Looking for a tax-savvy way to use your retirement investments for charitable giving? New federal rules include enhancements for Qualified Charitable Distributions – creating new opportunities for this popular giving strategy.
If you are 70.5 years old, you are permitted to use your IRA to make a Qualified Charitable Distribution (QCD) – also called a Charitable Rollover – of up to $100,000 a year to a 501(c)3 charity, such as the Community Foundation of Broward. The recent passage of the Legacy IRA Act will increase that amount to account for inflation.
In addition, recent approval of bipartisan legislation referred to as “SECURE 2.0” builds on giving rules in the original SECURE Act of 2019. SECURE stands for “Setting Every Community Up for Retirement Enhancement” and includes guidelines for QCDs.
Here are three new provisions affecting charitable giving:
- Taxpayers may now make a one-time $50,000 QCD transfer to a charitable remainder trust (CRT) or other split-interest gift such as a charitable gift annuity (CGA). These are the “Legacy IRA” provisions. Note that the law effectively mandates that the CGA or CRT be created solely for the purpose of receiving a QCD because the new statute requires that the vehicle contain only IRA assets.
- The Required Minimum Distribution (RMD) age (formerly 72) increased to 73 on January 1, 2023. The age will increase to 75 beginning on January 1, 2033. While this provision is not directly tied to charitable giving, it will nonetheless impact your overall financial plans and potentially affect the timing and strategy of your philanthropy. As a reminder, RMD refers to the mandated amount that a taxpayer must withdraw from qualified retirement plans, which include IRAs as well as 401(k)s and other tax-deferred retirement accounts.
- The annual per-taxpayer $100,000 QCD cap is now slated to be indexed for inflation, which will allow taxpayers to give even more from their IRAs directly to charity.
Here’s what remains the same:
- Eligibility for making a QCD still starts at 70 ½. This allows taxpayers who are not yet required to take IRA distributions under the RMD rules to still take advantage of the QCD technique without the income tax hit on the distributed funds while also removing those funds from liability for future estate taxes.
- Taxpayers required to take RMDs can still count QCDs toward their RMDs, thereby avoiding the usual income tax hit on RMD dollars.
- A QCD isn’t permitted to a private foundation or a Donor-Advised Fund. The Community Foundation offers several types of charitable funds that can be supported by a QCD, such as Unrestricted Endowed Funds, Field of Interest Funds, Designated Funds and Scholarship Funds.
Benefits of transferring an IRA to charity
When a Traditional IRA is inherited by heirs, it carries a tax liability for the investment gains accrued over the life of the fund as well as any tax deferred contributions. Unlike securities, which currently receive a “step up” in basis, these gains are taxed at the federal level as Ordinary Income, which can be more than 40% depending upon your tax bracket. No one escapes paying this tax.
However, by making the Community Foundation or another charitable organization the beneficiary of your Traditional IRA, you can move this highly taxable asset out of your estate without any taxes. A 501(c)3 charitable organization doesn’t pay tax on your gift, so the full amount can be used to support your charitable priorities.
For example, if you add to or create a charitable fund in your name at the Community Foundation, your IRA fuels support for causes and nonprofits close to your heart. Transferring your IRA to the Community Foundation can also be used to seed a Donor-Advised Fund, with your children, relatives and other loved ones designated as advisors. This creates a way to pass on your legacy of philanthropy to a new generation. It’s a win-win proposition for your family and your favorite causes.
To discuss ways to use QCDs or gift IRAs, contact Matt Kahn, Senior Director of Philanthropic Services, at firstname.lastname@example.org or 954-761-9503