Giving Mandatory IRA Distributions Directly to Charity Just Got Better
Give tax-free, allowing you to maximize giving or potentially put more in your pocket
Tax reform has left a lot of people unclear about the effect on their taxes. Following the news can be overwhelming and applying the law changes to your unique situation is next to impossible. But as the professional world digests the new laws and the IRS continues clarifying those gray areas, what people really want to know is how they can start preparing and adjust current plans to save taxes.
Here’s one to consider — it’s called a Qualified Charitable Distribution (QCD). If you are in the retirement crowd (specifically if you are over age 70–1/2 and taking Required Mandatory Distributions (RMDs) from IRAs) and are accustomed to making charitable contributions each year, making a minor change in how you make your contributions can lead to significant tax savings under the new tax law.
Generally, people who are in this RMD stage of life and give charitably don’t mix the two. In other words, they take their IRA distributions and use it for groceries or vacations. If they do give it to charity, it’s via a written check. The money would be taxable as income, and if it was given to charity, it could be itemized as a tax deduction. This sequence is not unlike receiving a paycheck and then deciding what to do with the money.
There was (and is) another option for your RMD money. Instead of receiving this distribution, you can give it directly to charity and never actually take possession of it. As mentioned above, it is called a Qualified Charitable Distribution. Essentially, by using the QCD your tax return would reflect less taxable income instead of more taxable income with a corresponding itemized deduction. The difference is subtle, but the tradeoff could make a difference. I’ve seen using the QCD reduce taxes by a few hundred dollars to several thousand. The savings often comes in the form of reducing the tax on Social Security income because it is a tiered system. In other words, less “other” income (such as IRA distributions) could mean less of your Social Security is taxed.
If the savings for doing a QCD is small, sometimes people would rather not hassle instructing their IRA custodian to send money to a charity. Regardless, it’s worth evaluating especially with the new tax rules. It’s now potentially more impactful because fewer taxpayers will itemize deductions with the new tax law because of a higher standard deduction and limits on many previously common deductions. With the QCD, you don’t have to worry about a tax deduction — it’s simply non-taxable income allowing you to maximize your giving or potentially put more in your pocket.
Be sure to check with your financial and tax advisors regarding the benefit and eligibility for a Qualified Charitable Distribution. Note you cannot make the distribution before turning 70 ½ and amounts are limited to your RMD total for the year up to a maximum of $100,000. Fidelity has a nice summary article to learn more about the rules.
Exploring ways to make an even greater impact with your wealth can be worth the time especially with the recent changes in tax law.
Anthony Saffer, CFP of One Degree Advisors, Inc. helps people who are committed to connecting plans for their finances, family, and future. Learn more at: onedegreeadvisors.com.
Advisory services offered through One Degree Advisors, Inc. Securities offered through Securities America, Inc., Member FINRA/SIPC. One Degree Advisors and Securities America are separate companies. Securities America and its representatives do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.
