A Charitable IRA Donation Can Be a Powerful Tool for Tax Planning and Doing Good

Published

August 24, 2021

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ira news, Investment News

Tax time is right around the corner and the Fall is a perfect time to begin strategizing on how to ensure there are no surprises come April. One often overlooked tax planning tool for IRAs is the Qualified Charitable Contribution (QCD).

Traditional IRA holders are required to take a Required Minimum Distribution at age 72 or older. Often, IRA holders neglect to consider RMDs when tax planning. IRA holders should be aware that RMDs are taxable income and will be treated as such on your tax return.

A QCD allows an IRA holder to make their RMD payable to a qualified charity, thus eliminating that RMD as taxable income. The QCD can be made for the entire RMD amount or less; it is up to the account holder. Using a basic example, if your required RMD for a given year was $5,000 and you made a $5,000 QCD your RMD taxable income for that year is $0. In the same scenario, if you made a $2,500 QCD you would need to take the remaining $2,500 RMD, which would be taxable. (Do note the OCD is not impacted whether you itemize or take the standard deduction.)

It’s very important to note that in order for the OCD to count towards your current year’s RMD it must be made by the end of the RMD deadline, which is typically Dec. 31. It is also important to note that you must request that your IRA custodian issue the check from your IRA payable to the charity. For example, if you have an IRA at Merck Employees Federal Credit Union, you would request the OCD from us and we would issue the check payable to the charity on your behalf.

Also note that the charity must be a qualified 501(c)3 organization. As always, it’s important to consult a tax advisor to address your specific circumstances.

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