How An IRA Strategy Can Help You Be More Generous On Giving Tuesday

When charitable appeals arrive for Giving Tuesday, most people turn to their checkbooks or payment cards. Some people, and the objects of their giving, would be better off making the contributions from traditional IRAs.

The best way for some people to make charitable gifts is the qualified charitable distribution (QCD), also known as the charitable IRA rollover. The QCD’s tax benefits allow you either to give more money or reduce income taxes.

Not everyone benefits from making charitable gifts through a traditional IRA. For most taxpayers, a transfer from a traditional IRA to a charity is treated as though the IRA owner received a distribution and then transferred the distribution to the charity.

The amount of the distribution is included in the IRA owner’s gross income. It’s also eligible for a charitable contribution deduction, but to take advantage of the deduction, the owner must itemize expenses. Few taxpayers itemize expenses now. So, for many taxpayers, making a charitable contribution from a traditional IRA increases income taxes.

Taxpayers ages 70½ and older, however, can make donations from traditional IRAs using QCDs. The amount of a QCD isn’t included in the traditional IRA owner’s gross income. The trade-off is it’s not eligible for a charitable contribution deduction. The QCD is a tax-free way to distribute money from a traditional IRA.

There’s a bonus for taxpayers ages 72 and older who are taking required minimum distributions (RMDs). For them, the QCD counts toward the year’s RMD. By making a QCD, you can take all or part of the RMD tax-free.

(Though you can make a QCD any time after age 70½, RMDs now don’t begin until age 72.)

Making a QCD is a much smarter way to make charitable contributions than writing a check. You take money tax-free from the IRA, and the non-IRA money you might have donated to charity can pay other expenses. The only giving strategy competes with it for tax benefits is to donate appreciated investments from a taxable account.