Money from an individual retirement account can be donated to charity. What’s more, a donation from a traditional IRA can be non-taxable since that tax break was made permanent in 2015.
- Funds from an IRA can be used for charitable donations if done correctly.
- Tax breaks on the charitable donation cannot be combined with the tax break on retirement savings.
- The IRS has established rules to make sure qualified charitable distributions are made properly.
How a Qualified Charitable Distribution Works
Normally, a distribution from a traditional IRA incurs taxes since the account holder didn’t pay taxes on the money when they put it into the IRA. But account holders 70½ or older who make a contribution directly from a traditional IRA to a qualified charity can donate up to $100,000 without it being considered a taxable distribution. The deduction effectively lowers the donor's adjusted gross income (AGI).
To avoid paying taxes on the donation, the donor must follow the IRS rules for qualified charitable distributions (QCDs), aka charitable IRA rollovers. Most churches, nonprofit charities, educational organizations, nonprofit hospitals, and medical research organizations are qualified 501(c)3 organizations. The charity will also not pay taxes on the donation.
This tax break does mean that the donor cannot also claim the donation as a deduction on Schedule A of their tax return. Other donations to charity that don't use IRA funds, however, can still be claimed as an itemized deduction. Since the Tax Cuts and Jobs Act (aka tax reform) increased the base standard deduction, for 2019, to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly, many fewer taxpayers will itemize on Schedule A, making the upfront deduction potentially even more important.
Taxpayers whose annual income affects their Medicare premiums might also find that this provision helps control the premium cost.
QCDs and Required Minimum Distributions
The donation can also help meet all or part of the IRA’s required minimum distribution (RMD) for the year. (Owners of traditional IRAs must start taking RMDs at age 70½ or face tax penalties; Roth IRAs do not require distributions while the account holder is alive.) The charity must receive the donation by Dec. 31 for the amount to be applied to that year’s tax return.
Account holders 70½ or older can donate to a qualified charity directly from a traditional IRA, effectively lowering their adjusted gross income.
QCDs are a good choice for individuals who otherwise could not deduct all or part of their charitable donations because of the IRS rule prohibiting a deduction for donation amounts that exceed 60% of a taxpayer's AGI. This rule might appear to affect only wealthy taxpayers who give generously, but it also affects anyone retired with little to no income who still wants to make a deductible donation.
Another way to donate IRA assets is through an estate after the donor's death by naming the charity as the designated beneficiary of the IRA. The charity will receive whatever percentage of the assets the account owner provides for on the beneficiary form. Distributions from SIMPLE IRAs are ineligible to be QCDs.
An IRA trustee uses IRS form 1099-R to report the QCD on an account owner's annual tax return. Owners should also keep records of the donation date, the account from which the donation came, the amount given, and the charity that received the donation.
Validating the deduction also requires a receipt from the charity stating that the donor received no goods or services in exchange for the contribution. The amount of your donation is reduced by the value of any goods or services received in exchange, and that part of the donation will be taxable.
The Bottom Line
Using an IRA to make a charitable donation can help lower a tax bill and help a worthy cause. Distributions must be made directly to the charity, not to the owner or beneficiary. All distribution checks need to be made payable to the charity or they will be counted as taxable distributions.