In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to ensure that employees would receive the retirement income employers promised through pension funds. ERISA covered lots of employer-promised benefits, including retirement and health care, and created a new option for Americans called an Individual Retirement Account, known simply as an IRA.
Individuals can contribute an amount of money to their IRA each year, reducing their taxable income by the amount of the contribution. Those contributions are tax deferred, meaning the value inside the IRA can grow without being subject to tax until it is withdrawn.
IRAs have been a popular way to save for retirement and reduce income tax because they allow individuals a wide array of investment opportunities. Many investors now have IRAs that have grown substantially.
Some individuals may put off withdrawing from their IRAs—and paying the deferred tax—for as long as possible. However, six months after an investor turns seventy, they are required to take a minimum withdrawal from their IRA. That required minimum distribution (RMD) may significantly impact their tax liability.
Fortunately, there is a way to make that RMD without having to pay tax on it. If an investor directs their IRA custodian to make that distribution directly to a qualified charity, the amount will not be taxable. (It must be distributed directly from the fund and not to the investor to pass on to the charity.) RMDs occur with other qualified retirement accounts as well.
While the qualified charitable distribution is not tax deductible, it reduces tax liability by not increasing taxable income. With today’s increased standard deduction, the benefit can be significant.
If you’d like to learn more about what options you might have to maximize the personal and charitable benefits of your retirement accounts, email us at contactcenter@cdfcapital.org or call us at 888-540-7112. We would love to help.
