5 Steps to Maximizing Tax Benefits through IRA Giving

Individual Retirement Accounts (IRAs) are powerful financial tools that not only help individuals secure their retirement but also provide unique opportunities for tax optimization. One such avenue is IRA giving, a strategy that allows you to support charitable causes while enjoying significant tax benefits.

In this blog post, we'll explore the overview, steps, and summarize the key points of IRA giving to help you make informed decisions about your financial future.

Overview of IRA Giving

IRA giving, also known as Qualified Charitable Distributions (QCDs), enables individuals aged 70½ or older to donate directly to eligible charitable organizations from their IRA without incurring tax liabilities. This strategy provides a tax-efficient way to support causes you care about while satisfying required minimum distribution (RMD) obligations.

The ABC's of Charitable Giving 

Anyone with an IRA account can make a Qualified Charitable Distribution, but IRA account owners who are also 70½ years old or older may transfer up to $100,000 to charity tax-free each year – a great way to easily support your favorite charity before the end of the year, reduce your tax liability and, for those who are at least 73 years old, count toward your Required Minimum Distribution (RMD) for the year.

IRA: Individual Retirement Account

Individual Retirement Accounts (IRAs) are very appealing to many Americans because they are tax-deferred, meaning your contributions to them within stated limits are tax-deductible, and their earnings and appreciation are not taxed until you withdraw them, presumably during your retirement years.

RMD: Required Minimum Distribution

As an IRA owner, when you reach the age of 72 (or 70½ years as of January 1, 2020), you are required to withdraw a minimum amount each year, called a Required Minimum Distribution or RMD, even if you don’t want or need the income. Because IRA distributions are taxed as ordinary income, these withdrawals could mean unfavorable tax implications depending on your financial situation.

QCD: Qualified Charitable Distribution

An elegant single-step solution to avoid paying taxes on your RMD withdrawals could be to request a Qualified Charitable Distribution from your IRA to a favorite charity, because IRA Qualified Charitable Distributions are not taxable as income provided that the distribution passes directly to the charity. 

For additional ways to financially donate, click below to learn more!

5 Steps to Maximize Tax Benefits through IRA Giving

1. Check Eligibility

Before initiating IRA giving, ensure that you meet the eligibility criteria. Generally, individuals aged 70½ or older can take advantage of QCDs. Consult with your financial advisor to confirm your eligibility.

2. Identify Qualified Charities

Ensure that the charitable organizations you wish to support are eligible to receive tax-deductible contributions. Qualified entities include religious organizations, educational institutions, and certain other non-profit organizations.

3. Determine the Donation Amount:

Decide on the amount you want to donate from your IRA. The maximum annual limit for QCDs is $100,000 per individual, providing a substantial opportunity to make a positive impact while optimizing your tax situation.

4. Coordinate with Financial Institutions

Contact your IRA custodian or financial institution to facilitate the direct transfer of funds to the chosen charitable organization. It's crucial to ensure the transaction is processed correctly to retain the tax benefits associated with QCDs.

5. Report the QCD on Tax Returns

When filing your income tax return, report the QCD amount on Form 1040. Even though QCDs are not taxable, it's essential to accurately document the transactions to ensure compliance with IRS regulations.

Explore More About IRA Giving

In summary, IRA giving is a strategic and tax-efficient way for individuals aged 70½ or older to contribute to charitable causes while optimizing their financial situation. By following the steps outlined above, you can navigate the process smoothly and enjoy the tax benefits associated with Qualified Charitable Distributions.

Contact Family of Christ International

If you have any questions or would like more information about IRAs, RMDs or QCDs, we encourage you to contact Edgar Madsen, our very own CPA – Certified Public Accountant – and Director of Family of Christ International’s Bloomington, Minnesota branch. He’d be happy to answer your questions or speak with your IRA trustee to help make a smooth Qualified Charitable Distribution from your IRA to Family of Christ International.

Remember, making a positive impact on the world can go hand in hand with smart financial planning, and IRA giving is a powerful tool that allows you to do just that. Take control of your financial future while contributing to the causes that matter most to you.