If you are an IRA owner who must take a required minimum distribution (RMD) in 2011, you can avoid some or all of the resulting income tax liability by donating a portion of it to charity. A qualified charitable distribution (QCD), also known as an IRA charitable rollover, can not only save you income taxes, it can also help minimize your taxable estate and fulfill your philanthropic goals. Through December 31, you can make tax-free transfers of up to $100,000 directly from your IRA to qualified charities. Here are the details.
Background
The QCD provision was enacted in 2006 and scheduled to end in 2009, but last-minute legislation extended it into 2010 and 2011. Prior to 2006, if a donor withdrew funds from a traditional IRA in order to contribute to charity, the withdrawal had to be reported as ordinary income and was taxed at regular income tax rates. Once the contribution was made, the donor was generally entitled to an income tax deduction for the value of the charitable contribution, which could potentially offset some or all of the taxable income generated by the withdrawal.
With a QCD, you can exclude from taxable income any IRA funds directly transferred to a charity as an outright contribution.
Note: There is currently legislation being considered in Congress that would make this provision permanent. It would also get rid of the $100,000 cap, reduce the minimum age at which taxpayers are able to take advantage of certain giving vehicles (e.g., charitable remainder trusts) from 70½ to 59½, and make it easier for donors to give through supporting organizations, private foundations and donor-advised funds.
Who might consider this strategy?
You would benefit most from implementing this strategy if you:
- Do not need all of the income from your RMDs
- Make charitable gifts, but do not itemize deductions. Generally, only taxpayers who itemize get federal income tax-saving benefits from charitable donations.
- Make large charitable gifts, but are unable to deduct all of them in a given year because of adjusted gross income limitations
- Want to avoid being taxed on your RMDs
Certain limitations apply
Certain limitations apply to these nontaxable charitable distributions from an IRA:
- You must be at least 70½ years of age when the gift is transferred.
- Total gifts cannot exceed $100,000 per year, per IRA owner or beneficiary. Married taxpayers with separate IRAs can give up to $200,000 total per year, but no more than $100,000 may be distributed from each spouse's IRA.
- Gifts must be made directly from your IRA to a public charity (i.e., they cannot be made to a private foundation, a supporting organization or a donor-advised fund).
- The gifts must be outright (i.e., they cannot be used to establish a charitable gift annuity or fund a charitable remainder trust).
Note: Transfers must come from the IRAs directly to the charity. If you have retirement assets in a 401(k) or 403(b), for example, you must first roll those assets into an IRA, and then make the transfer from the IRA directly to the charity.
Note: You cannot make a QCD from a SEP-IRA or SIMPLE IRA.
What are the income tax implications?
- Federal – You do not recognize the transfer as income, as long as it goes directly from the IRA to the charity. However, you are not eligible for an income tax charitable deduction.
- State – State laws vary, so check with your financial advisor.
The Certified Financial Planners at New Wealth Advisors are here to assist you in planning your RMD strategy.