There’s a clever new way you can have your cake and eat it too.
We’re talking about updated tax rules allowing you to gift a portion of your IRA funds to your favorite charity, which will help you feel good and save on taxes, too.
If you are age 70 1/2 or older you probably know you have to take money out of your IRA each year by making what we call a required minimum distribution, or RMD.
The amount you need to withdraw is based on your age, and IRS life expectancy tables. That withdrawal is taxable, meaning you have to withdraw the funds and pay income tax, whether you need the money or not.
For many clients, those withdrawals – and taxes – can be burdensome.
So here’s a thought. If you don’t need the entire withdrawal amount to spend, consider gifting some to your favorite charity.
You can transfer up to $100,000 from your IRA directly to a charity or community foundation if you’re age 70 1/2 or over (some organizations do not qualify, so check the rules before gifting). You pay no income taxes on the transfer or the amount withdrawn.
The gift counts as part of your Required Minimum Distribution (RMD), which lowers your withdrawals and therefore your taxes. And, it counts dollar-to-dollar to support your favorite charitable cause.
Why is this a smart move? If you took the money out of your IRA, paid taxes on the withdrawal, and then gave it to charity, you or the charity could end up with less.
explains how those IRA withdrawals can drive up taxes in an article for Trusts & Estates:
- Income taxes on Social Security benefits can increase,
- Limitations on annual charitable deductions and itemized deductions can apply, and
- Medicare insurance premiums can increase.
You get the message. Through some sneaky back-door IRS accounting rules, taking out IRA money affects several items on your tax return, and if you’re not careful, you’ll owe more tax than you thought possible! If cutting taxes is a concern, consider a charitable IRA gift.
This technique is not a good fit for everyone, but it’s a great move, says Jones, “for a charitably minded IRA owner who doesn’t need RMDs to live on.” Ask your CPA, attorney, or financial advisor for more information.