If you are age 70½ or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions.
A great way to reduce your taxable income while supporting causes you care about is to “rollover” a portion of your IRA’s minimum distribution to a charitable organization: perhaps your favorite local nonprofit, your alma mater, or your church. As long as the charity is a 501c3 organization in good standing with the IRS, you can directly send them a portion of your RMD and never claim that amount as taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later.
In my semi-annual tax and financial planning meetings with clients, I frequently hear that a priority is to decrease their annual tax burden. The reality is that their fixed sources of income from Social Security, pensions, investments, and IRA distributions require them to recognize more income than they need to cover retirement living expenses. It’s great to be in this position, but tax inefficient and you lose control over where and how your assets are being used.
How much should you rollover to a charity? I recommend starting by determining how much of your IRA RMD you need for living expenses. Let’s say you have an RMD of $20,000 and you need $10,000 for personal expenses. The other $10,000 can be distributed directly to the charities of your choice before year end.
The $10,000 charitable rollover will bypass the income portion on the front page of your tax return and won’t have to itemize if your standard deduction is higher. Depending on your tax bracket the tax savings will be an immediate 12-37% for most which means that your gift will have more impact versus giving the after-tax amount.
If this is your first time giving using an IRA charitable rollover, I would advise meeting with your tax and financial advisor to discuss a giving plan for the next 3-5 years. Depending on your philanthropic goals and types of organizations you want to support, your trusted advisors can recommend how to efficiently transfer assets to minimize tax and increase cashflow to the recipient.