Tax Saving Opportunity for Many Retirees With IRA Accounts

One often overlooked opportunity to donate to your favorite cause with tax free money is the ability for those age 70½ or older to directly contribute funds from their Individual Retirement Account (IRA) to a charity. There has been a series of short-term tax laws passed for over 10 years that have allowed those transfers, and the PATH Act of 2016 made that opportunity permanent.

Those who qualify can transfer up to $100,000 per year directly from their IRA to a charity, which is tax favored for a number of reasons:

  • The direct transfer does not count as taxable income to the recipient, and your adjusted gross income can impact a number of things, including taxable Social Security, deductible medical or miscellaneous expenses, and Medicare premiums.
  • You do not need to itemize deductions to benefit and the entire amount is tax free to the individual. Many retirees do not have mortgage interest or significant other deductions so this allows all individuals to benefit, regardless of itemizing other deductions or not.
  • If you make large donations as a percentage of your income, this donation would not be limited at all other than the $100,000 per year maximum.
  • Assuming the IRA has increased in value, you are donating appreciated assets without paying income taxes on the growth.
  • The IRA distribution counts as a required minimum distribution for the individual.

The key requirements for a direct IRA donation are the following:

  • Individual must be 70½ at the time of the donation
  • Donation must be from an IRA and not a 401k, pension, or other employer-sponsored retirement plan.
  • Donation must be to an eligible charity (Generally a 501(c)3 organization)
  • Donation can be any amount up to $100,000 per year; for married couples, it is $100,000 each
  • You can donate from either a traditional or Roth IRA, but a Roth IRA distribution to charity typically does not make sense since it is not taxable

If you are eligible and interested in learning more, please contact Becky at Next Act Theatre. We can work with you and/or your investment advisor to help.