Q: A couple of weeks ago, you wrote a column on the rules for charitable giving. I understand that I can give money to charities directly from my IRA, but you didn’t mention it in your column. Is it a good idea?
A: If you have an IRA and are older than 70 ½, you can give directly to charities from your IRA through something called a Qualified Charitable Distribution, or QCD.
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. This means that donating money directly from your IRA can satisfy your charitable intent and help you avoid nasty little things like Medicare’s income-related monthly adjustment amount, or IRMAA.
IRMAA is a surcharge imposed by Medicare on beneficiaries with modified adjusted gross income (MAGI) above certain threshold levels. Normally, a beneficiary pays 25 percent of the Medicare premium and the Federal government pays the other 75 percent. However, if your MAGI is high enough, IRMAA can increase your share of the premium to 35%, 50%, 65%, 80%, or even 85%. Your financial advisor can help you determine if a QCD can help you avoid IRMAA.
If a QCD sounds interesting to you, here are some 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, your distribution will be included in your taxable income for the year. If you itemize your deductions, you will still get a tax-deduction, but it will also increase your MAGI and could cause problems with IRMAA.
Second, you must be at least 70 ½ years old. Note that this is different from the age when required distributions must begin (age 72).
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, taxpayers must choose between receiving a standard deduction ($25,900 for couples filing jointly in 2022) or itemizing tax deductions. However, if you make your charitable donations 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 2022, 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.
As we move closer toward the holiday season after what has been a challenging year on many levels, I hope you find joy in giving. As you experience the increased satisfaction that comes from actively supporting causes that speak most directly to your 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 email@example.com.