How to Donate to Charity With Money From Your IRA

The IRS allows, and even encourages, charitable donations from tax-advantaged retirement accounts such as an IRA. Not only can this help you efficiently do some good, but you can take a solid tax deduction in the process. Here’s what you need to know.

If you’re interested in making charitable donations, a financial advisor can help you create a plan.

There are three main ways to donate retirement assets:

Make a direct transfer. The first, and easiest, is to simply give away your distributions. With this method, you cash out and withdraw assets as normal from your retirement account. Then, once you have the cash in hand, you can give it to the charity you prefer.

You would pay any applicable taxes on an IRA withdrawal, typically income taxes, and only can take a charitable giving deduction if you itemize your taxes.

Here, you transfer assets or money directly from your retirement account to the charity in question. You never cash the assets out. The IRS allows you to treat this as a tax-free transfer, meaning that you do not have to apply the assets to your taxable income for the year. This is true even if you take the standard deduction, making a QCD not only a very tax-efficient form of charitable giving but also a great way to meet your required minimum distributions tax-free.

However there are a couple of limits on QCDs. First, in general, you cannot make a qualified charitable distribution with Roth IRA money. Second, you must also be at least 70 1/2 years old, and can only give up to $100,000/$200,000 single/jointly. Finally, the distribution must go to a qualified, tax-exempt charity that does not benefit you in any way. 

If you can meet those requirements, this is an excellent way to donate money through your IRA.

Donate through estate planning. Finally, you can donate to charity through your estate planning. 

Your estate can transfer an IRA to charities directly (by transferring the portfolio and its assets), indirectly (by cashing out the IRA and donating the money) or in trust (by establishing a trust that will distribute the assets). This can be a good way to give a significant sum if you have large retirement assets. It can also create a very significant tax advantage for your estate, which can in turn reduce any taxes that your heirs and/or estate would owe. 

However be careful if you establish a trust, as this can complicate the tax advantages of your donation. If a qualified charity receives these assets, then your estate will get a tax deduction for the value that it gives. If a trust receives these assets, it may be more difficult to engineer that tax deduction.