Year-end giving from your IRA

Steve Merrell |

Giving has a way of making us happier. At least that’s the conclusion several published studies have reached after exploring the relationship between charitable giving and satisfaction. A study published by the Women’s Philanthropy Institute at Indiana University summed it up concisely: “The more a household gives as a percentage of income, the higher the household’s life satisfaction.”

We are fortunate to live in a community with many excellent opportunities to give. Some people mistakenly believe they must make large gifts to make a big difference. That simply isn’t so. While nonprofit organizations obviously appreciate large gifts, most giving is done by people like you and me—regular folks who give what they can to make a difference.

If you have an IRA and are older than 70 ½, you can give directly to charities using your IRA through something called a Qualified Charitable Distribution, or QCD for short.

Current tax law allows each qualified taxpayer to make up to $100,000 in QCDs every year. QCDs satisfy your required minimum distribution but are not included on your tax return as taxable income. In other words, using a QCD allows you to get money out of your IRA tax-free and can help you avoid the problems that come when RMD’s inflate your income. A prime example is Medicare’s income-related monthly adjustment amount, or IRMAA, that increases your monthly Medicare premium when your income exceeds certain levels.

If QCDs sound interesting to you, here are a few important points to keep in mind.

First, you must be charitably inclined. With a QCD, the money you distribute must go directly from your IRA custodian to the qualified public charity. If you distribute the money to yourself first and then donate it to charity, you get a tax-deduction if you itemize, but your distribution will be included in your taxable income for the year.

Second, you must be at least 70 ½ years old.

Third, your QCD must go to a 501(c)(3) tax-exempt organization. Private foundations and donor-advised funds are not authorized to receive QCDs. If you make a distribution to a non-authorized charitable entity, your contribution may be tax deductible (if you itemize deductions), but the distribution itself will be counted as part of your taxable income.

Fourth, you cannot receive any benefit from the charity in return for your gift. Sometimes, charities provide incentives for making pledges. While a QCD can be used to satisfy your pledge, you will be on shaky ground to accept a special incentive gift of more than nominal value in exchange for your QCD.

Fifth, QCDs may only be made from an IRA or an inherited IRA, not from employer-sponsored plans like 401(k) or 403(b) plans or active SEP or Simple IRAs. (An active SEP or Simple is one still receiving contributions from employers.) However, you can make QCDs from “inactive” SEP or Simple IRAs that are no longer receiving employer contributions.

Current tax law makes QCDs attractive for two reasons. First, the new tax law requires folks to choose between receiving the larger standard deduction ($24,600 for couples filing jointly in 2019) or itemizing tax deductions. However, if you make your charitable contributions with QCDs, you effectively get both. You can claim the higher standard deduction and give pretax dollars to charities through the QCD.

If you have already taken distributions from your IRA for 2019, you may want to wait until next year to benefit from the QCD. The IRS considers the first distributions in a year as counting toward that year’s required minimum distribution. However, if some portion of your RMD has yet to be distributed, you might want to discuss this strategy with your financial advisor.

This holiday season I encourage you to find the joy of giving. Give of your time; give of your talent; give of your treasure. As you experience the increased life satisfaction that comes from actively supporting those things that speak most directly to our soul, you may find that your giving is the best gift you receive this holiday season.

 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.