Donating Your IRA Minimum Distribution to Charity: A “Win-Win” Strategy

Donating Your Minimum Required Distribution to Charity

If you have an Individual Retirement Account (“IRA”), the IRS requires you to start taking minimum required distributions (“MRD”) for the year you reach age 70 ½, and for each year after that. You can wait to take the first minimum distribution until April 1 after that year, but then you may have to take 2 minimum distributions in one year – possibly putting you in a higher tax bracket. If the MRD is not made on a timely basis, an individual is subject to a 50% tax penalty on the shortfall.

The good news is that retirees in this situation have a way to make a distribution to charity with their MRD that offers tax-saving benefits. By making a “qualified charitable distribution” (“QCD”) retirees can make distribution to charity and reduce the tax bite as well.

How does a Qualified Charitable Distribution work?

A QCD is a nontaxable distribution, made by your IRA directly to the charity of your choice, up to $100,000 per year. A QCD is the optimal strategy for charitable giving for IRA owners age 70 ½ or more. This is because the QCD:

  • is not included in the individual’s taxable income, which may lower your tax bracket – and may reduce taxes on social security income as well as lower those Medicare premiums based on income,
  • avoids the need to claim the contribution as an itemized deduction, which fewer people will do under the new tax law starting this year,
  • satisfies the IRS’s MRD requirement, avoiding hefty tax penalties, and
  • simplifies financial planning because there is no need to manage the distribution, write a separate check or arrange a bank transfer to the charity, etc.

If a married couple both have IRAs and are subject to the MRD, each spouse can make a QCD – for a total tax savings of up to $200,000 in income for the year.

Where can you get more information on a Minimum Required Distribution to Charity?

The bank, mutual fund or insurance company maintaining your IRA can give you the necessary paperwork for the QCD. Please keep in mind that:

  • The QCD is available only for MRD amounts that would otherwise be taxed to you.
  • You cannot claim the QCD as a charitable deduction, too.

Of course, as with any tax-motivated action, you should check with your tax and/or financial adviser to be sure you qualify for the QCD and its intended tax benefits, and remember that QCDs are also available from inherited IRAs and Roth IRAs. (IRS Publication 590-B has helpful tax information on IRA distributions generally). For example, most state taxes follow the federal rules for QCDs, but that should be verified. And even though you take advantage of the QCD, you should still consider making a legacy gift to FPN under your will. More information on how to donate to the Foundation for Peripheral Neuropathy can be found on the FPN website.

This article was written by Lou Mazawey.

Lou Mazawey, the President of the Foundation for Peripheral Neuropathy, has enjoyed a long legal career at Groom Law Group in Washington, DC, helping clients with a variety of retirement plan matters. Mr. Mazawey prepared the following article for FPN members on a favorite topic.

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