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How to Use Your IRA to Donate to Charity (And Potentially Lower Your Tax Bill)

So, you’ve spent your career making contributions to tax deferred retirement accounts—401(k), 403(b), Traditional, SEP, or Simple IRAs. If you are 72 and older, you might be anticipating the end of the tax year with anxiety, as you are left wondering how your taxable income might be negatively affected during retirement. 

Although required minimum distributions (RMDs) are required after 70 ½ or 72 (depending on your age), charitable gifts are a great way to help others, while potentially reducing your taxable income.

Despite the RMD requirement, you might find yourself in a comfortable living situation in which you do not need to make the annual withdrawal, and consequently increasing your gross annual income. Unfortunately, if you do not make the RMD, you will be hit with a tax equivalent to 50% of the amount that was meant to be withdrawn. The solution? Charitable donations.

In this article, we will discuss how making charitable donations from your IRA account can serve your altruistic desires, while also potentially helping to lower your tax bill.

Required Minimum Distributions (RMDs)

After you reach the age of 72, you are required to make annual withdrawals from your Traditional IRA (Roth IRAs are not subject to this requirement). These withdrawals are normally taxed as income. It is possible you might find that you do not need to make a withdrawal on any given year, but you wish to avoid the tax penalty of 50% the total amount—in short, you’ve found yourself in a pickle. 

By making an RMD, you are effectively increasing your income—for better or for worse. A consequence of this is potentially moving yourself to a higher tax bracket when it may not be necessary for your lifestyle. This can have a detrimental effect on one’s financial situation, potentially causing a domino effect of sorts, as the unexpected increase in income may impact other anticipated benefits. 

Although this might sound intimidating, Southwestern Investment Group is here to help you avoid these unpleasant surprises in your finances by guiding you with a plan and helping empower you to take charge of your retirement.

Qualified Charitable Distributions—The Solution

Qualified Charitable Distributions (QCDs) are distributions made directly to a tax-exempt nonprofit or charitable organization directly from a Traditional IRA at age 70 ½ or later. QCDs can still be made at 70 ½, even though the RMD required age is 72. QCDs must be made directly to a qualified charity, up to $100,000 per person annually. Congress made the QCD rule permanent in 2015, providing a solution to this previously mentioned pickle. QCDs allow Traditional IRA owners to exclude their RMD from their adjusted gross income; allowing them to remain in a lower tax bracket and may consequently reduce or eliminate the taxation of social security. QCDs also allow individuals to remain eligible for deductions and credits (excluding an additional itemized charitable deduction for the same gift) that might have otherwise been lost.

Considerations

The IRS has established rules to ensure that QCDs are made properly, this is to help protect you and guide you throughout the process of managing your IRA account to your advantage. It’s important to note that tax breaks on charitable donations can not be combined with the tax break on retirement savings.

Since there are understandably many potential missteps with managing your retirement, it can be greatly helpful for you to consult with a trusted financial advisor. We are here to help.

Southwestern Investment Group provides financial guidance that helps empower you to make financial decisions with confidence. Contact us today to learn more about how to manage your retirement accounts.

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