Upon turning age 70½, people who have accumulated savings in traditional, tax-deferred Individual Retirement Accounts may make donations directly from those accounts to eligible charities such as Family Renew Community without paying the federal income taxes that would otherwise be owed. The following general information is not a substitute for legal and/or financial advice. Please consult a qualified professional before making any donation of retirement assets.
Income tax generally is due when money is withdrawn from traditional Individual Retirement Accounts. Beginning at age 70½, it becomes mandatory to make minimum withdrawals from these accounts each year, with stiff penalties for failing to do so. If you do not need your required minimum distribution for living expenses, you can avoid the income tax on all or part of it by donating the money directly to Family Renew Community.
Regardless of the how much an IRA owner 70½ or older is required to withdraw to avoid a penalty, he or she is allowed to transfer up to $100,000 a year directly to an eligible charity without owing tax on the transaction. Couples who file a joint return can exclude up to $200,000 of their eligible retirement savings from income tax by donating it to charity.
Here are some details to remember, according to Emily Brandon, senior editor for retirement at U.S. News & World Report:
* Qualified charitable contributions must be made by Dec. 31 each year in order to exclude that amount from taxable income.
* Charitable contributions can only be made from IRAs, not 401(k)s or similar types of retirement accounts. So you might need to roll funds over from a 401(k) to an IRA if you want to make tax-free charitable contributions part of your retirement plan.
* You don't need to itemize your taxes in order to make an IRA charitable distribution. However, you cannot additionally claim a charitable contribution tax deduction on a charitable distribution from your IRA.
* You don't have to make a huge donation to benefit from this tax break. For a retiree in the 25 percent tax bracket, an IRA charitable contribution of $5,000 could reduce your income tax bill by $1,250. Even a $1,000 donation would save you $250 in taxes.
* Funds must be transferred directly from the IRA to an eligible charity by the IRA trustee in order to qualify for the tax break. If you withdraw the money from your IRA and later donate it, it won't qualify as a tax-free qualified charitable distribution.
How to Donate Your Required Minimum Distribution to Charity, by Emily Brandon
The Best Way To Handle Required Minimum Distributions, by Bob Carlson