Benefit in 2024 With an IRA Charitable Rollover
Each year, traditional IRA owners of age 73 and older must take a required minimum distribution (RMD). In nearly all cases, the RMD is calculated using the Uniform Table. Under the Uniform Table, distributions generally commence at age 73 at approximately 3.8% and increase each year based on the age of the IRA owner. This RMD must be taken by December 31 each year.
The majority of traditional IRA owners with larger IRA balances take the RMD during the months of October, November and December. Because many individuals with larger IRAs do not require funds immediately for living expenses, by delaying an RMD until the end of the year, they benefit from additional tax-free growth in the IRA.
Fortunately, the IRA charitable rollover will qualify for the donor's RMD. The IRS term for an IRA charitable rollover is a qualified charitable distribution (QCD). Your IRA custodian may also use this term.
There are five donor profiles for IRA charitable rollover gifts. The first are the convenience donors who appreciate the simplicity and ease of using this method for their end-of-year contributions. The second is the generous donor, who wants to give past the 60% of AGI deduction limit. The third is a major donor. This person may be a generous individual who is looking for a favorable opportunity to make a major gift. Fourth, the Social Security recipient may reduce taxes with an IRA rollover gift. Finally, a standard deduction donor will benefit from a direct IRA to charity gift.
Convenience Donor
Many IRA owners delay taking IRA withdrawals until October, November or December each year. As the individual approaches the end of the year, he or she will need to make decisions. If an IRA owner is actively making gifts to charity during the year, then it may occur to him or her that this is a good opportunity to make a gift.
Convenience donors may contact their IRA custodians to arrange for an IRA charitable rollover. There is no charitable income tax deduction, but also no inclusion in federal taxable income. It is simply a very convenient way to help their favorite charity.
Generous Donor
Some very generous individuals are already giving up to the 60% of adjusted gross income level. This is the maximum level under IRS rules to deduct cash gifts each year. Any gifts over this limit may be carried forward and deducted over the following five years. Some generous donors may also have a large IRA. Since they frequently live at a moderate level in proportion to their income and assets, they may not actually need all of their IRA.
If there is a desire to give more, they can give up to 60% of adjusted gross income from their regular assets and then make "over and above" gifts from their IRA. Some generous donors may in effect give nearly 100% of income per year through this method. Since the IRA rollover is not included in taxable income, it will have no impact on their regular income and other charitable gifts.
Major Donor
Board members, trustees and other major donors frequently have large IRAs. As the rules have continually become more favorable for IRAs and required withdrawals have been reduced, large IRAs will continue to grow. Over longer periods of time, there are occasional market dips, but the longer-term trend is positive and large IRAs will continue to increase in value.
For many professionals and business owners, the IRA may even become the vast majority of the estate. They have a need to do some "asset balancing" or there may be major future income tax problems. Therefore, it may be desirable for the major donor to give up to $105,000 in 2024 to charity from his or her IRA. This has the advantage of "balancing" the estate assets.
In addition, there may be income tax benefits. If the donor were to take the IRA distribution into his or her own personal income, there are several types of exemptions that are phased out at higher income levels. Thus, it may actually be preferable to make the gift directly from the IRA rather than making a charitable gift from regular income.
Social Security Donor
Social Security is subject to two levels of taxation. For donors who have income in excess of the first level, 50% of Social Security is taxed. For donors with income in excess of the second level, up to 85% of Social Security income may be subject to tax.
Withdrawing an amount from an IRA will potentially cause your income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket. Even though the withdrawn amount is given to charity and deducted, there still is increased tax on your IRA. Thus, by making the transfer directly to charity, many Social Security recipients will save income taxes.
Standard Deduction Donor
Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income (AGI). Thus, they may not have a sufficient level of deductions to itemize and choose instead to use the standard deduction.
If this donor withdraws $1,000 from his or her IRA and then gives it to charity, there is $1,000 of increased income with no offsetting charitable deduction, since the standard deduction is taken. Therefore, it will be preferable for all donors who are taking a standard deduction to make IRA rollover gifts directly to charity and avoid the additional income tax.
