Giving to Charity from your IRA
IRA Charitable Strategies: Combining Generosity with Tax Efficiency
Many people are unaware of the tools available when giving charitably through their IRA, which can provide tax benefits while spreading good worldwide. Many people know that distributions from an IRA are considered taxable income. However, people often miss the chance to avoid this tax burden by taking the distribution and donating the funds they do not need. If you find yourself in this situation, there are some solutions available.
Understanding Charitable Giving Through an IRA
Before delving into tax-advantaged strategies, it’s important to address the first and readily available avenue, Qualified Charitable Distributions (QCD). The IRA allows individuals 70 ½ or older to make tax-free charitable donations directly from their IRAs. You can donate up to $100,000 annually from your IRA through a QCD. This amount can also satisfy your Required Minimum Distribution (RMD) if you are of RMD age. The donated amount is not included in your taxable income, which can help lower your overall tax liability. This strategy is particularly advantageous for individuals who do not itemize deductions because it allows them to get the tax benefit for their charitable donations.
Tax-conscious Strategies for Charitable Giving Through an IRA
- Donate your RMD: If you are of RMD age, 73 years old as of 2023, you must take a required minimum distribution from your IRA. Consider donating some or all if you do not need the income directly to a qualified charity through a QCD. This can reduce your annual taxable income while supporting a cause you care about.
- Offset Taxable Income: Even if you are not required to take an RMD, you can still use QCDs to offset taxable income. Donating a portion of your IRA funds to charity can reduce your overall tax liability.
- Bunching Strategy: You can employ a “bunching” strategy to maximize tax benefits. Instead of making annual donations, you can bunch multiple years’ worth of gifts into a single year and make a sizable QCD. This can help you exceed the standard deduction threshold and itemize deductions in that specific year, leading to more significant tax savings.
- Establish a Charitable IRA: With this arrangement, a portion of your IRA assets can be donated to a charitable organization while you receive some income during your lifetime.
A donor-advised fund (DAF) is a charitable giving vehicle allowing individuals, families or organizations to contribute to a centralized fund and then recommend grants from the fund to specific nonprofit organizations. You can contribute to a donor-advised fund using your traditional IRA assets.
By contributing to a DAF, you can take a tax deduction in the year you contribute to the DAF, even if you do not immediately distribute the funds to charities. This approach allows you to bundle several years’ worth of charitable deductions into one tax year, potentially providing a significant tax deduction.
Charitable Remainder Trust
A charitable remainder trust (CRT) is a trust that enables an individual or couple to donate assets and receive an income stream for themselves or other beneficiaries. After a specific period or the death of the last income beneficiary, the remaining assets in the trust are given to one or more charitable organizations. This type of trust is irrevocable.
The CRT is funded with assets from your traditional IRA. You receive an immediate charitable deduction for the present value of the charity’s remainder interest in the trust, which can help offset taxes on the IRA distribution.
Charitable Gift Annuity
A charitable gift annuity (CGA) allows an individual to make a gift to a nonprofit organization and, in return, receive regular fixed payments for the rest of their life or a specified term. CGAs provide a combination of charitable giving and income generation for the donor. Like a CRT, you can set up a charitable gift annuity with traditional IRA assets. Part of the annuity payments may be considered a tax-free return of principal, reducing your taxable income in the year of the gift.
Consult with a Financial Advisor
Donating to charity through an IRA is a smart way to support a cause while also being mindful of taxes. However, navigating the tax laws related to charitable giving and IRAs can be complicated. The Tax Cuts and Jobs Act made notable changes to tax deductions and exemptions. Therefore, it is crucial to collaborate with an advisor or a tax expert to ensure your financial situation and current tax code inform the most tax-efficient decision. Contact an Adams Brown wealth management advisor to help you make the best decisions and manage your wealth.