August 10, 2018

IRA Charitable Rollover

Distribution
Blog:PFA PonderingsInvestingRetirementTaxes

Penned by Jennifer I Richard, JD, the Director of Gift Planning at Maine Community Foundation, working with donors and other partners to improve the quality of life for all Maine people.

A couple of PFA Ponderings ago there was a discussion about retirement savings in the context of IRS Tools: the CARROT and the STICK.   In this go around, we would like to introduce Jen Richard, director of gift planning at the Maine Community Foundation, to discuss one more special carrot that may benefit Individual Retirement Account (IRA) owners who are over the age of 70 ½ and make charitable gifts.

Qualified Charitable Distributions (aka IRA Charitable Rollovers)

It is commonly known that in the year that you turn 70 ½, you must typically start withdrawing required minimum distributions (“RMD”) annually from your IRA.  The theory being, when working and saving for retirement, you enjoyed the benefit of income tax deferral on the amounts contributed to your retirement funds and on the growth of the funds. Now, at age 70 1/2, whether you need the money or not, it is time to begin withdrawing the money and paying taxes on the amounts withdrawn.  As the saying goes, “all good things must come to an end”.  Or, must it? If you make charitable gifts, you may want to consider a Qualified Charitable Distribution (“QCD”).*  A QCD is a tax provision that allows you, after you have reached the age of 70 ½, to gift up to $100,000 annually from your IRA to qualified charities.  The gifted amount is not included in your adjusted gross income (“AGI”) for income tax purposes and it counts toward satisfying your annual RMD.  Not taxed and still counts toward RMD -this sounds like a great solution for an IRA owner who already makes charitable gifts, so what rules must be followed to qualify this gift as a QCD?

  1. You must be 70 ½ or older.
  2. Gift must be made from an IRA (not SEP, Simple, 401K, or any other retirement plan).
  3. Gift must be made directly from the IRA Trustee to the qualified charity (without passing through your hands or your other accounts).
  4. Gift must be made to a public charity** (law specifically excludes private foundations, donor-advised funds, and non-operating supporting organizations).
  5. Gift cannot exceed $100,000 annually per taxpayer.
  6. You cannot claim the gift as a charitable deduction on your tax return.
  7. You must receive the same type of acknowledgment from the charity for the contribution that would be required if you were receiving a charitable deduction and you cannot receive any goods, services, or other benefits in exchange for the gift.

One of the distinct benefits of a QCD is that it reduces your AGI regardless of whether you itemize deductions.  The QCD provision is not a new law. After various iterations over many years, the current provision became permanent law in 2015.  However, with the Tax Cut and Jobs Act of 2017 increasing the standard deduction while limiting and eliminating previously allowable deductions, it is anticipated that there will be even fewer taxpayers itemizing deductions this year.  A QCD may be a solution for non-itemizers to continue to enjoy a tax benefit for making a charitable gift.

Several other tax provisions are based on your AGI, so reducing AGI may also provide additional tax benefits.  They include, your tax bracket, whether you pay taxes on your Social Security income, whether you pay alternative minimum tax, whether you pay a 3.8 percent Medicare tax on your investment income, and if you do itemize, whether your medical and charitable deductions are limited by your AGI.

If you are an IRA owner over age 70 ½ and you make charitable gifts, or you think you might like to make a charitable gift, consider a QCD as one of your charitable giving options. As with all charitable gifts, it is important to seek advice from your professional advisors not only for guidance on the tax laws, but also, for guidance as to which of your assets is the most tax efficient asset and best asset to give to meet your personal and charitable goals.

* IRC Section 408(d)(8)

**The Maine Community Foundation is a public charity.  QCDs may be contributed to all Maine Community Foundation charitable funds except donor advised funds.