Donating to Charity Using Money From an IRA

Jan 22, 2024 By Susan Kelly

Your working life was spent saving to retire. However, you also ensured that you regularly donated to charities. After retirement, your earnings may be restricted. But you're not going to stop working towards your charitable goals. The money you earn from your IRA can be given to charities. In addition, when you've reached the threshold at which you must take required minimum distributions (RMDs) out of traditional IRAs, you can get tax-free by donating the money to a charity. There's good news that you can do this if you're looking forward to doing it. The tax break became permanent in the year 2015. It's just a matter of being certain to follow the rules strictly.

How QCD Works

A distribution made from a traditional IRA typically carries a tax charge because the account holder did not have to pay taxes on the amount at the time they donated. However, account holders who are 70 and a half years old or older and contribute straight from an IRA to an eligible charity cause can give up to $100,000 without being considered a tax-deductible donation. This exception applies only to contributions made directly from the traditional IRA. Because of this deduction, the amount of their adjusted gross income is decreased.

Donors must comply with the IRS guidelines for QCDs to save tax on the gift. They are referred to as tax-deductible IRA rollovers. Most churches, non-profit charities, educational institutions, non-profit hospitals, and medical research organizations are eligible for 501(c)3 organizations. The charity also won't have to pay taxes on the contribution. This means that donors can't claim their donations as deductions on their Schedule A tax returns. Most taxpayers will likely not list their deductions on the tax form, particularly since tax reforms in the Tax Cuts and Jobs Act (TCJA) have increased the standard deduction base.

QCDs and IRA Distributions

So the traditional IRA owners have to begin taking RMDs as early as 72 years old or risk tax penalties. Directly from an IRA will be able to meet all or a portion of the RMDs that the IRA has during the year of tax. The charity must be notified of the contribution before December 31st to receive the amount used on the tax return. QCDs are an excellent option for those who would otherwise not claim all or part of their donations to charities due to the IRS policy that bans deductions when the donation amount is greater than 60% of the taxpayer's AGI. This rule could apply only to wealthy taxpayers who donate generously. However, it also applies to retired people who have little or no income but still wish to make a tax-deductible contribution.

Meet the QCD Requirements

IRA holders must have 70 1/2 or over to be eligible for an untaxed charitable donation. Anyone who meets the minimum age requirements can donate the maximum amount of $100,000 each calendar year out of an IRA to an eligible charitable organization without paying tax on the transfer. If you submit a joint tax return and your spouse can also donate to charity up to $100,000, which means that couples can exempt as much as $200,000 from their retirement savings from tax when they donate the funds to charities. Suppose you give more than the allowed amount; the donation is considered income and is taxed as income. Donations to charities that qualify for charitable status must be made before the end of December 31 of each year to remove the amount from tax-deductible income.

Charitable contributions are only made out of IRAs, and they are not 401(k)s or similar retirement accounts. You'll be required to transfer funds from the 401(k) into an IRA to make tax-free charitable donations to your retirement savings plan. It is unnecessary to list your tax returns to take the IRA donation to charity. But, you can't benefit from a charitable contribution tax deduction for a charitable distribution made from an IRA.

Satisfy Required Minimum Distributions

An IRA charitable contribution is eligible to satisfy the requirement for minimum distributions each year of your IRA. You may be able to reduce the requirement for minimum distribution by making an eligible charitable contribution from your IRA. You can donate a portion of your distribution requirement to charity and take the rest in retirement funds, provided you satisfy the minimum distribution requirements by the end of each calendar year.

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