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March 29, 2019
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March 29, 2019

Consider Making Your Charitable Donations from Your IRA

After years of contributing to tax-deferred 401(k)s and IRAs, income tax is due on that money when you take withdrawals in retirement. Annual withdrawals from traditional retirement accounts are required after age 70 1/2, and the penalty for skipping a required minimum distribution is 50 percent of the amount that should have been withdrawn. However, if you are in the fortunate position of not needing your distribution for living expenses and are charitably inclined, you can avoid income tax on your required withdrawal by donating your money directly to a qualifying charity.

Here’s how a qualified charitable distribution from your IRA can be used to help others and reduce your tax bill.

— Meet the QCD requirements.

— Satisfy required minimum distributions.

— Calculate your QCD tax break.

— Set up a direct transfer to a charity.

— Select a qualifying charity.

Meet the QCD Requirements

IRA owners must be age 70 1/2 or older to make a tax-free charitable contribution. Those who meet the age requirement can transfer up to $100,000 per year directly from an IRA to a charity without paying income the tax. If you file a jointly, your spouse can also make a charitable contribution of up to $100,000, couples can exclude up to $200,000 if they donate it to charity.

Satisfy Required Minimum Distributions

You can donate part of your required distribution to charity and withdraw the rest of it as retirement income. “A lot of people already do give, so why not give from your IRA with funds you have to take out anyway?”

A charitable contribution from your IRA could save you tens of thousands of dollars in taxes. You don’t have to make a huge donation to benefit from this tax break. For a retiree in the 24 percent tax bracket, an IRA charitable contribution of $5,000 could reduce your income tax bill by $1,200. Even a $1,000 donation would save you $240 in taxes. “Most people need the money coming out of their retirement account, but if you don’t, you can satisfy your required minimum distribution by taking this money and directing it to your favorite charities.”

Set Up a Direct Transfer to a Charity

Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee in order to qualify for the tax break.

Select a Qualifying Charity

A charity must be a 501(c)(3) organization in order to receive tax-free IRA charitable contributions.

For more information, contact your financial advisor or Rich Good at the Boys and Girls Club of LA Harbor.