Terry Savage: Making charitable gifts from IRAs
It’s the season of the year when thoughts turn to charitable gifts and IRA required minimum distributions. With deference to turkeys, this is a classic case of being able to kill two birds with one stone! Let me explain.
You know you must take an required minimum distribution (RMD) before year-end from all retirement accounts (except those created on an after-tax “Roth” basis), once you have reached age 73. If you don’t understand exactly how to calculate and withdraw your RMD, please go to my website, www.TerrySavage.com, and read the recent column explaining the process.
Those RMDs are taxed as ordinary income. You can use the money for any purpose, or just save or invest it in an after-tax account. Some people use their retirement plan withdrawals to make charitable contributions, which are tax deductible if you itemize, using Schedule A on form 1040.
But using your RMD to make a direct charitable contribution avoids this middle step. If you follow the rules carefully, you can direct a portion of your RMD directly to a qualified charity, and use that contribution to fulfill some, or perhaps all, of your RMD.
Even better, the direct distribution avoids having RMD income push you into a higher tax bracket and maybe even increase your Medicare Part B premium in the years ahead.
And, yes, before explaining the rules, I recognize that this opportunity applies to only a select group of retirees — those who have enough “extra” money to designate contributions to charities. In my columns, I typically try to provide information that will help the broadest cross-section of my readers. But in this case, if I am able to conveniently encourage charitable contributions, then so many more people will benefit from the good works that these charities do throughout the year. So please read on and spread the word.
You can gift up to $100,000 of your distribution from IRAs (including but not limited to your RMD) to a recognized 501(c)(3) charity and qualify it as a charitable distribution. (Couples filing jointly can make direct IRA contributions of $200,000.) The deadline is December 31, but of course this is a process you should start now to avoid the year-end rush.
To make this type contribution, you should contact your plan custodian right now. Include the name of the charity and its mailing address. You do not take the money; instead, the custodian sends the check directly to the charity. They not only must make the distribution before year-end, but the check also must be cashed by the charity to qualify the contribution for the current year.
The contributions can be made to one or more different qualifying charities. If you’re looking for a good cause to support, start searching at CharityNavigator.org. There you can find ratings for each charity, and search by cause. You’ll see which ones devote most of your contribution to doing good work — as opposed to paying for salaries and overhead.
Of importance to the very wealthy, this contribution from your retirement account does not count toward your annual charitable contribution allowance based on your annual income. For tax year 2023, the limit on charitable cash contributions is 60% of the taxpayer's adjusted gross income. There is a lower limit for non-cash contributions. So, if you want to be even more generous than this limitation, your direct retirement plan contribution is above this limit.
While I’m on the subject of charitable giving, there’s a separate strategy for those who might want to give a much larger contribution this year, perhaps to take the generous tax deduction that comes with the contribution. But it won’t qualify as an IRA RMD distribution.
Consider creating a donor-advised fund. It is like creating your own private foundation. You get the immediate tax deduction, can invest the money for growth, and follow the rules for direct distributions from your donor-advised fund. There is no required annual distribution. And these contributions to a DAF are irrevocable, meaning you cannot get your money back; it can only be distributed to registered charities.
There are tax benefits and emotional benefits from giving to a good cause you want to support. Combining these strategies always makes sense. And that’s The Savage Truth.
(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)
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