Use Your IRA for Charitable Giving and Save on Taxes

It’s time to stop writing donation checks to your church, favorite university, and other nonprofits. Yes, you heard us right. Put away the checkbook. Don’t write any more donation checks to charity until you read this article.

Contrary to how that may sound, we’re NOT advocating that you stop GIVING to your church or charity. Not at all. Hopefully you’re in a position to give generously and regularly. If you’re 70 1/2 or older, however, there may be a better way to donate money to your favorite nonprofit than by giving cash or writing a check.

Taxpayers who are 70 1/2 or over and who have a traditional Individual Retirement Account (IRA) can score significant tax benefits by choosing to donate money directly from their IRA account to their church or charity. Qualified taxpayers can donate up to $100,000 each year to charity from their IRA and pay no tax on the withdrawal. Except for this provision, all other withdrawals from traditional IRA accounts are taxable.

The IRS refers to it as a “qualified charitable distribution” or QCD, but in popular usage this feature is often called an IRA Charitable Rollover. This charitable distribution can cover the annual required minimum distribution, or RMD, which also becomes effective at age 70 1/2.

How the IRA Charitable Rollover Works

To see how the IRA Charitable Rollover can benefit you, let’s look at a typical situation.

Frank and his wife Brenda, both in their 70s, have saved well over the years and are generous with their giving. They donate about $10,000 each year, split between $5,000 to their church and another $5,000 to a few charities that mean a lot to them. With combined retirement income of $75,000 and a paid-off mortgage, they can no longer benefit from itemizing deductions, meaning they no longer get a tax deduction for their donations to church and charity. To make matters worse, the IRS requires them to take about $30,000, combined, from their IRA accounts each year to meet their required minimum distributions. This $30,000 RMD is fully taxable. 

After Frank and Brenda learn about the IRA Charitable Rollover opportunity, they decide to stop writing checks to their church and charities. Rather, they instruct their IRA custodian to send $5,000 to their church and $1,000 checks to five other charities they support. These donations will offset their RMD distributions, meaning they will only have to pay tax on $20,000 of their RMD.

Frank and Brenda are so pleased with their IRA Charitable Rollovers and the resulting tax savings that they decide they can now afford to raise their annual charitable giving to $15,000, so they instruct their IRA administrators to send another $5,000 to their church and charities.

Answers to Your Questions about IRA Charitable Rollovers

The following Q&A will help you better understand this relatively new provision in the tax law. For a more in-depth article on this same topic, please see our blog post from late last year.

Q: Are you saying I can remove any amount of money I wish each year from my traditional IRA, up to $100,000, and the distribution won’t be taxable? 

A: That’s right, provided you are at least age 70 1/2 and follow the instructions carefully. The distribution must be made directly from your IRA, by your IRA administrator or custodian, to the charity. You may not take receipt of the money.

Q: What if my spouse also has a traditional IRA and is at least 70 1/2?

A: In that case, you may both donate up to $100,000 each year to charity through your IRAs, for a combined total of up to $200,000.

Q:  I own three Iarge IRA accounts. May I deduct up to $100,000 from each of them?

A:  No, the $100,000 cap is for qualified charitable distributions from all of your IRAs, combined. You may choose which IRA, or which combination of IRAs, to take the distribution from.

Q:  What if I only want to do an IRA Charitable Rollover for the exact amount of my required minimum distribution?

A: That is fine. No problem. This will keep your RMD from being added to your taxable income, potentially saving you thousands of dollars each year in taxes.

Q: Since charitable donations are deductible anyway, how is an IRA Charitable Rollover better?

A:  If you are one of the lucky few taxpayers who can still benefit from itemizing your deductions, then there is no benefit to the IRA Charitable Rollover. However, since the last tax reform act was passed in 2017, most taxpayers are finding it better to the claim the new and much higher standard deductions rather than itemize. A married couple age 65 or over, for instance, can claim a standard deduction of $26,600. For this reason, most taxpayers no longer get a deduction for their charitable donations. For these filers, the IRA Charitable Rollover provides a similar tax benefit, since the money distributed to charity from the IRA does not count as taxable income.

Q:  I have a Roth IRA. Can I do an IRA Charitable Rollover from it?

A:  Yes, but there is no benefit in doing so. Unlike traditional IRAs, distributions from Roth IRAs are not taxable. This opportunity works best for traditional (taxable) IRA accounts.

 Q: Most of my retirement money is in my company’s 401(k) plan. May I make a qualified charitable distribution from my 401(k)?

A:  This special opportunity only applies to IRA accounts. You may, however, be able to change your 401(k) to an IRA by making an IRA Rollover, but talk with your financial advisors first about the pros and cons of doing so.

Q: I recently withdrew money from my IRA before learning about IRA Charitable Rollovers. If I donate this money to charity, can I claim it as an IRA Charitable Rollover and avoid having the IRS count it as taxable income? 

A: Sorry, but no. The distribution must be made directly from your IRA custodian to the charity. Your IRA administrator can walk you through the proper steps to take.

Q:  I want to donate $20,000 to charity from my IRA using the qualified charitable distribution method you describe in this article. If I do so, can I also claim this $20,000 as a charitable deduction on my tax return?

A:  No, since you’ve already received a tax break on this money when you did the IRA Charitable Rollover, you cannot also claim the same donation as a charitable deduction.

Considering an IRA Charitable Rollover? Don’t Miss the Deadline

Please note that IRA Cbaritable Rollovers must be completed before year’s end to benefit you on this year’s tax returns. Talk with your financial or tax advisors soon, and make sure the proper forms are submitted to your IRA custodian before it’s too late.

The IRA Charitable Rollover is one of the best tax-saving opportunities available today to the average senior adult or couple age 70 1/2 or older. Take a look and you too may just stop writing checks to your church or charity.

Note: As with any significant investment or tax decision, we recommend you seek professional advice before taking action. This column is for informational purposes only and is not to be construed as offering tax or legal advice.