The tax code, with all of its hundreds of pages of regulations, stipulations, and loopholes always leave something be learned. Not only is the U.S. Internal Revenue Code massive, different write-offs and deductions occur at different stages in life, so it’s unsurprising if you don’t know the details of the IRA (Individual Retirement Account) charitable rollover. What is this magical option that allows you to give to your favorite charities without having to count the distributions as taxable income? Here are a few details to know before speaking with your financial advisor about how/if you should incorporate it into your financial roadmap.
Like at the amusement park where you have to be a certain height to ride the roller coaster, you have to be a certain age to garner the benefits of the IRA charitable rollover…age 70.5 or older to be exact. (A tiny, yet important caveat to this, is this is based on the year—not the day—the taxpayer reaches that golden number of 70.5 years.)
Why is 70.5 such an important age? At this time people are required to make distributions from their IRAs annually. Such distributions are then subject to taxes as they’re added to the taxpayers’ adjusted gross income (AGI).
Rolling, Rolling, Rolling…Keep those Donations Rolling
The charitable rollover is advantageous because it allows taxpayers to give money to public charitable organizations (not donor-advised funds and private foundations except in rare circumstances) and that money isn’t included as part of the AGI. So, donations made through the IRA charitable rollover are therefore not subject to taxes. You’ll hear this type of transfer referred to as a qualified charitable distribution (QCD). The trade-off for the charitable rollover is the taxpayer then has to forego the charitable income tax deduction.
Donate by the Rules
The operations around a win-win QCD are pretty strict. The donation cannot be withdrawn and then dispersed to a charity; the donations must be sent straight (without pit-stops or bathroom breaks) to the public charity by the IRA administrator. Additionally, if a charity you donate to sends you any free goods or services, send them straight back. To be eligible for the tax-free benefit there should be no quid pro quo. And, be sure to get a written receipt of donation to every charity recipient. That means if you split $100,000 amongst five not-for-profits, you should have five written receipts of contribution—one from each.
The $100,000 is an important number to remember as it’s the maximum amount a single donor can donate through charitable IRA rollover contributions annually. (If you’re married, the amount is not portable betwixt spouses.) Of course, you could totally donate more money to charities in any given year, but it wouldn’t be eligible to be a QCD.
Lastly, be sure to involve your trusted financial advisor in the beginning stages of your intention to utilize the IRA charitable rollover. One major reason to involve your financial advisor (and probably your accountant too) in such decisions is the nuances of the IRA charitable rollover on taxes filed as itemized versus standard deductions. Whether you’re looking at this as a legitimate option or simply planning ahead for the future, the experts will help you integrate the rollover into your grand financial plan.