Provided by Clark Kendall
Let’s say you are of an age where you must take a required minimum distribution (RMD) from a traditional IRA, but you do not need the additional income or would like to make a major charitable gift for the year. Would you also like a significant federal tax break in acknowledgment of that gift? If so, an IRA charitable rollover may be a good financial alternative to a traditional RMD.
If you are age 70½ or older and have one or more traditional IRAs, you may want to explore the potential of this tax provision, first introduced in 2006 and recently made permanent by Congress. In the language of federal tax law, it is called a Qualified Charitable Distribution (QCD) – a direct transfer of up to $100,000 from the IRA to a qualified charity.¹·²
An IRA charitable rollover may help you lower your adjusted gross income (AGI). That may be a goal in your tax strategy, especially if your AGI is large enough to position you for increased Medicare premiums, greater taxation of your Social Security benefits, or exposure to the 3.8% investment income tax and the 0.9% Medicare surtax. If your AGI passes a certain threshold, you also lose the ability to itemize deductions.²
Up to $100,000 per individual and $200,000 per married couple may be excluded from your gross income in the year in which you make the gift. The gifted amount also counts toward your Required Minimum Distribution (RMD).¹·² Imagine lowering your household’s AGI by as much as $200,000 in a tax year.²
It is also important to mention, a QCD will not afford you an opportunity for a charitable deduction. That would amount to a double benefit for the taxpayer making the gift, which is not something federal tax law allows. 3
You need not be rich to do this. When many people first learn about the IRA charitable rollover, they think it is only for multi-millionaires. Even if you do not think of yourself as wealthy, a QCD could prove a significant element in your tax strategy.
How does it work? Logistically speaking, an IRA charitable rollover is a trustee-totrustee transfer: the IRA owner does not take possession of the money as the gift is arranged. Rather, the custodian or trustee overseeing the IRA writes a check for the amount of the gift payable to the charity. It is a direct transfer of funds, not a withdrawal.²
An IRA owner must be age 70½ or older to do this, and he or she must be the original owner of the IRA (an inherited IRA may not be used). The gifted assets must come from an IRA (or multiple IRAs) subject to RMD rules. SEPs and SIMPLE IRAs are ineligible if an employer contribution has been made for the particular year. 4 , 5
Can you gift appreciated securities as well as cash? You can. Securities held within an IRA may be directly transferred from an IRA to a qualified charity in a QCD. You can claim an income tax deduction for the full fair market value of those securities. 4 , 5
The charity or non-profit involved must pass muster with the IRS. It must be an entity that qualifies for a charitable income tax deduction of an individual taxpayer, and it cannot be a donor-advised fund, a private foundation that makes grants, or a supporting organization under Internal Revenue Code Section 509(a)(3). The charity must provide you with a letter of acknowledgement denoting that you received no goods, services, or benefits of any kind in exchange for your gift, and that you shall not receive any in the future as a consequence of your gift. If that letter is not quickly sent to you, be firm in requesting it. 4,5
In case you are wondering, you can actually contribute more than your IRA RMD amount for a particular year through an IRA charitable rollover, as long as the gifted amount does not exceed $100,000. If you pledge a donation to a qualified charity or nonprofit, an IRA charitable rollover can be used to satisfy your pledge. 5
This tax break has been a boon to charities and IRA owners alike. Correctly performed, a charitable IRA rollover may help to lessen tax issues while benefiting qualified non-profit organizations.
About Clark A. Kendall, CFA, AEP®, CFP® Clark Kendall has more than 30 years of experience in investment management and wealth management strategies. He is among a select few wealth managers worldwide who have earned the triple designations of Chartered Financial Analyst (CFA), CERTIFIED FINANCIAL PLANNER™ (CFP®) and Accredited Estate Planner® (AEP®). He has been named one of the Washington metropolitan area’s top wealth managers by the National Association of Board Certified
Advisory Practices (NABCAP) and the Washington Business Journal.
As a founder of Kendall Capital Management, Clark provides intelligent, independent financial direction to high-net-worth individuals and families in and around Montgomery County, Maryland – particularly Montgomery County’s “Middle Class Millionaires.” His financial planning analysis, strategies and approach to client service are designed with these clients in mind. As a fee-only, independent financial advisor, Clark is a fiduciary who is held to the highest standard of any professional advisor in the industry. He sits on the same side of the table as the client and utilizes his skills and talents to serve clients with these common goals and concerns.
Clark’s approach is to financial services is to actively manage portfolios that meet his clients’ goals in a cost effective manner. As a fee-only, independent advisor, Clark has no allegiance or conflicts with other financial organizations for trading or product selection.
1 – marketwatch.com/story/ira-charitable-rollover-provision-made-permanent-2015-12-25 [12/25/15]
2 – forbes.com/sites/jamiehopkins/2016/01/20/why-retirees-need-to-stop-writing-checks-to-charities/ [1/20/16]
3 – cof.org/content/analysis-ira-charitable-rollover-extension [12/22/15]
4 – wealthmanagement.com/retirement-planning/ira-qualified-charitable-contributions-reinstated-made-permanent [12/21/15]
5 – forbes.com/sites/berniekent/2015/12/20/should-you-make-a-charitable-contribution-from-your-ira/ [12/20/15]