If you've reached age 59 1/2 and are feeling generous of spirit,
little-known tax rules surrounding charitable distributions from an
individual retirement account (excluding SEP and SIMPLE IRAs) could
spell a nice donation for your charity of choice and a terrific tax
break for you.
Thanks to a provision in the Pension Protection Act, you can
make cash donations to many tax-exempt charities directly out of
your traditional or Roth IRA and receive a 100% deduction on your
distribution, without having to worry about restrictions that can
reduce or delay itemized charitable write-offs. And that's not the
only tax perk it offers. Here's what you need to know.
The qualified charitable distribution (QCD) provisions were
renewed for 2011. Up to $100,000 can be excluded from gross income
and treated as a qualified charitable distribution for this year.
This means you can make a payment of an otherwise taxable amount
from your traditional or Roth IRA
to a qualified public charity. Any distributions, including any
required minimum distributions, which the IRA owner actually
receives cannot qualify as QCDs. Likewise, any tax withholdings on
behalf of the owner from an IRA distribution cannot qualify as
The excluded amount can be used to satisfy any required minimum
distributions that the individual must otherwise receive from their
IRAs for 2011. If you fail to use up your entire $100,000 privilege
this year, you won't get another chance unless Congress extends the
break. The deadline for making a 2011 QCD is January 31, 2012.
A qualified charitable distribution from a traditional IRA
counts as a payout for purposes of the required minimum withdrawal
rules. Therefore, you can arrange to donate all or part of your
2011 required withdrawal amounts (up to the $100,000 annual limit
for QCDs) that you would otherwise be forced to receive and pay
income taxes on.
If you own one or more traditional IRAs to which you've made
nondeductible contributions, part of your IRA balances are taxable
amounts (from your deductible contributions and account earnings)
and part are nontaxable amounts (from your nondeductible
contributions). In this situation, qualified charitable
distributions are treated as coming from taxable amounts first.
This is contrary to the "normal" rule that says your IRA
distributions are treated as being partly taxable amounts and
partly nontaxable returns of your nondeductible contributions.
Being allowed to pull out taxable amounts first for qualified
charitable distributions works to your benefit. Why? Because it
allows you to completely avoid taxes on otherwise taxable amounts
that are distributed from your IRA(s) to charity, while leaving
nontaxable amounts in your IRA(s) that you or your heirs can
withdraw tax free later on.
Last but not least, qualified charitable distributions will
reduce your taxable estate. The idea of taking QCDs out of a Roth
IRA is not nearly as attractive as taking such distributions out of
your traditional IRA(s) because you and/or your heirs can take
income tax free Roth IRA withdrawals after the account has been
open for at least five years. So with a Roth IRA, the only obvious
advantage to the qualified charitable distribution strategy is that
it will reduce your taxable estate.
The new qualified charitable distribution break can be a
tax-smart move for retirees who are seeking strategies around the
typical RMD. However, you would be wise to check with a tax
professional before pulling the trigger.
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
the Snider Investment Method Owner's Manual; read and consider them
carefully before investing. More information can be found on our
website or by calling 1-888-6SNIDER. Past performance is not
indicative of future results.