Using an IRA to Contribute Directly to a Charity

There are many ways to contribute to charity. While time and talents are popular, as are donations of specific items, giving money is still the most common way that people provide options for charities to use. If you want to give money without tax concerns, or you want to leave money to charity as part of your estate or retirement plan, you have some excellent options. One of those choices is to contribute directly to a charity through your IRA, which can allow you to avoid paying taxes on that money. That helps your financial situation and also provides more money for the charity to appreciate.

While you are alive

Once you are past the age of 70.5 years, you can give to a charity from your retirement accounts without paying tax or losing any money. If you take money out you will pay taxes on the amount thus reducing the amount you can spend.  If you give that money directly to charity instead, the charity will receive the full amount you transferred to them.  It is an excellent way to make use of more of your money for the purpose of helping others.

Rules – The charitable distribution must be:

  • From a traditional IRA
  • Direct from the IRA trustee to the charitable organization—with no intervening possession or ownership by the IRA owner
  • On or after the IRA owner has reached age 70½
  • A contribution to an organization that would qualify as a charitable organization other than a private foundation or donor advised fund
  • There is a $100,000 annual limit to donations. Spouses can each give $100,000 from their respective IRAs each year.

Tax Benefits:

Charitable IRA distributions come with several tax benefits

  • Required minimum distribution (RMD):
    • The charitable rollover is included in determining the amount of the RMD.
    • Therefore, if the RMD was $70,000, a $70,000 distribution directly to charity would satisfy the requirement for that year.
    • The taxpayer would not be required to take the $70,000 into income.
  • Less likely that Social Security will be taxable
    • By not being included in AGI, the charitable rollover will not be included in the base amount, which would otherwise result in an increase in the amount of Social Security income subject to income tax.
  • Avoiding the percentage limitation on charitable contributions.
    • Not subject to the 50% of adjusted gross income limits
  • Itemized deduction and personal exemption phase outs
    • Because the charitable IRA distribution isn’t included in gross income, it will not be included in AGI. Since it is not included in AGI, it avoids artificially inflating AGI and possibly triggering phase outs
  • Effect of AGI:
    • By not being included in AGI, the charitable rollover does not increase the floor and thereby does not reduce the amounts otherwise deductible for medical expenses and miscellaneous itemized deductions.

At your death

With an IRA you can set a beneficiary who will receive the money if you should pass away. That beneficiary does not have to be a single person. It can be an entity such as a charity, as well. It is also possible to have more than one beneficiary, and to have a portion of the IRA proceeds go to one place and another portion go to another place. Many people do this when they have family they want to leave money to, but they also want to help provide for a charity. By contributing directly to a charity through your IRA, you bypass issues that could cause you to pay more in taxes and fees.

What About the Tax Breaks?

When you take money from an IRA there are taxes that need to be paid. But if you give money directly to charity from your IRA, that charity will receive the full value of your donation. That not only gives an organization of your choice a larger donation to work with, but it keeps you from paying taxes on money you do not have and may not use.  For large donations and people in specific income brackets, those tax breaks can be significant.