CAN I DONATE MONEY TROUGH MY IRA?
Money from your IRA or Individual Retirement Account can be utilized to give to 501 (c) 3 entities. This question has come up several times lately. The end of the year is a big time for individuals to examine what their personal tax situation will look like in the coming spring.
Giving to charity is one of the ways that you can pursue a tax break. As with many parts of the tax code, giving to charity may not fully decrease your taxes. If you do not itemize you may not be able to deduct your charitable donations on the federal level. However, if you are taking "Required Minimum Distributions" or also known as "RMD's" from a retirement account, you may be able utilize what is known as the QCD, which allows you to avoid paying taxes on your distribution.
WHAT IS AN RMD?
A required minimum distribution is simply the required amount of money that must be withdrawn from your traditional IRA or qualified retirement accounts when you reach a certain age. The IRS uses the RMD as a safeguard against people using retirement accounts to avoid paying taxes. When you add money to your retirement, you don't generally pay taxes on that contribution, unless it is a ROTH account. So the IRS wants to make sure and collect the taxes at some point; which is why they require individuals over the age of 70 (now 72, just passed in the SECURE Act) to withdraw and pay taxes on the money they previously had deferred.
BACK TO THE DONATION PART: QUALIFIED CHARITABLE DONATION (QCD)
A QCD is a direct transfer of funds from your IRA to a qualifying charity. A QCD can be counted as a satisfaction of your RMD. The QCD does not require that you itemize, which most people don't with the new higher standard deduction; but rather you are just directing what would be taxable income, to a charity. The charity will then receive the money and also are not required to pay tax on that money, win-win for both parties.
The maximum amount of a QCD is $100,000. This means if you have RMD amounts that you would like to use for a charity you could be looking at a great way to decrease your taxable income.
HOW IT WORKS
If you are 70 1/2 you are eligible to do a QCD. All you need to do is simply contact the custodian who manages your retirement account and direct them to submit a payment directly to the charity of your choice. Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are 501 (c) 3 organizations. But make sure and check with your charity first to make sure they are qualified as a 501 (c) 3. The charity must receive the donation by December 31 to be eligible for that tax year as a reduction to taxable income. You cannot take your regular RMD and write the check yourself to a charity. This QCD requires that you make the payment directly from the retirement account to the charity. The only exception to this is if you have check writing privileges with your IRA account, in this case you can write the check directly to the charity from the IRA account.
Using your IRA to make charitable contributions can be possible if you are 70 1/2 and receiving RMD monies. If you are interested in supporting a worthy cause this is a great way to donate and receive a tax break. Make sure the payments are made direct and talk to your tax advisor about the required reporting in tax season.