Creative Aging: Charitable Use of Individual Retirement Accounts
“I have found that among its other benefits, giving liberates the soul of the giver. “—Maya Angelou
“If you are at least 70.5 years old and have assets in an Individual Retirement Account (IRA), the smart way to donate to charity is often from that IRA,” says Financial Advisor Devin Reimer from the Registered Investment Advisor, intellicents. If you make Qualified Charitable donations (QCDs) directly from your IRA, neither you nor the 501(c)(3) charity receiving the donation will need to pay taxes on those dollars.
In an October interview, Reimer, who has been a financial advisor in Marion County for the past 12 years, explained to me the benefits of QCDs. What follows is based on that interview.
QCDs have been around since 2006. Reimer said that using QCDs to make charitable donations has become especially valuable after the Tax Reform Act of 2017. That reform act increased the standard income tax deduction and reduced itemized deductions. Effective 2018, the standard deduction went from $13,000 for a married couple to $24,000.
The result: many fewer people now itemize their deductions—including their charitable donations—to reduce their tax liability. Not itemizing means they now pay income tax on the money they are giving to charities.
Normally, when you withdraw money from an IRA, you pay tax on that withdrawal. But if you have a donation made directly from your IRA to a qualified charity, you are donating pre-tax dollars.
If your income as a couple is between $20,551 and $83,550, your federal tax bracket is 12 percent. If you donate $500 to a charity as a QCD directly from your IRA, the charity receives the full $500. If you first withdraw the $500 from your IRA, you will pay 12 percent tax on it for a total of $60. This will leave you with only $440 to donate to the charity.
If your income as a couple is between $83,550 and $178,150, your tax bracket for that money is 22 percent. Donating $500 directly from your IRA is still $500. But donating it after 22 percent taxes, you would have just $390 left to donate to the charity of your choice.
The ceiling for donating QCDs is quite high: $100,000 per person per year.
Processing a QCD is not difficult. Your chosen charity will know whether it is a 501(c)(3) nonprofit and qualifies for QCDs. If it qualifies, you can provide your investment management company with the name of the charity, its mailing address, and the amount you wish to donate. Some investment management companies send the check directly to the charity. Others provide the checks (made out to the designated charity) for you to mail.
You will receive a 1099 form for your contribution and need to report it on your tax return.
This can be especially valuable when IRA holders reach 72 and are required to take minimum distributions from their IRAs. Instead of taking all or their Required Minimum Distribution (RMD), they can designate some of it to go directly to a charity and reduce their tax burden for the year. With careful calculations and planning, they may even be able to keep their income down in a lower tax bracket.
If people have designated a charity to receive part of their estate, it is good financial planning to designate the charity as beneficiary of the IRA, or a percentage of the IRA. The reason: a charity will not pay income tax on funds from an IRA, but your heirs will pay income tax on any IRA moneys they receive. Heirs will not, however, pay income tax or capital gains tax on post-tax assets such as Roth IRAs and assets purchased with post-tax moneys. (For Roth IRAs, investors pay taxes on the amount they are investing, and then no income tax or capital gains tax is due on any appreciation in value of that asset.)
An estate of a single person in Iowa needs to exceed $12.06 million before any estate tax is due. The estate of a couple needs to exceed $24.12 million in value before any estate tax is due.
The above is provided for general information purposes only and is not intended to be investment advice. Consult with your financial advisor before making investment and donation decisions.
Adapted from Creative Aging by Carol Van Klompenburg, published 2023, available from Amazon and for Pella-area residents directly from Carol. Carol has an MA in theater arts and is available for reading performances of her writing on aging, moments in her gardens, and other topics.