Charitable Contributions from IRAs

Charitable contributions from IRAs

Did you know that, if you are at least 70½ years old, you can make tax-free charitable donations directly from your IRA? By making what's called a qualified charitable distribution (QCD), you can benefit your favorite charity while excluding up to $100,000 annually from gross income. These gifts, also known as "charitable IRA rollovers," would otherwise be taxable IRA distributions.

How QCDs work

To make a QCD, you instruct your IRA trustee to make a distribution directly from your IRA (other than SEP and SIMPLE IRAs) to a qualified charity. The distribution must be one that would otherwise be taxable to you. You can exclude up to $100,000 of QCDs from your gross income each year, and if you file a joint return your spouse (if 70½ or older) can exclude an additional $100,000. You don't get to deduct QCDs as a charitable contribution on your federal income tax return — that would be double-dipping.

QCDs count toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA, just as if you had received an actual distribution from the plan. However, distributions that you actually receive from your IRA (including RMDs) and subsequently transfer to a charity cannot qualify as QCDs.

A QCD must be an otherwise taxable distribution from your IRA. If you've made nondeductible contributions, normally each distribution carries a pro-rata amount of taxable and nontaxable dollars. A special rule applies to QCDs, though — the pro-rata rule is ignored and your taxable dollars are treated as distributed first. If you have multiple IRAs, they are aggregated when calculating the taxable and nontaxable portion of a distribution from any one IRA.

Points to watch

• RMDs are calculated separately for each traditional IRA you own, but may be taken from any of your IRAs.
• If you plan to offset your RMD with a QCD, the transactions must be done in conjunction with one another. You cannot take an RMD and retroactively use those dollars to make a QCD — that runs afoul of the "first-dollars-out rule."
• Your QCD cannot be made to a private foundation, donor-advised fund, or supporting organization as described in IRC Section 509(a)(3).
• Beginning in 2023 you can make a one-time QCD of up to $50,000 to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity.
• If you make deductible contributions to an IRA for the year you reach age 70½ or beyond, this could reduce the allowable amount of your QCD.

Why are QCDs important?

Without this special rule, taking a distribution from your IRA and donating the proceeds to a charity would be more cumbersome and possibly more expensive. You would request a distribution, include it in gross income, then take a corresponding income tax deduction for the charitable contribution. Due to IRS limits, the additional tax from the distribution may be more than the charitable deduction — and with the much higher standard deduction amounts introduced by the Tax Cuts and Jobs Act of 2017, itemizing may be even less beneficial than before 2018, making QCDs more appealing.

Can I name a charity as beneficiary of my IRA?

Yes, but understand the advantages and disadvantages. Generally, a spouse, child, or other individual you designate as beneficiary of a traditional IRA must pay federal income tax on any distribution received after your death. By contrast, a charity will not have to pay income tax on distributions from the IRA after your death, provided it qualifies as a tax-exempt charitable organization under federal law — a significant tax advantage.

After your death, distributions of your assets to a charity generally qualify for an estate tax charitable deduction. If a charity is your sole IRA beneficiary, the full value of your IRA will be deducted from your taxable estate for purposes of determining federal estate tax.

There are also nontax implications. If you name a charity as sole beneficiary, your family members will not receive any benefit from those IRA assets. If you would like to leave some assets to loved ones and some to charity, consider leaving taxable retirement funds to charity and other assets to your loved ones — often the most tax-efficient solution, because the charity will not pay tax on the retirement funds.

If retirement funds are a major portion of your assets, another option is a charitable remainder trust (CRT), which can be structured to receive the funds free of income tax at your death and then pay a taxable lifetime income to individuals of your choice, with the remaining trust assets passing to the charity when they die. You can also name the charity and one or more individuals as co-beneficiaries. There are fees and expenses associated with the creation of trusts.

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