With year-end approaching, clients often ask if they can use their individual retirement accounts (IRAs) to fund their philanthropic missions. Unfortunately, most cannot. But there is an exception: Individuals who must take a required minimum distribution can donate those distributions, or a portion of them, to a qualified public charity.
A qualified charitable distribution (QCD) or charitable IRA rollover, allows owners of IRAs who are at least 70½ years old to donate up to $100,000 each year directly from their IRA to a qualified public charity. This can be a valuable way to avoid paying income tax on a required distribution. Donors may benefit from a charitable IRA rollover if they:
- cannot itemize deductions,
- hold the majority of their assets in retirement accounts, and/or
- have required minimum distributions that might push them into a higher tax bracket.
The main drawback is that the law excludes rollovers into donor-advised funds (DAFs), supporting organizations, and private foundations.* In addition, donors must have clear documentation for tax filing purposes.
What’s the Best Gift to Give?
For a donor in the top federal income-tax bracket, a $100,000 gift from an IRA to a charity will avoid $37,000 in embedded federal income tax (Display). That is, it would reduce the effective cost of the gift to just $63,000. This makes sense for individuals who cannot itemize. A cash gift would result in the same economic benefit if the donor could take full advantage of itemizing a charitable income-tax deduction in the current year.
However, if a donor gives highly appreciated stock to a qualified charity, the combined benefit of avoiding the embedded capital-gains tax and creating a charitable income-tax deduction may be greater than the tax benefit of a charitable IRA rollover, as the Display shows. Donating appreciated stock may be the more beneficial approach if the donor can itemize deductions and/or their required distribution will not push them into a higher tax bracket.
Your Giving Plan
Being philanthropic means more than selecting the charity or deciding how much to give. It means choosing the right asset, and defining an appropriate giving strategy and structure. Taking into account how best to maximize the benefit to your selected charities is as important as making the most of the benefit to you. The more you make your charitable coffers work, the greater the benefit to all.
*By contrast, donor-designated funds (DDFs) are approved recipients of charitable IRA rollovers; these charitable vehicles allow individuals, families, small groups, or organizations to raise money to support a specific not-for-profit organization.
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The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.