Maximize Your Charitable Giving Using Your IRA
A series of strategies for tax-savvy investors. Contents.
“Qualified charitable distribution” is tax jargon for money you send directly to a charity from your pre-tax retirement account. This is better than taking the money from your bank account and then writing a check to the charity.
With the QCD, you keep the withdrawal completely absent from your income tax return. This makes the donation effectively tax deductible, which would not have been the case if you claimed the standard deduction. In other words, if you withdraw $ 10,000 from your IRA and then send a check to The Salvation Army, you add $ 10,000 to your adjusted gross income and may or may not have a corresponding deduction.
Even if you itemize, so that your taxable income remains unchanged (+ $ 10,000 from withdrawal, – $ 10,000 from charitable deduction), you have inflated your adjusted gross income. This can cause serious peripheral damage, such as exposing more investment income to the 3.8% surtax and increasing your Medicare premiums.
You are entitled to a QCD on the day (not the start of the year) you turn 70-1 / 2. You are limited to $ 100,000 per year from these donations. Also, you cannot direct a CDQ to a donor advised fund.
Wait a little longer, until the start of the year, you turn 72, and you get the added benefit of a QCD. He is counting on mandatory withdrawals, which are due to start that year. Thus, this allows a larger portion of the account to continue to compose tax-free.
Note that the retirement account used for a QCD is a pre-tax IRA. You would never send Roth money directly from the custodian to a charity.