Making charitable donations from your IRA may be a very smart decision.
Can you give money to the Valley Park Education Foundation (VPEF) using your IRA? For individuals 70 1/2 or older - the answer is usually yes. What many retirees don't know is they can donate all, or a portion of their IRA directly to the Valley Park Education Foundation. It's called a qualified charitable distribution or QCD. A QCD can be a very tax-effective way to support VPEF. Here's how to donate from your IRA using a QCD.
QCDs reduce your taxable income
Qualified charitable distributions do not provide a charitable deduction for taxpayers. Instead, with a qualified charitable distribution, a check is sent directly from an IRA to VPEF. This allows the donor to exclude the amount from taxable income. The QCD goes toward satisfying any required minimum distributions (RMD), and also is excluded from your taxable income. To illustrate the benefits, here are four ways RMDs can increase taxes:
1. RMDs can push retirees into a higher tax bracket. Since distributions are ordinary taxable income, it can push some retirees into a higher marginal tax bracket. Making QCDs from the IRA may help avoid that.
2. Medicare surtax. RMDs also increase the taxpayer's modified adjusted gross income, or MAGI, which could trigger the 3.8% Medicare surtax. QCDs may help limit that.
3. Taxing Social Security. Withdrawals from a retirement account can cause Social Security benefits to become taxable, up to 85% for single filers with income above $34,000 annually or married couples with income above $44,000. QCDs may help lower the amount of social security that is taxable.
4. Medicare Part B and D premiums are calculated using a taxpayer's MAGI from the prior, prior year. So RMDs can cause increases to your Medicare costs. QCDs could limit that.
For retirees who are charitable and over age 70 1/2, a QCD to VPEF may be worth considering.
What are the rules for qualified charitable distributions?
As with any tax strategy, it's important to pay close attention to the IRS rules. Here are some of the major ones:
• The IRA owner must be age 70 1/2 or older.
• The annual QCD limit is $100,000 per account owner. Note: the limit can exceed the annual required minimum distribution (RMD).
• Donations must go directly from your IRA to VPEF.
• Most types of IRAs qualify: traditional IRAs, rollover IRAs, inherited IRAs, SEP IRAs and SIMPLE IRAs. QCDs from a Roth IRA may be allowed, but since Roth IRAs are usually tax-free, it probably doesn't make sense.
• QCDs only apply to taxable distributions. So if you've previously made non-deductible contributions, you'll need to do some extra math to figure out the tax benefits.
• Making tax-deductible IRA contributions can reduce your deduction for qualified charitable distributions when both are made in the same tax year.
There are other ways you can give to VPEF including giving appreciated stocks and donating cash. Contact Jaime Gast (636) 923-3690 for more information on how.
Consult your tax advisor for advice before making QCDs or filing your tax return.