Sunday, January 29, 2023
Homenew road to retirementRetirees may save with this year-end charitable donation tax strategy

Retirees may save with this year-end charitable donation tax strategy

  • Retirees age 70½ and older can donate to charity from their individual retirement accounts with a qualified charitable distribution. 
  • This strategy may satisfy required minimum distributions at age 72 and reduce their adjusted gross income, offering other benefits. 
  • However, philanthropic retirees must know the rules and common pitfalls, financial experts say.

Sam Edwards | Getty Images

As the year winds down, retirees eager to make charitable gifts may consider a tax-friendly donation from their individual retirement account. 

The strategy, known as a qualified charitable distribution, or QCD, involves a direct payment from an IRA to an eligible charity.

Retirees who are age 70½ and older may transfer up to $100,000 per year, and someone who is age 72 may use a QCD to satisfy their required minimum distribution.  

"For most people, most of the time, you're going to be better off doing this as your first source of charitable giving," said certified financial planner David Foster, founder of Gateway Wealth Management in St. Louis.

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The primary benefit of a QCD is that the transfer won't be counted as taxable income, he said.

Since fewer Americans itemize deductions, it can be difficult to claim a write-off for charitable gifts. However, retirees taking the standard deduction may still benefit from a QCD because it won't be part of their adjusted gross income, Foster said.

Moreover, a QCD reduces their IRA balance, cutting the size of future required minimum distributions, he said.  

"That's a relatively small benefit for most people but still relevant," Foster added.

Benefits of lower adjusted gross income

While most people don't make charitable donations solely because of the tax breaks, QCDs may offer a big one: reducing adjusted gross income.

"That's important because [higher] adjusted gross income often triggers a lot of other tax ramifications," said JoAnn May, a CFP and CPA with Forest Asset Management in Berwyn, Illinois.

For example, more adjusted gross income may cause a hike in monthly premiums for Medicare Part B and Part D, she said.

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