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All about qualified charitable distributions

By Mark McGahee

Do you have an IRA? As you enter your 70s, you may start to look at that IRA not only as an asset, but also as a problem. By law, you must take required minimum distributions from a Traditional IRA once you reach age 72; there are very few exceptions to this. The downside of these distributions? The entire distribution is taxable. (You never have to take required minimum distributions from a Roth IRA, provided you are its original owner.)

While the income from the required minimum distribution is nice, the linked taxes can be a headache. Relief for that headache might be available to you, though. Did you know that you can potentially satisfy some or all of your annual required minimum distribution requirement in a way that can help you manage taxes and make a charitable impact?

Consider the Qualified Charitable Distribution. This is a direct asset transfer from an IRA to a charity or non-profit organization of your choice. The organization must be tax-exempt under Internal Revenue Section 501(c)(3).

Sometimes called a charitable IRA gift, these distributions are intended to accomplish two things. One, it gives you a chance to contribute up to $100,000 in a single year to a cause or charity. Two, you can count the entire amount of the distribution toward your required minimum distribution for the year, and the qualified charitable distribution amount may not be included in your gross income.

You must be at least 70½ years old to make a qualified charitable distribution. You may want to coordinate this distribution with the help and guidance of a financial professional, because if you improperly manage the transfer of assets between your IRA and the charity, the tax break you hope for could be lost. You also need to allow enough time for the asset transfer to occur, meaning these distributions are best arranged before the very end of a calendar year.

In 2020, the age limit for putting money into a Traditional IRA was lifted, and some older IRA owners wondered if they could make a distribution to a charity and simultaneously characterize it as an IRA contribution. The Internal Revenue Service said no to that.

That said, a qualified charitable distribution is a choice that you may want to look at, especially if you think of taxes when you think of your mandatory annual IRA distributions. It should be noted that the tax treatment of IRAs can change from year to year, and remember, this article is for informational purposes only and does not constitute real-life advice. If a qualified charitable distribution interests you, consider talking with a financial professional before making any move.

 

Mark McGahee may be reached at 757-539-9465 or mmcgahee@isgva.com.