If you’ve reached age 70 ½ and you’re looking for ways to save money on your tax return, making charitable donations from your IRA may be a good tax strategy for you.
There are a wide range of IRS-approved charities that can accept cash donations and these qualified charitable donations (QCD) can satisfy all or part of the amount of your required minimum distribution from your IRA. For example, if your 2019 required minimum distribution was $10,000, and you made a $5,000 QCD for 2019, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.
These QCD’s can be taken out of a traditional IRA free of federal taxes, provided you meet certain requirements. There are a number of things to be aware of if you’re interested in making use of this kind of distribution and it’s always recommended that you speak with a professional tax and/or financial advisor when making financial decisions.
For an IRA distribution to be treated as a QCD, the distribution must meet the following criteria:
1. It can’t occur before you, as the IRA owner, reach age 70 1/2.
2. It must meet the normal tax requirements for a 100 percent deductible charitable donation. If you receive any benefit that would be subtracted from a donation under the normal charitable deduction rules (such as free tickets to an event) the distribution does not qualify as a QCD. This is important to note.
3. It must be a distribution that would otherwise be taxable. A Roth IRA distribution can meet this requirement if it’s not a qualified (tax-free) distribution. This is generally not advisable, financial planners say.
Additionally, there is a $100,000 cap on total QCD distributions per year for each IRA owner.
You should also keep in mind with QCDs you cannot claim the amount contributed as a an itemized deduction, unlike with other charitable donations. However, because the QCD is tax free, it’s equivalent to a 100 percent deduction.
If you have questions about whether making charitable donations from your IRA makes sense for you, please contact one of our tax advisors. We are here to help!