The Charitable IRA

In late 2019, Congress made some significant tax changes taking effect in the 2020 tax year that may apply to many retiree taxpayers.

The Secure Act of 2019 made changes to Required Minimum Distributions (RMDs) as well as Qualified Charitable Distributions (QCDs) that are worth noting.

One of the changes worth mentioning relates to the age of the taxpayer.

Starting in 2020, anyone, even those individuals that are beyond the age of 70 ½ are eligible to make traditional IRA contributions as long as they also have income from employment. Before this change, you were no longer eligible to do this after reaching the age of 70 ½. Another change relating to the age of the individual affects required minimum distributions. The age at which you were required to take a minimum distribution from your retirement accounts has shifted from 70 ½ to 72. Even further than this, required minimum distributions have been suspended for tax year 2020 altogether, and it is not necessary to take a distribution if you don’t need to or want to. Obviously, if you decide to take a distribution in 2020, you can still do so and you can also use this distribution for a qualified charitable distribution if you choose. 

A qualified charitable distribution is an otherwise taxable distribution from an IRA owned by an individual who is age 70 ½ or over that is paid directly from the IRA to a qualified charity.

So what does this mean for the taxpayer? This allows you to transfer any amount up to $100,000 annually of IRA funds tax free to a qualified charity. A couple of ways this helps with regards to taxation, it can satisfy your required minimum distribution for that tax year as well as not being reported as taxable income on your tax return. Not including this distribution as taxable income on your tax return lowers your adjusted gross income (AGI) which is used to determine other tax breaks that you might be eligible for. For example, medical expenses as they are subject to AGI as well as how much or your Social Security will be taxable due to your income outside of Social Security. This can make a significant difference on your tax due if you are not in need of the income and you are someone that contributes to qualified charities such as your church or other qualified organizations anyway. One thing to keep in mind with the new changes to some of these rules is that if you do decide to put money into an IRA if you are eligible due to employment, this can reduce the amount of the qualified charitable distribution that you can make tax free. This is something to discuss before you make a decision to do both.  

An example of how a qualified charitable distribution can help you from a tax standpoint is below using the following criteria:

A charitably minded retired couple over the age of 70 ½ with income of $80,000, an RMD from IRA totaling $10,000, claiming the standard deduction on their tax return and they normally make annual charitable gifts of $10,000.

Donate RMD to CharityWrite a Check to a Charity
Total Income$80,000$90,000
Standard Deduction($27,400)($27,400)
Taxable Income$52,600$62,600
Tax Bill$5,917$7,117
Tax savings of $1,200

If you have any questions regarding how this could work for you, please feel free to contact our office.