Charitable IRA Gifts

In 2013, you can once again donate up to $100k to a charity tax-free. Provided by Doug Potash The IRS extends a major tax break. Thanks to the American Taxpayer Relief Act of 2012, charitable IRA gifts are once again allowed in 2013. An IRA owner aged 70 or older may gift up to $100,000 this year to either a 170(b)(1)(A) public foundation or a 501(c)(3) charity. Congress may elect to extend this opportunity in 2014 and subsequent years.1,2 What do you gain by doing this? The possible tax benefits of a qualified charitable distribution (QCD) from an IRA are threefold. A QCD counts toward your RMD, but it doesnt count as taxable income. If you dread mandatory IRA withdrawals and the taxes that come with them, you should know that a charitable IRA gift can be used to satisfy all or part of the annual Required Minimum Distribution. At the same time, the contribution amount is excluded from your gross income. With higher tax rates and surtaxes kicking in this year, reducing your AGI may be a priority.1,3 A QCD can help you reduce the size of your taxable estate. Most of the money in a traditional IRA will eventually be taxable. Donating some or all of these assets to charity will lower your taxable estate dollar for dollar. (As you can surmise, QCDs are more beneficial to traditional IRA owners than Roth IRA owners from this standpoint.)3,4 A QCD could also help you contend with charitable donation limits. You may reach a point where you would like to donate an amount greater than 50% of your AGI to charity. Normally, the IRS doesnt allow that but charitable IRA gifts don't count against that 50% limit as they arent included in a taxpayers gross income. While a charitable IRA gift isnt tax-deductible, you may not itemize to begin with many retirees just take the standard deduction.3 How do you do this? To realize most or all of these tax perks, the gift has to take the form of a qualified charitable distribution (QCD), alternately known as a trustee-to-trustee transfer or IRA charitable rollover. In other words, the financial firm serving as the trustee of your IRA writes a check directly to the charity. A financial professional you know and trust can help you fill out the accompanying paperwork.2 If the IRA trustee makes the check payable to you and you deposit it and write a check for the equivalent amount made payable to the charity, it is a taxable event and the whole purpose of the charitable IRA gift is defeated. Should you make that blunder, you will have to declare the income and just take a normal charitable deduction on the donation.2

What does the fine print say? To make a QCD, you have to own an IRA and be age 70 or older. You cant make a QCD from an employer-sponsored retirement account such as a 401(k) or 403(b); in fact, you cant make a QCD from a SEP or Simple IRA either. 1,2 The QCD cant be made in a way whereby you would derive benefits from the charity or foundation later. It cant become the basis of a charitable remainder trust or a gift annuity, for example. A QCD also cant be made to a donor-advised fund (via which the contributed assets would be invested and grow tax-free prior to the actual charitable donation).2 A QCD cant be a split interest gift. The amount of the QCD must otherwise have been considered taxable income, and you are not permitted to claim a charitable deduction for it. 2 Help a charity, help your financial situation. If you are well off and dont really need or want the additional income and income taxes that would result from your RMD, a charitable IRA gift may offer you a solution with the flavor of a win-win a boon for the charity, a tax break for you and/or your heirs.
Doug Potash may be reached at 443-837-2550 DouglasPotash@PremierPlanningGroup.com PPG, 115 West St #400, Annapolis, MD 21401 www.premierplanninggroup.com
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Citations.
1 - irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013 [5/1/13] 2 - fpanet.org/ToolsResources/ArticlesBooksChecklists/Articles/CharitablePlannedGiving/QualifiedCharitableDistributionsfor2012and2013/ [1/29/13] 3 - bankrate.com/finance/taxes/gifts-to-charity-pay-off-on-your-taxes-1.aspx [1/10/13] 4 - fidelitycharitable.org/giving-strategies/advisors/donating-retirement-assets-to-charity.shtml [5/7/13]

Doug Potash is a Registered Representative offering securities through Cambridge Investment Research, Inc., Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a federally registered investment advisor. Cambridge and Premier Planning Group are not affiliated.