Donating to Charity? Use your RMD and Save

Gary Alt |

Question: I am over 70 1/2 so I am taking the required minimum distribution (RMD) from my IRA account. I would like to make a donation to a recognized tax deductible charity. I would like to have the check for that contribution made directly to the organization using my IRA account. Can I do this? As I understand the present IRS rules, IRA monies can be paid directly to charities without creating a tax issue to the contributor. Is that correct? I apologize if you have answered this type question in previous articles.

Answer: In 2007 Congress, for the first time, allowed taxpayers over 70 ½ (70 and one-half) to donate up to $100,000 of IRA money to an eligible charity without reporting the withdrawal as income on their tax return.  This process has since become known as a “Qualified Charitable Distribution (QCD)” or a “Charitable IRA Rollover.” 

Congress extended the Charitable IRA Rollover in 2008, 2009, 2010, 2011, 2012, and 2013.  Sometimes they wait until the last minute.  It wasn’t until New Year’s Day 2013 that they extended the Charitable IRA Rollover for 2012 (the previous year) and 2013 (the New Year).  Congress has yet to extend it for 2014.  Chances are they will, but probably not until after the November elections.  My advice is to assume they will and make your RMD charitable contribution as if the law was still in effect. 

To make a QCD, instruct your IRA custodian to make the distribution checks payable to your selected charity(ies).  Then if Congress extends the law, you can exclude those distributions in your income on your 2014 tax return.  Note that distributions to donor-advised funds, charitable remainder trusts, charitable lead trusts, and private foundations do not qualify as QCDs.  

QCDs have potential advantages over itemized charitable deductions for some taxpayers.   Current tax laws reduce the amount of your itemized deductions if your income exceeds certain thresholds.  And by using a QCD rather than simply donating after-tax money to charity, your modified adjusted gross income (MAGI) will be lower.  Lower MAGI may lower your taxable social security, lower your tax bracket, increase your deductions, and lower your Medicare Part B premiums.

To further explain, higher income taxpayers pay higher premiums for Medicare Part B. The standard monthly premium for individuals with a MAGI of $85,000 or less is $104.90. For MAGI's above that threshold, premiums are adjusted upward.  Individuals with a MAGI above $214,000 pay $335.70 per month.  MAGI thresholds for married couples are double the threshold amount of an individual.   

Here is an example of how a QCD can save you money:

Assume (1) Your MAGI is $80,000 before you take your 2014 required distribution from your IRA, (2) You donate $30,000 to charity this year, and (3) Congress extends the QCD. 

With an MAGI of $80,000, you will pay $104.90 per month for Medicare Part B.  If you withdraw $30,000 from your IRA and include it in your income, your MAGI will go up to $110,000 and your Medicare Part B premiums will double to $209.80 per month. 

However, if your IRA custodian issues the check made payable to the charity via a QCD, your MAGI will stay at $80,000 and your  Medicare Part B premium will stay at $104.90 per month.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to