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Charitable IRA gifts offer a win-win solution

Kim Last

Kim Last

Thanks to the American Taxpayer Relief Act of 2012, charitable Individual Retirement Account gifts are once again allowed in 2013. An IRA owner aged 701/2 or older may give up to $100,000 this year to either a 170(b)(1)(A) public foundation or 501(c)(3) charity. Congress could elect to extend this opportunity in 2014 and subsequent years.

What do you gain by doing this? The possible tax benefits of a qualified charitable distribution (QCD) from an IRA are threefold:

  •  A QCD counts toward your required minimum distribution, but doesn’t count as taxable income. If you dread mandatory IRA withdrawals and the taxes that come with them, you should know a charitable IRA gift can be used to satisfy all or part of the annual required minimum distribution. At the same time, the contribution amount is excluded from your gross income. With higher tax rates and surtaxes kicking in this year, reducing your adjusted gross income could be a priority.
  • A QCD can help you reduce the size of your taxable estate. Most of the money in a traditional IRA will eventually be taxable. Donating some or all of these assets to charity will lower your taxable estate dollar for dollar. As you can surmise, QCDs are more beneficial to traditional IRA owners than Roth IRA owners from this standpoint.
  • A QCD also could help you contend with charitable donation limits. You could reach a point where you would like to donate an amount greater than 50 percent of your AGI to charity. Normally, the IRS doesn’t allow that. But charitable IRA gifts don’t count against that 50 percent limit as they aren’t included in a taxpayer’s gross income. While a charitable IRA gift isn’t tax-deductible, you might not itemize to begin with — many retirees just take the standard deduction.

How do you do this? To realize most or all of these tax perks, the gift has to take the form of a qualified charitable distribution (QCD), alternately known as a trustee-to-trustee transfer or IRA charitable rollover.

In other words, the financial firm serving as trustee of your IRA writes a check directly to the charity. A financial professional you know and trust can help you fill out the accompanying paperwork.

If the IRA trustee makes the check payable to you and you deposit it and write a check for the equivalent amount made payable to the charity, it is a taxable event and the whole purpose of the charitable IRA gift is defeated. Should you make that blunder, you’ll have to declare the income and just take a normal charitable deduction on the donation.

What does the fine print say? To make a QCD, you have to own an IRA and be age 701/2 or older. You can’t make a QCD from an employer-sponsored retirement account, such as a 401(k) or 403(b). In fact, you can’t make a QCD from a SEP or Simple IRA, either.

The QCD can’t be made in a way in which you’d derive benefits from the charity or foundation later. It can’t become the basis of a charitable remainder trust or a gift annuity, for example. A QCD also can’t be made to a donor-advised fund through which the contributed assets would be invested and grow tax-free prior to the actual charitable donation.

A QCD can’t be a split interest gift. The amount of the QCD must otherwise have been considered taxable income, and you aren’t permitted to claim a charitable deduction.

If you’re well off and don’t really need or want the additional income and income taxes that would result from your required minimum distribution, a charitable IRA gift could offer you a solution with the flavor of a win-win — a boon for the charity and a tax break for you or your heirs.

Kim Last is president of Kimberly A. Last Financial Services in Grand Junction. Working in the financial services industry since 1998, Last holds the CFP, CLU and CLTC designations. Her clients include individuals and small businesses. She focuses primarily on retirement planning, including accumulation, tax strategies, distribution, long-term care and wealth transfer planning. Securities and investment advisory services are offered through Brokers International Financial Services, LLC, Panora, IA, Member FINRA/SIPC. Brokers International Financial Services, LLC, and Kimberly A. Last Financial Services are not affiliated companies. These are the views of Peter Montoya Inc., not the named representative, and shouldn’t be construed as investment or tax advice. Neither the named representative nor broker/dealer offer tax or legal advice. Please consult your financial advisor for more information.
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