If you have a traditional IRA (instead of a Roth IRA), and you are approaching the magic mark of age 70-1/2, you will soon hit the point where you are forced to take your first, annual, required minimum distribution from your IRA and pay taxes on it. Depending on other income and your overall financial situation, this can put you in an unpleasant tax position.
One possible way of dealing with this is the IRA charitable rollover, also known as a Qualified Charitable Distribution (QCD). It is not an option for the 2014 tax year, since Congress allowed it to expire at the end of 2013. However, the IRA charitable rollover has periodically expired and been revived or extended since its inception in 2006. It expired in 2011, but was extended again through 2013 as part of the infamous "fiscal cliff" deal in 2012. Who knows what Congress will do this time?
If Congress revives this option and it stays in its previous form, the IRA charitable rollover has a multitude of tax benefits. A limit of $100,000 can be put toward the minimum required distribution, and the receiving charity is not obligated to pay tax on the donation.
It is not tax deductible as an itemized deduction under Schedule A, but the effect is even better – since it directly reduces your income, it has the same effect as an "above-the-line" deduction in your 1040 form. This lowers your AGI (adjusted gross income), which lowers the threshold value for some itemized deductions that do not kick in until you hit a specified percentage of your income. Medical and dental expenses are in that category, and those expenses are extremely important to you as a retiree. There are other benefits of a lower AGI, such as avoiding higher Medicare premiums.
Since the QCD is not currently enacted, should you take the risk and make an IRA contribution to charity? Financial advisors are divided. You will have to decide based on your overall financial situation and your tolerance for risk.
Some financial advisors are betting on Congress to restore this benefit, but are suggesting a bit of a delay to see which way Congress is leaning, or to lower the amount of the deduction as a bet hedge. If the QCD is not extended, you can still take this as an itemized deduction under Schedule A, but you will lose the benefits of lowering your AGI – and, of course, you will have to pay taxes on the contribution amount since it was distributed from your IRA to you.
Think of the QCD as a form of direct IRA rollover – since the money goes directly to the charity instead of passing through you, it is not considered a withdrawal that you made and, therefore, is not taxable. If it were distributed to you first then to the charity, the contribution would be taxable. For a maximum $100,000 contribution, that's a pretty big hit regardless of in which tax bracket you find yourself.
It is important that the custodian of your IRA handle the QCD correctly. Any mistake that sends the contribution through you as a withdrawal negates the tax savings.
In the end, what is Congress likely to do? That is hard to predict, especially in an election year. If the QCD is portrayed as merely "just another tax break for the rich" instead of benefiting those who have saved well for retirement, it could be derailed by populist sentiments. Cross your fingers and hope for the best if you would like to use the QCD to lower your tax bite while supporting your favorite charity.
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