Thank you for joining us for episode 36 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “Can I donate money from my retirement accounts to a charity?”
This is a great question because people realize when they’re older that they give to charity anyway.
Are There Tax Advantages?
You can always donate money to a charity out of your retirement accounts if you just simply cash in part of the retirement account. Let’s say you want to give $50,000 to a charity this year. You can just take $50,000 out of your IRA and give it to a charity. If you do that, you have increased income because you took money out of a retirement account, but you also get a tax deduction because you gave the money to a charity or gifted the money to a charity. The problem with that is in the tax laws. In the tax rules and the calculations that increase in your income, even though you get a deduction for the same amount.
When you give the money to charity, that increase in your income could cause you to be in a higher tax bracket and could cause you to pay more taxes on your Social Security. It could cause you to pay higher Medicare premiums or to even have phaseouts in other areas.
Here’s the great news. If you’re over 70 1/2, you can donate up to $100,000 straight to a charity and not show that on your income taxes. Now, you don’t get the tax deduction because you never showed it as income. That doesn’t matter if you’re giving money to a charity anyway.
This is a home run because you don’t have to declare that on your gross income. You can deduct it again. You can send it again, directly from the retirement account from your IRA. It has to be an IRA. You have to be over 70 1/2 directly to the charity. The charity gets the money. It comes out the same from a tax standpoint as if you would have cashed it in and given that money to charity. However, it doesn’t hit your increased income. It doesn’t increase your income.
The other advantages are that you don’t take your required minimum distribution as long as you take up to the required minimum distribution and give the money to a charity.
If you’re over 70 1/2 there are some tax advantages to doing it directly from the IRA to the charity. Other than that, you can cash the money in from your IRA or from your 401(k), give it to the charity, but it could have some adverse tax consequences.
Thanks for joining me and I hope you found this information helpful!
P.S. If you enjoyed this topic and want to learn more, listen to my podcast, “How Do Charitable Donations Fit Into Retirement Planning?”
P.P.S. Feel free to submit questions here for a chance to have them answered!