IRA charitable donations are permanent: Here’s what it means for retirement planning

There won’t be any doubt about it this year – charitably-minded retirees will be able to make donations from their Individual Retirement Accounts. Really. For sure.

Congress permitted donations direct from IRAs under the Pension Protection Act of 2006, but it’s been a rollercoaster ever since. The Qualified Charitable Distribution (QCD) would sunset every couple years, leaving donors uncertain whether the provision would be available.

But the QCD was extended permanently under budget legislation enacted in December – and the certainty has given retirees a reliable tool for smart planning.

The QCD allows IRA account holders at least 70 ½ years old to make direct donations up to $100,000 annually direct without first taking a distribution. That can be useful for affluent households making contributions so large that they hit the maximum deduction and carry-forward limits. But it also is useful for less-wealthy donors who don’t itemize deductions on their tax returns.

The key benefit is keeping donated dollars out of the adjusted gross income reported on your tax return, as would happen if you donated by first taking an IRA distribution. Higher adjusted gross income could push you into a higher marginal income tax bracket. But it also can increase taxation of your Social Security benefit, or trigger the high income surcharges on Medicare Part B premiums paid by some seniors.

QCDs also help satisfy annual required minimum distributions from your IRA, which can be helpful for IRA owners who don’t need the distributions to meet living expenses. Distributions generally must be taken from IRAs starting in the year you turn 70 1/2 (and from 401(k)s at the same age, unless you’re still working for the employer that sponsors the plan).

Interestingly, QCDs may hot always be the best charitable giving solution. Michael Kitces, partner and director of research for Maryland-based Pinnacle Advisory Group, notes that donating appreciated stocks can yield a better tax saving – the donation is deductible, but also avoids capital gains taxes. In an email exchange this week,  he explains it this way:

If a charitable contribution is “just” worth 25 percent and the QCD saves you at a 27 percent rate by avoiding Medicare Part B premium charges, that may still be dwarfed by donating appreciated securities at the 25 percent tax bracket plus saving 15 percent in capital gains taxes on all the gains (the bigger the gains, the more valuable that is). In other words, even with the tailwind of these AGI-based rules (that benefit from QCDs reducing AGI), if there are appreciated securities with huge gains, it can still be competitive to donate appreciated securities. Especially when it comes to avoiding Medicare premium surcharges, which often create anxiety for retirees but in reality are a fairly “small” surcharge relative to someone’s income at that level (and thus why, per the article above, it’s actually only a small increase in marginal tax rates).

See Michael’s post on this question at Nerd’s Eye View (recommended reading, by the way).

 

Comments

  1. Question: How would this work for someone that wanted to leverage their gift by having the charity purchase an insurance policy with the gift? Would that still be considered “direct”, with the charity as owner and beneficiary? Would a trust be needed? If so, what kind? Could a charitable remainder lead trust be allowed involving an annuity? In other words, could insurance contracts be involved under these new allowances?

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