If one of your holiday traditions is to support charitable organizations with year-end donations, some tax-wise strategies can help those at retirement age be savvy givers -- and avoid unexpected penalties.
If you are age 70 1/2 or older, you can use a qualified charitable distribution (QCD) to donate up to $100,000 annually directly from a traditional IRA to an eligible public charity without counting that amount as taxable income.
If you are 72 years of age or older, you must take a required minimum distribution (RMD)--and the amount you donate can reduce the amount of your mandatory withdrawal--and do this without incurring taxation.
To be tax-wise and giving-savvy, follow these rules and tips:
- You can donate the full amount of your RMD, up to a maximum of $100,000 annually.
- Be careful not to withdraw the funds or deposit them into your personal account and then write a check. The funds must come directly from the IRA to the charity. You should work with the IRA custodian to correctly accomplish a QCD or RMD.
- You can use less than the full RMD for the charitable distribution; however, taking the incorrect amount for your RMD could result in a hefty penalty. For example, if you have an RMD of $6,000 and you want to give only $4,000 to charity, you would still need to withdraw the remaining $2,000 and pay taxes on it.
- Before you arrange for the transfer of funds, be sure the charity is eligible. Not every organization or cause qualifies for a QCD or RMD. The organization must be a 501(c)(3) -- not a donor-advised fund, private foundation or supporting organization. CHI Health Foundations are qualified 501(c)(3) charities. For further information, please contact your local foundation.