As humans, one of the most amazing traits we have is our capacity to give – and not just the beautifully wrapped gifts to our loved ones on the holidays. Rather, generosity is at the core of who we are as a species, a common thread that holds the fabric of our society together. Regardless of age, background, or ability, all of us have something to offer to create good within our communities.
Some people show generosity by volunteering at a soup kitchen on the weekends or signing up to serve on the board of a local nonprofit organization. Others choose to sponsor an event in their community to show their support for a cause they care about.
Whether we give our time, talents, or money, our generosity gives us the opportunity to care for one another and come together to make our communities better, whether it’s by eradicating hunger, sheltering the homeless, supporting the arts, funding education, or being civically engaged in other meaningful ways.
When people give with their time and talents in small communities, their efforts are often on full display. However, for people who prefer to be financially generous, it can be challenging to know how, where, and when to donate money in a way that is the most impactful and beneficial. If you are one of these people, allow me to educate you on one option that may help streamline your charitable gifts: Qualified Charitable Distribution.
A favorite quote of mine is “generosity can break the power of greed.” If you are over 70 years old and have any money invested in a Traditional IRA, a Qualified Charitable Distribution may be a compelling way you can break the power of greed in your own life, as it allows you to give pre-tax money from your IRA account to donate to charitable causes, as long as you meet all of the qualifications.
Typically, IRA assets are taxable to account holders or their beneficiaries at their passing. Once the IRA owner turns 72 years old, they must take a Required Minimum Distribution (RMD) from the account. These funds are fully taxable as part of their Adjusted Gross Income.
In the past, many people who would donate to charity would itemize donations on their tax return and get some form of deduction. However, recent tax law changes have significantly increased the standard deduction, meaning that many people no longer benefit from itemizing donations on their tax returns. As a result, they are getting the personal satisfaction of knowing they helped that charity, but have lost tax incentives to do so.
Fortunately, if you donate a portion of these assets to a 501(c)(3) nonprofit organization through a Qualified Charitable Distribution, this money may be tax free because charities with this status are tax exempt.
If you own an IRA account and want to give to charity that aligns with your personal values, the Qualified Charitable Distribution can be a smart tax planning strategy that allows you to be financially generous while benefitting the bottom line on your tax returns, as donations to nonprofit organizations count toward the IRS Required Minimum Distribution.
There has also been a change in the way Traditional IRA dollars are passed onto non-spouse beneficiaries. Previously, beneficiaries could “stretch out "inherited distributions over their own lifetime to balance out the tax impact. The timetable has now been reduced to a 10-year period to get inherited IRA dollars out of the IRA account so they can be taxed. This means that large IRA account balances passed on to non-spouse beneficiaries may create some challenging tax planning scenarios, which is another reason why a Qualified Charitable Distribution may be something to consider.
If you are looking for a way to be more generous, break the power of greed, and help your favorite charity while using smart tax planning strategies, a Qualified Charitable Distribution may be right for you, as it allows you to distribute up to $100,000 in a calendar year if you are over age 70.5 and have a Traditional IRA account. Keep in mind, the money needs to go directly to the charity, and the organization must be a qualified 501(c)(3). Even though our kids can often feel like charities, they are not eligible.
If you are ready to take advantage of a Qualified Charitable Distribution, be sure to consult with your tax advisor, financial advisor, and charitable organization before you begin, so that everything will get reported correctly and both the IRA owner and the charitable organizations involved will benefit.I'm here to help you feel more confident about your financial future.
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