Retirees who don’t rely exclusively on individual retirement accounts (IRA) for income may consider donating a portion of their funds to charity, which comes with a tax benefit.
A provision in the tax code allowing retirees at age 70½ to direct up to $100,000 annually out of an IRA tax free to a qualified charity was made permanent in the most recent federal budget action.
As many investors make charitable donations throughout the year, this strategy could be a discussion topic anytime during the year.
The donation may also be made from required minimum distributions (RMDs), which are required beginning at age 70½ and are reported as taxable income. Distributions excluded from income are equivalent to a 100% deduction.
There are additional reasons why the so-called IRA charitable rollover can be a more tax–efficient alternative than claiming a tax deduction on the Form 1040:
- Generally, in order to claim a charitable deduction, you must itemize on your tax return. For retirees who no longer pay mortgage interest, the deductions may be too small to itemize. The provision offers the tax benefits of a charitable contribution without having to itemize your deductions.
- Charitable deductions are limited by a taxpayer’s income — generally up to a maximum of 50% of modified adjusted gross income. By directing your IRA distribution to a charity, you can avoid this restriction.
- If reporting additional income (from RMDs) on Form 1040 increases your Medicare Part B premiums or negatively affects the taxability of your Social Security benefits, then directing the RMD from the IRA tax free to a charity may be appropriate.
- Some states do not allow residents to deduct a charitable contribution. Making a donation to a charity directly from an IRA may provide a way to effectively claim a state tax deduction. Consult a tax professional for state-specific guidance.
To determine whether making a charitable donation is an appropriate strategy for investors, share Putnam’s investor education article, “Donating IRA assets to charity.” It is important for retirees to discuss the strategy with their financial advisor or a tax expert before making the decision.