If you have money in an Individual Retirement Account (IRA), you know you can’t take out distributions without paying taxes on the money you withdraw. For many older folks with large portions of their personal wealth tied up in IRAs and other tax-advantaged retirement accounts, the tax implications of taking money out of an IRA can impede their ability to give large sums to the charity of their choice.
If you want to give money to a charity you support, taking the cash out of your IRA and paying the taxes on it could eat up a big chunk of the gift you were hoping to give. While you can take an itemized deduction for charitable contributions, the deduction has to exceed the standard deduction before it actually becomes useful for you to claim the money donated. Not only that, but charitable contributions are only deductible up to a portion of your income depending upon the type of charity you support and the type of property or assets donated. This means you could end up having to pay a lot more in taxes than you get back in deductions if you take money out of your IRA prematurely to make a gift to charity.
Fortunately, lawmakers have addressed this problem in the past and made it possible for Americans to exercise their generous spirit, with an “IRA charitable rollover, described below. Lawmakers are also working on a way to make it possible for IRA-holders to once again give money to a charity without having to pay a big bill to Uncle Sam in return for their generosity.
Gifting an IRA to Charity
To give a gift from an IRA to charity without having to pay taxes on withdrawals, a tax rule was introduced in 2006 called a Qualified Charitable Distribution or QCD. It is also referred to as a Charitable Rollover. Under this special tax rule, a person could give as much as $100,000 from their IRA directly to the charity of their choice. The money was excluded from income, so there was no penalty for making the gift.
However, the rule had some limitations, such as restricting the ability to give an IRA to charity only to people over the age of 70 1/2 at the time the gift was made. Furthermore, the tax exclusion applied only to standard and Roth-IRAs and not to other kinds of retirement plans. Still, it made it possible for people to contribute to causes they are passionate about.
Unfortunately, the IRA charitable rollover rule was not made a permanent rule at the time it was passed. The rule initially allowed for donations from IRAs without tax implications only in 2006 and 2007. However, it has been extended several times including in the Fiscal Cliff deal that lawmakers reached to extend the tax break through 2013. It was made permanent in 2015 and not changed under the most Tax Cut and Jobs Act of 2017.
Even though the Tax Cut and Jobs Act of 2017 does makes it more difficult to obtain a financial benefit for some of your charitable donations, the QCD can help. If you are over age 70.5 and have to take required minimum distributions (RMD), consider using the QCD. You can support your favorite charity and, at the same time, lower your taxable income. If you aren’t at the age where you have RMDs, speak with your income tax advisor about how you take advantage of these rules once you do turn 70.5. This will involve determining how much you have in tax-advantaged accounts and how you currently need or will need to spend to support your retirement lifestyle. With careful planning, you can use a QCD to meet your RMD requirement, satisfy your charitable intents, and saving money on taxes both today and into the future. Not a bad deal.