Advertisement
IRAs

The Rules for Making a Tax-Free Donation from an IRA

Making tax-free gifts to charity from an IRA is gaining in popularity among older investors, thanks to changes under the new tax law. Here’s what you need to know to make a qualified charitable distribution.

Question: I’d like to make a tax-free transfer of my required minimum distribution from my IRA to charity. Is the deadline for donating to a charity the same as the deadline for taking my RMD? And does my IRA administrator have to send the money directly to the charity, or can I withdraw the money and write a check myself?

Advertisement - Article continues below

Answer: The deadline for making a tax-free transfer from an IRA to a charity—called a “qualified charitable distribution” or QCD—is the same as it is for your required minimum distribution. That’s generally December 31 unless this is your first RMD. First-timers have until April 1 of the year after turning 70½ to take an initial RMD—and they can’t take a QCD before age 70½.

Also, to qualify as a tax-free transfer, you can’t withdraw the money first and then write a check from your non-IRA account. The money has to be transferred directly from the IRA account to the charity. Check with your IRA administrator for its procedure. Some firms, such as Fidelity, let you write a check from your IRA to the charity, if you have check-writing privileges on the account. Or you can fill out a QCD form and have Fidelity make out a check to the charity and send it directly to the charity or to you. Other companies don’t let you write a check on your IRA but instead have you fill out a form to have the IRA administrator send the money directly to the charity.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

It’s a good idea to start the process well before the end of the year. “It’s important do this ahead of time because the money has to come out of your account,” says Keith Bernhardt, vice president of retirement income at Fidelity. “Make sure the charity cashes the check before the end of the year.”

With a QCD, you can give up to $100,000 annually from your IRA to charity and have that count as your RMD. The distribution isn’t included in your adjusted gross income, so it’s tax free. Now that the standard deduction has more than doubled and fewer people will be itemizing their deductions (and, as a result, fewer people will be taking a charitable deduction), a tax-free transfer from an IRA to charity is gaining popularity.

Mari Adam, a certified financial planner in Boca Raton, Fla., says many of her clients are interested in QCDs, especially this year. She’s talking with them about QCDs in October, so they have plenty of time to decide whether or not to take their RMD themselves or give all or some of the money to a charity. “We want to make sure we ask if they want to do a QCD before we process their RMD,” she says. “Once the RMD is processed, it’s too late.” After you withdraw the required minimum distribution, you can’t use it for a QCD for the year.

Advertisement - Article continues below

She also allows more time because she and her clients take extra steps to make it clear where the contribution came from. Otherwise, the charity may receive a check from the IRA administrator but may not have information about the donor. For example, for her clients with IRAs at Charles Schwab, Adam has Schwab make out a check to the charity but then send the check to the clients—not directly to the charity. The clients then send the check with a memo that includes their name, the charity’s name and an explanation that the donation is a QCD from their IRA. They also include a gift acknowledgment form they ask the charity to sign and return, so they have additional proof of the gift for their tax records.

There’s generally no limit to the number of QCDs you can make—as long as the total doesn’t exceed $100,000 for the year—but ask your IRA administrator if there’s a minimum gift size. Many of Adam’s clients make several QCDs each year, but she discourages them from making small gifts that way because the process can be time-consuming. “I would try to avoid the $50 gift and just make those out of your personal account,” she says.

Before you decide which charities to support, make sure they’re eligible to receive a QCD. “The list of entities eligible for a QCD is not the same as the entities eligible for a typical charitable deductible donation,” says Adam. The organization must be a 501(c)(3) charity, but you cannot make a QCD to a donor-advised fund.

You can look up whether a charity is eligible to receive tax-deductible charitable contributions using the Tax Exempt Organization Search at IRS.gov. Then ask the charity if it’s eligible for QCDs. “Or ask your tax advisor to verify,” Adam says.

Advertisement
Advertisement

Most Popular

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check
Coronavirus and Your Money

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check

The deadline for seniors and veterans to request an additional $500 stimulus check for a dependent child is approaching fast. See how you can claim yo…
September 25, 2020
Trump Promises $200 Prescription Drug Card for Seniors
Medicare

Trump Promises $200 Prescription Drug Card for Seniors

Medicare beneficiaries will soon receive a debit card in the mail that they can use to pay for prescription drugs.
September 25, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020

Recommended

With Estate Taxes on Sale Now, You Snooze, You Lose!
tax planning

With Estate Taxes on Sale Now, You Snooze, You Lose!

You may want to consider gifting your home — or maybe a fractional interest in it — as well as using an irrevocable trust before it’s too late.
September 25, 2020
Check Your Financial Adviser Now (and Every Year) or Regret It Later
wealth management

Check Your Financial Adviser Now (and Every Year) or Regret It Later

Fewer than 10% of investors use such free background checks as Investor.gov, BrokerCheck or IAPD to check their financial advisers’ backgrounds. These…
September 21, 2020
The Annuity With a Tax-Planning Twist
Financial Planning

The Annuity With a Tax-Planning Twist

A qualified life annuity contract helps retirees with guaranteed payments to last their entire lives.
September 21, 2020
Election 2020: Joe Biden's Tax Plans
taxes

Election 2020: Joe Biden's Tax Plans

With the economy in trouble, tax policy takes on added importance in the 2020 presidential election. So, let's take a look at what Joe Biden has said …
September 18, 2020