Is Your IRA Distribution Tax-Free? The Answer May Surprise You

August 9, 2016 | by James Behr Jr & Christopher Paleologus

In 2015 Congress voted to make Qualified Charitable Distributions (QCD) a permanent part of the tax code. If you have to take a required minimum distribution (RMD) from your IRA account (all of those over the age 70 ½ with traditional IRAs must take them each year), you have the ability to direct that distribution to the charity of your choice tax free. A QCD allows you to make a charitable donation via a direct transfer from your IRA of up to $100,000 annually. As a direct transfer from the IRA to the charity, the distribution is tax free and will not count toward your income tax for the year. The donation must be made to an organization that qualifies for charitable income tax deductions. This is a tax strategy that can help save you money without negatively impacting the charity.

There are several tax benefits associated with making a QCD rather than a regular taxable distribution which must be included when calculating your adjusted gross income (AGI) in any tax year. When a distribution is included in your AGI, income tax on social security benefits can increase, Medicare insurance premiums could rise, and limitations on charitable deductions and itemized deductions could reduce your tax benefit of gifting to charities.

Making a QCD is as easy as contacting the charity of your choice to see who the check should be made out to and then contacting your investment advisor and instructing them to transfer your RMD directly to the charity. The check must be made payable directly to the charity, not the owner of the IRA, or it will not qualify. Most advisors already have forms to do this and simply require a signature. Be sure to obtain the acknowledgement from the charity stating the amount of the donation after you send it and remember, it must be a charity that qualifies for a charitable income tax deduction of an individual.


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