Making charitable contributions from an Individual Retirement Account (IRA) can be a powerful way to support causes you care about while enjoying significant tax benefits. As individuals age and prepare for retirement, utilizing their IRA for direct donations to eligible charities not only fulfills their philanthropic goals but also allows you to manage taxable income effectively. This strategic approach not only enhances the impact of your giving but also ensures compliance with IRS regulations, making it a win-win for both the donor and the charitable organization.
What is a Qualified Charitable Distribution?
A qualified charitable distribution is an IRA withdrawal that is paid directly from your IRA to a qualifying charity. While income tax is normally due on each traditional IRA distribution, the account owner does not need to pay taxes on the amount transferred to charity.
3 Steps to Set Up an IRA Qualified Charitable Distribution:
1. Meet the QCD Requirements
IRA owners must be age 70 1/2 or older to make a tax-free charitable contribution. Those who meet the age requirement can transfer up to $108,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction.
If you file a joint tax return, your spouse can also make a charitable contribution of up to $108,000, meaning couples can exclude up to $216,000 of their retirement savings from income tax if they donate it to charity. If you donate more than the maximum allowable amount, it is considered income and could be subject to income tax. Qualified charitable contributions must be made by Dec. 31 each year to exclude that amount from taxable income.
Charitable contributions can only be made from IRAs, not 401(k)s or similar types of retirement accounts. So you might need to roll funds over from a 40(k) to an IRA if you want to make tax-free charitable contributions part of your retirement plan.
You don’t need to itemize your taxes to make an IRA charitable distribution. However, you cannot additionally claim a charitable contribution tax deduction on a charitable distribution from your IRA.
2. Satisfy Required Minimum Distributions
An IRA charitable contribution satisfies the annual minimum distribution for your IRA. You can donate part of your required distribution to charity and withdraw the rest of it as
retirement income as long as you meet the minimum distribution requirement by the end of the calendar year.
3. Set Up a Direct Transfer to a Charity
Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee to qualify for the tax break.
You’ll also need the Rocky Mountain MS Center’s Tax ID number: 84-0795455.
If you withdraw the money from your IRA and later donate it, it won’t qualify as a tax-free qualified charitable distribution.
This is for informational purposes only and not financial or tax advice. Please consult a professional for personalized guidance based on your individual circumstances.
