosing your qualified charity, it must be a 501(c)(3) organization for it to accept your tax-free IRA charitable contributions. Organizations that don’t qualify include private foundations and donor-advised funds. You’re also permitted to distribute your required minimum distributions to more than one charity during the same year.
For example, you may want to consider giving a portion of your donation to a local organization that provides food assistance and another portion of your donation to an arts location that shares your values.
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