Two Tax-Smart Tips for Charitable Giving with an IRA
Caleb Lund, CAP®
Director, Charitable Strategies Group
Hayden Adams, CFP®
Director, Tax and Financial Planning
Schwab Center for Financial Research
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A traditional IRA offers a tax-advantaged way to save money over many years and have an income stream in retirement. Charitably-minded owners of traditional IRAs may be pleased to know that their accounts can also be used in two ways to maximize charitable impact and minimize taxes. The first way is making Qualified Charitable Distributions (QCDs), and the second way is naming charitable beneficiaries.
1. Give to charity during retirement years through a QCD.
Retirement-age individuals and couples may find that they don't need income from their traditional IRAs in certain years or all years. Their other sources of income may be sufficient.
Some may not want the IRA income because these withdrawals are subject to ordinary income tax, and more taxable income may push these IRA owners into a higher tax bracket. In particular, a higher tax bracket can have adverse impacts on Social Security payments and Medicare benefits.
Regardless, starting at age 72 the IRS mandates traditional IRA owners take annual income withdrawals, known as Required Minimum Distributions (RMDs). Failure to take these withdrawals could subject IRA owners to stiff penalties.
Thankfully, charitably-minded individuals and couples age 70½ and older have a tax-smart strategy available with traditional IRAs: the QCD, also known as a charitable IRA rollover. The QCD allows a donor to instruct a traditional IRA1 administrator to send up to $100,000 per year—all or part of the annual RMD—to an operating charity.2 And couples who submit tax returns with married filing jointly status each qualify for an annual QCD of up to $100,000.
The IRA assets go directly to charity, so donors don't report the QCD as taxable income and don't owe any taxes on the QCD. In addition, the assets can be put to good use by a donor's favorite operating charity,2 making QCDs a win-win strategy.
Some donors may also find that the QCD provides greater tax savings than cash donations for which charitable tax deductions are claimed. This is because Adjusted Gross Income (AGI) is reduced, as shown in the case study below, and AGI is used in several key calculations, such as determining the taxable portion of Social Security benefits or what deductions and credits donors qualify for receiving.
In addition, a QCD allows a donor to receive a tax benefit from a charitable contribution even if the donor does not itemize deductions. This is the result of the QCD being excluded from taxable income.
Case study: enhancing tax savings with a QCD gift
Bob will submit tax returns with the single filing status and have ordinary income of $80,000 in 2022. Bob is 75 years old in 2022 and needs to take a RMD from his traditional IRA. In this instance, Bob's IRA is valued at $1,050,000, resulting in a projected RMD of $42,683 ($1,050,000 divided by the IRS mandated age 75 distribution period amount of 24.6). The below illustration compares a cash gift of $42,683 with a QCD gift for $42,683.
|Can a donor claim a charitable income tax deduction for a QCD gift?||
No. A donor cannot claim an income tax deduction, but by utilizing the QCD the donor can lower taxable income, which may provide greater income tax savings in comparison to making a cash gift and claiming an income tax deduction.
|Do donor-advised funds qualify to receive QCD gifts?||
No. However, a donor can name a donor-advised fund account or another public charity as the beneficiary of a traditional IRA as part of estate planning.
|Is there a QCD option for a 401(k) account or other retirement assets?||
No. The QCD is only available for charitable rollovers from IRAs. For other retirement accounts, including 401(k) accounts, donors can name a donor-advised fund account or another public charity as a pay-on-death beneficiary as part of estate planning. Donors may also roll over assets from a 401(k) account into a traditional IRA and thereafter gift the IRA assets to charity using a QCD.
|Can donors make a QCD that exceeds their required minimum distribution for the year?||
Yes. Keeping in mind that up to $100,000 per year may be rolled over to a qualified charity, donors may make a QCD in excess of their RMD. However, the excess distribution cannot be carried over to cover RMDs for future years.
|Can a QCD be spread among several charities?||
Yes. This can be done as long as the QCD is made to operating charities.2 Donor-advised funds, for example, do not qualify.
|If a QCD is made to an operating charity such as a university, can the gift be used to purchase courtside seats at the university's basketball game, participate in a charity auction, or pay fees for a charity golf tournament?||
No. A donor cannot receive any benefit for making a QCD. Note, however, that donors may be able to use a QCD to fulfill a donation pledge, but donors should consult with a tax or legal advisor on specific limitations.
|Can a donor-advised fund be named as beneficiary of a traditional IRA?||
Yes. Although donors cannot make QCDs to their donor-advised fund accounts during their lifetimes, they can transfer traditional IRA, 401(k), and some other tax-deferred assets to a donor-advised fund account upon death by way of a beneficiary designation.
|If a donor makes a QCD, can the donor also receive an income tax deduction for making another charitable gift?||
Yes. Donors may employ multiple giving approaches each tax year. Please note that a QCD may lower taxable income, which can impact the amount of deductions available to a donor in a given tax year.
|Did the SECURE Act change the age at which the QCD is available to donors?||
No. The SECURE Act changed the IRA RMD start age from 70½ to 72, but the law did not impact the QCD start age, which remains at 70½.
2. Set up giving beyond lifetime by naming a donor-advised fund account or other public charity as a charitable beneficiary.
Not all assets owned (e.g., real estate, brokerage accounts, and retirement accounts) are treated the same when passed to heirs. In fact, a unique feature of traditional IRAs is that heirs pay income taxes on the inherited assets at their own income tax rate at the time of withdrawal.
This unique tax feature is why public charities can be ideal beneficiaries of traditional IRAs. Public charities—including donor-advised funds—do not pay income tax on IRA income, which means every penny of the donation can be directed to support the donor's charitable goals.
What's more, donors can ask their advisors about using IRA assets to fund gifts, such as charitable remainder trusts, that provide income to heirs. For example, charitable remainder trusts may:
- Provide a steady stream of income for heirs
- Enable an estate to claim an estate tax deduction, if needed
- Fund a charitable legacy by naming a donor-advised fund account or other public charity as the beneficiary of trust assets
Naming a charitable beneficiary is easy to do and may result in substantial tax savings for a donor's heirs and estate.
What donors can do next
Schwab Charitable has tools, information, and other resources available online to inform and guide donors throughout their philanthropic journey. Donors seeking resources related to this article may:
- Learn about the benefits of a Schwab Charitable donor-advised fund account
- Designate a donor-advised fund account or other operating charity2 as a beneficiary of a traditional IRA
- Join the Charitable Legacy Program, available with a Schwab Charitable account, and identify charities to support beyond lifetime
Donors contemplating any of the strategies in this article should consult with their financial, tax and legal advisors.
For questions or assistance with philanthropic planning or charitable giving, donors and their advisors may:
- Visit the Schwab Charitable website
- Email Schwab Charitable Donor Relations at firstname.lastname@example.org
- Call Schwab Charitable at 800-746-6216
- Speak with a Schwab Charitable Relationship Manager