Charitable Giving Through Individual Retirement Accounts
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.
The idea was that taxpayers could contribute an amount each year, reducing their taxable income by the amount of the contribution. Additionally, the value inside the IRA could grow without being subject to tax until it was withdrawn; earnings were tax deferred.
IRAs have been a popular way to reduce income taxes because they allow individuals a wide array of investment opportunities that qualify. Many investors now have IRAs that have grown substantially.
Incomes are now much higher than they were when IRAs were first created, and individuals often put off taking withdrawal from their accounts—and paying the deferred tax—for as long as possible. When the investor reaches the age of 70 ½, they are required to take a minimum withdrawal. That distribution may make a significant impact on their tax liability.
Fortunately, there is a way to make that Required Minimum Distribution (RMD) without having to pay tax on it. By directing your IRA custodian to make that distribution directly to a qualified charity, the amount will not be taxable. (Note: 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.
You may need the income provided by your IRA during your lifetime. If you name a charity as the beneficiary for your account, any remaining value will pass to charity at your death.
We have prepared a special report, Charitable Giving Through Individual Retirement Accounts, to help you understand options to maximize the personal and charitable benefit from your retirement accounts. The guide is free and can be downloaded here. There is no cost or obligation.
