Qualified Charitable Distributions


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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 directly 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 QCDs.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Taxes

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