Donating to charity directly from your IRA can have multiple benefits if you are over the age of 70½ and required to make annual withdrawals, known as required minimum distributions (RMDs). These RMDs may end up forcing you to withdraw more than you wish, forcing you to liquidate and possibly increasing your tax burden. By funding your charitable giving directly from your IRA, however, you can avoid this hassle, as the amount you donate can be counted against your remaining RMDs.
In addition to lowering your RMDs, this strategy can have rewards come tax time. Typically, the entire amount you withdraw from your IRA is added to Adjusted Gross Income (AGI) and taxed at your ordinary income tax rate. However, if you donate to charity directly from your IRA, that amount is not included in AGI. For example, if your RMD is $70,000 and you withdraw $70,000 normally, the entire amount is included in AGI. However, if you withdraw $60,000 and make a $10,000 donation directly from the IRA, only $60,000 is added to AGI, yet you have fulfilled your $70,000 RMD. AGI is an important determinant of more than just taxable income, and lowering it can have a favorable impact on Medicare premiums, Social Security payments, and the net investment income surtax as well.
There are some rules to be aware of when making a donation in this manner. First, charitable contributions must go directly from the IRA’s custodian to the charity, skipping the account owner completely. Additionally, the charity being contributed to must be a qualified charity, the most common of which being defined as 501(c)(3) organizations. Finally, these charitable transfers are not valid until a retiree actually turns 70½ and are limited to $100,000 per year.
One final thing to consider is that just because donations from an IRA are tax efficient, they may not be the most tax efficient option. Individuals with highly appreciated assets in taxable accounts, for example, may be better off donating the appreciated stock as described here. All in all, choosing the right method of donation can turn your benevolent gift to your favorite charity into a tax-efficient, benevolent gift.