Donate Your RMD to Charity & Save on Taxes

You’ve spent years contributing to your tax deferred 401(k)s and IRAs and as you withdraw money from these accounts in retirement, income tax is due. At the age of 70 1/2 you are required to take an annual withdrawal from these types of accounts, called a Required Minimum Distribution (RMD). The penalty for skipping a RMD is 50% of the money you should have withdrawn.

So, what happens if you are in a situation where you don’t need the distribution for living expenses, but you do not want to pay the 50% penalty?

You could donate your RMD to a qualified charity using the IRA distribution. Not only does donating your RMD this way satisfy the annual distribution requirements for your IRA but, it could also help to reduce the impact of income taxes when taking your RMD.
If you are already donating money to a charity, why not give from your IRA with funds you have to take out anyway and get the benefit of a tax break?

There are requirements for donating your RMDs to a qualified charity. For example, the charity must be a 501(c)(3) organization. Charities do not qualify if they are private foundations or donor advised funds.

You must be at least 70 1/2 years or older and you could transfer up to $100,000 per year directly to an eligible charity without paying taxes on that transaction. If you file jointly, your spouse could also make a charitable donation of up to $100,000, meaning couples could donate up to $200,000 per year (it’s important to note that if you donate more than the maximum allowable amount it is considered income and could be subject to income tax).

Funds must be transferred directly from the IRA to the eligible charity by the IRA trustee in order for it to count for a tax break.

Qualified Charitable donations must be made by Dec. 31 each year in order to exclude that amount from taxable income.

Most charities will automatically send you a donation receipt, but if they don’t, it’s good to request an acknowledgement of donation for your tax purposes.

Contributions can only be made from IRAs, not 401(k)s or similar types of accounts. You would need to roll funds from a 401(k) to an IRA if you would like to make tax-free charitable contributions part of your retirement.

It’s important to note that when you make a charitable contribution from your IRA, you can not claim it as a charitable contribution tax deduction. You are not getting taxed on this money, so you don’t get to count it as a charitable deduction also.

If you would like to discuss your option and how we could make this part of your retirement plan, give us a call today @ 801-465-6990.

Sincerely,

Scott B. Wharton & Staff

Give us a call if we can help with anything 801-465-6990!


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