Chances are you have heard that many older charitably minded people can benefit from making gifts directly from their individual retirement accounts (IRAs). Technically known as a qualified charitable distribution (QCD), this strategy is often informally referred to as an IRA charitable rollover.
The primary benefits of an IRA charitable rollover are familiar to many. If a donor has reached the age of 70½, he or she can make a gift from an IRA directly to a charitable organization without the amount of the distribution being treated as taxable income to the donor—effectively making the distribution a deductible gift. Furthermore, if the donor has reached the age at which he or she must take a required minimum distribution (RMD) from qualified retirement plans, a gift directly from an IRA reduces the amount of the RMD that otherwise would be taxable income on a dollar-for-dollar basis up to a maximum of $100,000 per taxpayer per year.
These benefits have proved to be the headline grabbers, and rightfully so. There are, though, additional, often overlooked, benefits of IRA rollovers. Among those is the ability of a QCD to help many donors avoid additional tax on their Social Security benefits. Here’s why: Up to 85% of Social Security benefits can be taxable, and the portion that is taxable is determined by the amount of other income the taxpayer has.
A distribution from a retirement plan to a taxpayer is generally taxable and gets added to other income in determining how much of the taxpayer’s Social Security benefits gets taxed. Unless the recipient is already subject to the 85% maximum, more of the recipient’s Social Security benefits will be subject to tax—even if the recipient uses the distribution to make a charitable gift.
A QCD, however, goes directly to the charitable organization without being considered distributed to the taxpayer and, therefore, does not increase the portion of Social Security benefits that are taxable. If you are intending to make charitable gifts and are old enough to make qualified charitable distributions, you will likely be well served by using QCDs to fund your philanthropic goals. Check with your financial advisor to determine your eligibility to make a QCD.
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