You may have heard that, upon reaching 70½ years of age, we are required to begin withdrawing portions of our traditional IRAs on an annual basis. These Required Minimum Distributions (“RMDs”) are distributed regardless of whether the plan owner actually needs the money to supplement other income sources. These RMDs are always reported via tax return to the IRS as ordinary income, which is taxed at the plan owner’s marginal tax rate. Further, if the IRA owner forgets or refuses to take the distribution, he/she could owe substantial IRS-issued penalties.
Wouldn’t it be nice, however, if we could avoid taking this unneeded income and, instead, help our local church, synagogue, mosque, and other charities we support anyway? Not only is it nice, but current law allows you do just that (and in a tax-efficient way!). The process involves instructing the trustee of your IRA to send your RMD directly to your favorite charity(ies), as opposed to collecting it personally and then giving charitably. As an example, if you give $5,000 annually to your church throughout the year and, at the same time, your RMD for that year is also $5,000, you (and your church) would greatly benefit from a direct transfer of the $5,000 from your IRA trustee to your church. Effectively, you have now taken care of your charitable intent while simultaneously satisfying your RMD mandate. There is an additional bonus which involves saving tax dollars – the technique allowed you to donate from a pool of funds (the IRA) that you otherwise would’ve owed income taxes on! This means you have the ability to give more funding to your charity without digging deeper into your own pocket!
There truly is no “catch” with this strategy. In fact, current law allows for the donation of up to $100,000 of your RMD each year! While few of us have that large of an RMD anyway (I certainly do not!), you may want to consult with your CPA or other income tax advisor to see if this is a strategy that makes sense for you.