Unlocking Tax Advantages: Power of IRA For Qualified Charitable Distributions

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Matthew A. Kaliff | SPECIAL TO THE CJN

Article reprinted with permission from Cleveland Jewish News

It’s a given that building a retirement nest egg is essential to achieving long-term financial stability. That’s why millions of Americans look to their individual retirement accounts (IRAs), 401(k)s, 403(b)s and pension plans to support their lifestyle in retirement. According to the most recent reported data, approximately 36.6 million U.S. households own traditional IRAs. In addition to its value as retirement savings tool, a traditional IRA is also a tax-smart resource for charitable giving and legacy planning.

An increasingly popular giving strategy is the IRA qualified charitable distribution, sometimes called the IRA charitable rollover. A QCD allows individuals who are at least 70½ years old to transfer up to $105,000 directly from a traditional IRA to eligible charitable organizations, tax-free. The transferred amount is excluded from federal and Ohio taxable income, potentially lowering your overall tax liability. The QCD is particularly appealing for individuals who consistently give to charity but, like most people, do not itemize their deductions at tax time. Similarly, because an IRA rollover donation reduces taxable income, it may prevent an individual from moving into a higher tax bracket.

Moreover, an individual can use the IRA rollover to satisfy all or part of their IRA annual required minimum distribution. For example, someone whose RMD is $30,000 this year could withdraw $20,000 from the IRA for themselves as regular income, while also directing $10,000 to one or more eligible charities tax-free.

To make an IRA rollover contribution, the account owner simply instructs the IRA custodian to make a QCD to the preferred charity. The distribution must go directly to the organization and not through the owner. Otherwise, the distribution will be counted as income and taxed to the donor. For most charitable organizations, a QCD donation can pay an annual gift, support a program, or endow a named fund. We see many people using the QCD to support meaningful causes in our Cleveland Jewish community and Israel. Note that donor advised funds, private foundations cannot receive QCD contributions. It’s good practice to alert the recipient charitable organization in advance as many IRA custodians send checks without any indication about the source of the gift.

Finally, IRA assets are highly tax-efficient sources for planning a charitable bequest. When IRA assets pass to an heir, they may be subject to tax, reducing the amount inherited. However, the same assets pass to a charitable beneficiary completely tax free. To name a charitable beneficiary, contact the custodian to request a beneficiary designation form or complete one online.

IRA rollover contributions are subject to limitations, so consulting with a financial adviser or tax professional is recommended to ensure compliance with IRS regulations. That said, an IRA offers a flexible option to make a meaningful difference while optimizing your retirement savings.

Matthew A. Kaliff is senior director of endowment development & foundations at the Jewish Federation of Cleveland in Beachwood. This article is for information purposes only. Consult with your own financial or tax advisers when making financial decisions.

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