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You spent your working years saving up for retirement. But you also made sure you donated regularly to charity. Once you’ve retired, your income may be limited. But you don’t want to give up on your philanthropic goals. So how can you keep donating to your favorite charity(s) during retirement?
Money from an individual retirement account (IRA) can be donated to charity. What’s more, if you’ve reached the age where you need to take required minimum distributions (RMDs) from your traditional IRAs, you can avoid paying taxes on the money by donating it to charity.
This tax break was made permanent in 2015. You just have to be sure to follow the rules carefully.
Key Takeaways
- Funds from an IRA can be used for charitable donations if done correctly.
- Charitable donations made from an IRA are called qualified charitable distributions.
- Tax breaks on charitable donations cannot be combined with the tax break on retirement savings.
- Donations made from an IRA can meet all or part of the IRA’s required minimum distributions for the tax year.
- QCDs must be reported by the IRA trustee on Form 1099-R of the account owner’s annual tax return.
How a Qualified Charitable Distribution (QCD) Works
A distribution from a traditional IRA normally incurs taxes since the account holder didn’t pay taxes on the money when the money was paid in. But account holders aged 70½ or older who make a contribution directly from a traditional IRA to a qualified charity can donate up to $100,000 without it being considered a taxable distribution. The deduction effectively lowers the donor’s adjusted gross income (AGI).
Donors must follow the IRS rules for qualified charitable distributions (QCDs) to avoid paying taxes on the donation. These are called charitable IRA rollovers.
Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(c)3 organizations. The charity will not owe taxes on the donation.
This tax break means the donor can’t claim the donation as a deduction on Schedule A of their tax return. But most taxpayers probably won’t itemize their deductions on the form, especially since the Tax Cuts and Jobs Act (TCJA) increased the standard deduction. The standard deduction for the 2022 and 2023 tax years are noted in the table below:
| 2022 and 2023 Standard Deductions | ||
|---|---|---|
| Filing Status | 2022 | 2023 |
| Single | $12,950 | $13,850 |
| Married filing separately | $12,950 | $13,850 |
| Head of household | $19,400 | $20,800 |
| Married filing jointly | $25,900 | $27,700 |
| Surviving spouse | $25,900 | $27,700 |
Sources: Internal Revenue Service Rev. Proc. 2021-45 and Internal Revenue Service Rev. Proc. Internal Revenue Bulletin: 2022-45
Taxpayers whose annual income affects their Medicare premiums may also find that this provision helps control the premium cost.
If you itemize your deductions, you can claim donations made with funds from non-IRA sources.
Qualified Charitable Distributions (QCDs) and IRA Distributions
A required minimum distribution (RMD) is an amount of money that a taxpayer must withdraw from certain retirement accounts, including IRAs, every year. The minimum age has been bumped upwards a couple of times but it is 73 as of Jan. 1, 2023.
The same revision decreased the penalty for failing to take an RMD but it’s still hefty: 25% of the remaining balance in the account.
Any donations made directly from an IRA can meet all or part of the IRA’s RMDs for the tax year. The charity must receive the donation by December 31 for the amount to be applied to that year’s tax return.
QCDs are a good choice for individuals who otherwise could not deduct all or part of their charitable donations because of the IRS rule prohibiting a deduction for amounts that exceed 60% of a taxpayer’s AGI.
This rule might appear to affect only wealthy taxpayers who give generously, but it also affects anyone retired with little to no income who still wants to make a deductible donation.
Roth IRAs do not require distributions while the account holder is alive, so this provision doesn’t work for them.
Donating an IRA After Death
Another way to donate IRA assets is through an estate after the donor’s death by naming the charity as a designated beneficiary of the IRA. Once this is done, the charity receives whatever percentage of the account’s assets the owner states on the beneficiary form when the estate is settled.
There are some added benefits to naming a charity (or charities) as a beneficiary and donating funds from your IRA after your death rather than doing so while you’re still alive. Not only can you choose to allocate specific percentages to your heirs and charities, but you can also use the funds to provide financial support to the causes that are near and dear to you. If you choose to roll the entire balance of your account over to a cause, that charity will get the full benefit.
There are also tax benefits associated with donating your IRA after your death. For instance, your heirs won’t be liable for income taxes once the assets are distributed. Furthermore, any estate taxes can be offset by a charitable tax deduction as long as the value of the assets being donated is included in the gross estate.
Distributions from SIMPLE IRAs are ineligible to be QCDs.
Filing Requirements
If you choose to make a donation through your IRA to a registered charity, you must report the transfer. An IRA trustee must use IRS form 1099-R to report the QCD on an account owner’s annual tax return. Owners should also keep records of the donation date, the account from which the donation came, the amount that was given, and the charity that received the donation.
Validating the deduction also requires a receipt from the charity stating that the donor received no goods or services in exchange for the contribution. The amount of the donation is reduced by the value of any goods or services received in exchange, and that part of the donation will be taxable.
Is an IRA Distribution to Charity Tax-Free?
Traditional IRA distributions are treated as taxable income, which means you will owe taxes on the amount you withdraw from your account. The same rule, though, doesn’t apply to charitable donations. The IRS allows you to use required minimum distributions from your IRA as qualified charitable distributions on a tax-free basis. But keep in mind that you can’t claim a tax deduction for the amount donated.
What’s a Better Tax Break: Charitable Contributions From Stock or an IRA?
Donating from your IRA as a qualified charitable distribution means you won’t pay any taxes on the amount donated the same way you would if you took a required minimum distribution as income. But you won’t be able to claim the amount as a deduction on your annual tax return.
But making a contribution from stocks may end up benefiting you more in the long run, especially if you held the stock for more than a year and its value appreciates by the time it is donated. This allows you to deduct the stock’s full fair market value without having to realize the capital gain.
At What Age Can I Make a Qualified Charitable Distribution From My IRA?
You can begin making qualified charitable distributions from your IRA as soon as you turn 70½. Keep in mind that any QCDs that are generated from your IRA must be limited to amounts that would be taxed by the IRS as ordinary income.
What Charities Are Eligible for a Qualified Charitable Distributions?
You can make qualified charitable distributions to any 501(c)(3) organization. These are the only groups that can receive tax-deductible donations. Those that don’t qualify are private foundations and donor-advised groups.
The Bottom Line
Using an IRA to make a charitable donation can help lower a tax bill and help a worthy cause. Distributions must be made directly to the charity, not to the owner or beneficiary. All distribution checks need to be made payable to the charity or they will be counted as taxable distributions.
Talk to your IRA custodian about how to make this happen and be sure to leave sufficient time for the funds to reach the charity.
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