The IRS allows, and even encourages, charitable donations from tax-advantaged retirement accounts such as an IRA. Not only can this help you efficiently do some good, but you can take a solid tax deduction in the process. Here’s what you need to know.
If you’re interested in making charitable donations, a financial advisor can help you create a plan.
How Can You Donate Money From an IRA
There are three main ways to donate retirement assets:
Make a direct transfer. The first, and easiest, is to simply give away your distributions. With this method, you cash out and withdraw assets as normal from your retirement account. Then, once you have the cash in hand, you can give it to the charity you prefer.
You would pay any applicable taxes on an IRA withdrawal, typically income taxes, and only can take a charitable giving deduction if you itemize your taxes.
Minimize taxes with a QCD. The second way of donating from an IRA is through a Qualified Charitable Distribution (QCD).
Here, you transfer assets or money directly from your retirement account to the charity in question. You never cash the assets out. The IRS allows you to treat this as a tax-free transfer, meaning that you do not have to apply the assets to your taxable income for the year. This is true even if you take the standard deduction, making a QCD not only a very tax-efficient form of charitable giving but also a great way to meet your required minimum distributions tax-free.
However there are a couple of limits on QCDs. First, in general, you cannot make a qualified charitable distribution with Roth IRA money. Second, you must also be at least 70 1/2 years old, and can only give up to $100,000/$200,000 single/jointly. Finally, the distribution must go to a qualified, tax-exempt charity that does not benefit you in any way.
If you can meet those requirements, this is an excellent way to donate money through your IRA.
Donate through estate planning. Finally, you can donate to charity through your estate planning.
Your estate can transfer an IRA to charities directly (by transferring the portfolio and its assets), indirectly (by cashing out the IRA and donating the money) or in trust (by establishing a trust that will distribute the assets). This can be a good way to give a significant sum if you have large retirement assets. It can also create a very significant tax advantage for your estate, which can in turn reduce any taxes that your heirs and/or estate would owe.
However be careful if you establish a trust, as this can complicate the tax advantages of your donation. If a qualified charity receives these assets, then your estate will get a tax deduction for the value that it gives. If a trust receives these assets, it may be more difficult to engineer that tax deduction.
Why Donate Money From an IRA
There are many reasons to donate money from your IRA. The chief two are altruism and taxes.
Altruistically, this is an excellent opportunity to give back. In your retirement you have the time and opportunity to start helping causes that you care about. If your portfolio has done well, you may also have the means. By donating from your IRA you can help support causes and institutions that matter to you, and through proper estate planning you can make that a part of your legacy.
Financially, donating money from your IRA can confer a significant tax benefit. For current retirees, under ordinary circumstances you must itemize your taxes in order to take a charitable giving deduction. With a QCD you can write off this donation even if you take the standard deduction. For estate planning purposes, charitable giving can be a way of managing the potential taxes associated with a very wealthy household. This deduction will reduce the taxable value of your estate, lowering the taxes that your estate and heirs must pay.
Bottom Line
Donating money through your IRA is a great way to give back and manage your taxes. While you can make these donations directly, by taking a distribution and giving away the cash, it’s often more efficient to do this through a qualified charitable distribution or long-term estate planning.
Charitable Giving Tips
- Charitable giving is a very popular way to manage your taxes if you do take itemized deductions. It isn’t an option for everyone, but for the households that can use this it can be quite effective.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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