Individuals cannot keep money in their retirement accounts forever. Beginning on April 1, of the calendar year after turning 701/2, individuals must start making withdrawals from their IRA, Simple IRA, SEP IRA, or retirement plan account. The minimum withdrawal amount is called the Required Minimum Distribution (RMD). Generally, the RMD is calculated from an IRS Uniform Lifetime table.
Some people find they do not need the RMD for living expenses and prefer to donate the funds toward their favorite charity or charities. A law made permanent in 2015, allows donors aged 701/2 to make a qualified charitable distribution from a traditional IRA or ROTH IRA directly from the IRA trustee to the charitable organization, and not declare the amount as part of their gross income. The amount distributed to the charity or charities would count as part or all of the individual’s RMD. The maximum amount that can be transferred with this result is $100,000 per year. Note that this applies to IRAs but not retirement plan (401(k) or 403(b)), money purchase plan, profit sharing etc., or other accounts you have with your employer even though the RMD rules also apply to those accounts. Of course, many donors have rolled over their retirement plan accounts to an IRA.
For example, let’s say Mary wants to support the private school where her grandchildren attend but budgets carefully and does not want to donate from her regular accounts. She is required to take RMD amounts from her IRA this year in the amount of $10,000; therefore, she instructs her IRA custodian to directly transfer the $10,000 to the school. Through her donation, Mary has met her RMD requirement, avoided any penalties, and does not have to declare the $10,000 as income on her Federal tax return. States and municipalities differ on whether the rollover is excluded from state income tax calculations.
For some donors this may not convey any tax benefits as the amount included in income is offset by the charitable deduction with no difference in the ultimate federal tax paid. However, there are many situations where not including the RMD in income will achieve a better tax result. This could be because of the donor not itemizing deductions, bumping up against a percentage of AGI limit for all of their charitable contributions, affecting an exemption or itemized deduction phase-out situation, or might decrease the amount of social security benefits subject to tax. Roth IRA rules can be tricky when determining the best outcome. Donors may also find it administratively easier.
For a married couple both spouses may have IRAs so they could each make a charitable rollover in this manner up to $100,000 each. The IRA rollovers can only be outright gifts (although the charity may consider the donations to meet a pledge or matching requirement) but they cannot be used to fund a life income gift such as a charitable gift annuity or a charitable remainder trust. IRA charitable rollovers cannot fund donor advised funds, private foundations, or supporting organizations. In addition, the donor cannot receive any privileges in exchange for the gift that would have reduced the tax deduction they would have otherwise qualified for. It usually can be counted toward a particular giving level designation provided no benefits are provided as a result.
Everyone’s tax situation is different, so please consult your Aronson tax advisor to address your specific situation, and how to report this properly on your tax return when you receive a 1099-R from your IRA administrator.