Charitable donations have long been a way for individuals to give back to their communities and support causes they care about. However, many people may not realize that charitable donations can also have tax benefits. By donating from your IRA, you may be able to achieve tax savings while also making a difference in the world.
What is an IRA?
An IRA, or individual retirement account, is a type of investment account that allows individuals to save for retirement while potentially receiving tax benefits. There are two main types of IRAs: traditional and Roth. With a traditional IRA, contributions may be tax-deductible, and taxes are paid upon withdrawal during retirement. With a Roth IRA, contributions are made with after-tax dollars, but withdrawals during retirement are tax-free.
What are the tax benefits of donating from an IRA?
For individuals over the age of 72 and a half, the IRS requires that a minimum distribution be taken from their traditional IRA each year. However, by donating this distribution directly to a qualified charity, the individual may be able to avoid paying taxes on the distribution altogether. This is because the donation is considered a Qualified Charitable Distribution (QCD) and is excluded from the individual’s taxable income. By reducing their taxable income, the individual may also be able to lower their tax bracket and potentially save on taxes overall.
Additionally, individuals who donate from their IRA may be able to satisfy their Required Minimum Distribution (RMD) while also giving back to a cause they care about. This can be a win-win situation for both the individual and the charity they choose to support.
How to make a charitable donation from your IRA
To make a QCD, the individual must be over the age of 72 and a half and the donation must be made directly from the IRA custodian to a qualified charity. The donation cannot exceed $100,000 per year, but it can count towards the individual’s RMD for that year. It is important to note that the donation must be made from a traditional IRA, as Roth IRAs do not have RMDs. Additionally, the individual cannot claim the donation as a charitable deduction on their tax return since it was not included in their taxable income to begin with.
Charitable donations can make a significant impact on the world, and donating from your IRA can also have tax benefits. By making a Qualified Charitable Distribution, individuals over the age of 72 and a half may be able to avoid paying taxes on their Required Minimum Distribution while also supporting a cause they care about. It is important to speak with a financial advisor or tax professional to understand the potential tax benefits and implications of making a charitable donation from your IRA.
This material is intended for informational/educational purposes only. Vantage Point Financial, LLC does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.