Who should consider a charitable IRA distribution, and how does it work?
Q: What are the key benefits of an IRA qualified charitable distribution (QCD) to a charity?
A: The IRA QCD provision can help bolster your legacy while reducing your taxable estate. While you will not receive a charitable deduction for a transfer from your IRA to a charity, the amount of your transfer will not be included in your gross income, nor will it be subject to income tax. You will have the added satisfaction of knowing that your charity can receive the full amount, with no tax cost to you or to the charity.
Q: Will I get the tax benefit even if I don’t itemize deductions?
A: Many retirees take the standard deduction when calculating their income-tax liability because they don’t generate enough deductible expenses or income to make itemizing worthwhile. As a result, they could be losing out on the tax advantages of deducting their charitable donations. Using the tax-free IRA QCD provision as a way to make charitable contributions allows you to obtain the tax benefit of the contribution without having to itemize deductions.
Q: Why might an IRA QCD be a better strategy than simply leaving my IRA to my heirs?
A: IRA assets are subject to estate taxes, and the IRA beneficiaries may have to pay income taxes on distributions from the IRA assets they inherit. Using the IRA QCD provision, you can reduce the size of your estate, thereby reducing the total amount of taxes imposed. You will effectively be giving your favorite charity the full gifted amount, versus having a reduced net value for yourself or your named beneficiaries, had you left the money within your estate.
The IRA QCD provision can help to bolster your legacy while reducing your taxable estate.
Q: Does this strategy circumvent the cash limit on income I can give to a charity?
A: No, but it may raise that limit in some cases. Typically, a donor may only deduct a cash contribution to a charity of up to 50 percent of his or her adjusted gross income (AGI) in any given year (a lower AGI limit may apply to certain charitable contributions). Any excess charitable contribution deductions are carried over to the following five years. By using the IRA QCD provision, you can avoid the 50 percent AGI limitation and donate up to $100,000 from your IRA.
Q: How do I know what charities qualify?
A: Distributions made directly to a qualified charity are considered a QCD only if they would otherwise qualify as a charitable deduction, other than meeting the percentage of income limits. However, according to the IRA QCD provision, payments to certain entities, such as donor advised funds and Section 509(a)(3) supporting organizations, do not qualify for IRA QCD treatment, meaning that the distribution will be treated as a typical IRA distribution and may be included in your gross income for federal income tax purposes.
Q: What types of retirement accounts can my donation come from?
A: Generally, all IRAs are eligible to make these direct payments to charities, except for ongoing SIMPLE and SEP (including SARSEP) IRAs. A SEP or SIMPLE IRA is considered ongoing if the employer made a contribution for the year in which the QCD would be made. Transfers to a charity from other retirement plans, such as a 401(k) or 403(b) plan, will not qualify under this provision. It may be possible, however, to roll over funds from these accounts into a traditional or Roth IRA and to make an eligible transfer to charity.
Jeffrey S. Gerson and Shawn P. Landau are Financial Advisors with the Wealth Management division of Morgan Stanley in New York City. The views expressed herein are those of the authors and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member, SIPC (http://www.sipc.org). Morgan Stanley Financial Advisors engaged Worth to feature this article. Gerson and Landau may only transact business in states where they are registered or excluded or exempted from registration, (http://www.morganstanleyfa.com/ggmgroup). Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Gerson and Landau are not registered or excluded or exempt from registration. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the US. CRC1411018 03/16.
This article was originally published in the October/November 2016 issue of Worth.